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Quick Takes from Apple’s Q2 FY19 Earnings Call

With waning iPhone sales and increasing revenues from services and wearables, here are three short takes on Apple’s Q2 FY19 earnings call:

  1. iPhone sales continue to see a decline. Apple has seen a 20% year-on-year (YoY) decrease in sales, mainly driven by a weak Chinese market. However, the company claims to have lessened this impact compared to Q1 FY19 through implementing price adjustments and increasing trade-in and financing programs. Apple cited government stimulus packages and improved dialogue between the US and China as positives. We believe that longer holding periods and high iPhone XS and XS Max prices are contributing to this decline. The trade-in programs also point to this as more consumers are subsidizing new iPhone purchases with their old devices. The iPhone XR was the most popular iPhone in Q1. There was no mention of Apple and Qualcomm’s agreement or future outlook regarding 5G-integrated iPhones.
  2. Apple also announced growth in iPads and wearables. iPads were up 22% YoY, and wearables saw a 50% increase YoY with CEO Tim Cook claiming that the wearables segment is now the size of a Fortune 200 company. Frequent promotions and price cuts are likely to have driven iPad sales, while the growth of the wearable business was due to new customer sales. Three out of four Apple Watch sales came from new customers indicating an increase in demand for features such as ECG. Apple has seen success in the health and fitness space and is increasing its stickiness in this market through partnerships such as with Veterans Affairs in the US through a health record sharing platform. Look for this trend to continue in 2019.
  3. All eyes are now on Apple’s services segment as revenues peaked at US$11.45 billion this quarter, making up around 20% of Apple’s total sales revenue. This is also up 16% YoY, and Apple continues to target US$14 billion per quarter by 2020. With decreasing iPhone sales, services have become a new front of innovation and potential revenue opportunities for Apple. The recent Apply News+, Apple Card, Apple Arcade, and Apple TV+ announcements will undoubtedly help with this revenue goal. Apple, however, did not announce any further pricing or details about the services during the call, so we will have to wait and see how these services will play out. It will be critical for the company to gain initial consumer buy-in with these new services.

 

Editor’s Note: Apple’s financial year 2019 runs from September 30, 2018 to September 28, 2019. 

Maurice Klaehne is a Senior Analyst with Counterpoint Technology Market Research, based out of Boston, USA. He has spent more than five years working as a market researcher and strategy consultant heavily focused on emerging markets and uncovering new growth opportunities for his clients which include business service, CPG, healthcare, and life science companies. Maurice holds a Master’s in International Development and Management from Sweden’s Lund University, and an undergraduate degree in Political Science and International Development from Canada’s McGill University. He is a native German speaker and also speaks fluent French.

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