Apple Earnings: Company Still Tied to iPhone for Better or Worse

(Bloomberg) -- Apple Inc. is now exactly the company that investors slowly started to accept in recent months. Whether that is good or bad news is entirely in the eye of the beholder.

What's clear is that Apple is having trouble increasing the number of iPhones it sells. In the company's fiscal second quarter ended March 31, iPhone units sales inched up 2.9 percent. The predictions of an iPhone “super cycle” — a resurgence of iPhone handset sales this year sparked by the remodeled iPhone X model —  are officially garbage. There is no super cycle, as almost everyone outside of Apple headquarters has come to acknowledge. 

The good news, though, is that Apple is beginning to match outsiders' lowered expectations. Instead of relying on selling more iPhones, Apple instead is squeezing higher prices from those it does manage to sell and is turning out strong sales gains from ancillary products including App Store products and add-on devices like AirPods headphones. Apple said its revenue from its services business — a grab bag including the App Store, iCloud, AppleCare warranties and more — rose 30.5 percent in the March quarter from a year earlier. Investors are overly excited about the profit potential from Apple's services business, but its rate of sales gains is impressive in light of the weak iPhone unit growth.

Driven by those iPhone-adjacent segments, Apple's total revenue rose 16 percent from the quarter a year ago, and the company predicted its revenue would increase as much as 18 percent in the three months ending in June —  better than Apple's stock analysts had forecast. Apple shares rose about 4 percent in after-hours trading on Tuesday.

But this wasn't a share gain predicated on excitement. It was a gain of relief, fueled by lowered expectations. Earlier this year, before Apple watchers lost faith that the company could buck a broad industry slowdown in smartphone sales, analysts on average were predicting $56.5 billion in revenue for Apple's June quarter. Now they're thrilled with Apple's forecast of up to $53.5 billion. It turns out it's easier to clear a lowered bar. 

Apple deserves credit for finding ways to grow at a healthy clip even as the number of iPhones it sells increases slowly, if at all. The increased stockholder returns Apple announced on Tuesday will lift its bottom line, too. But Apple remains what many people hope and fear: A company whose fortunes are tethered —  slightly less than before — on a single slow-growing product. 

To contact the author of this story: Shira Ovide in New York at sovide@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.

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