Despite soft iPhone sales in the holiday quarter, Apple (AAPL) topped Wall Street's profit target and reported record earnings. The Apple earnings report showed that the company is more than just an iPhone maker as other businesses picked up the slack.
XApple stock rose 6.8% to 165.25 on the stock market today. The Cupertino, Calif.-based company reported fiscal first-quarter results late Tuesday.
Apple earned $4.18 a share on sales of $84.3 billion in the quarter ended Dec. 29. Analysts expected Apple earnings of $4.17 a share on sales of $84 billion. On a year-over-year basis, earnings per share rose 7% while sales fell 5%.
In the December quarter, Apple's iPhone revenue declined 15% year over year, while sales from all other products and services grew 19%. Still, iPhone accounted for 61.7% of the company's total revenue in the period.
Apple Services Revenue Grew 19%
Services were Apple's second-largest business last quarter, making up 12.9% of total revenue and growing 19% year over year.
The Apple earnings report provided more details on the company's services business than it has previously disclosed. Its services had a gross profit margin of 62.8%, which topped analyst estimates for 60%. Apple's hardware, including iPhone, iPad, Mac and other devices, had a gross margin of 34.3%.
On a conference call with analysts, Apple Chief Financial Officer Luca Maestri said Apple has an active installed base of 1.4 billion devices. That includes 900 million iPhones in use, he said. The iPhone installed base has grown by almost 75 million in the last 12 months, he said.
Apple's services generated a new all-time high of $10.9 billion in the first quarter. Its services include Apple Music, Apple Pay, iCloud, AppleCare, App Store and other offerings.
Apple Pay handled over 1.8 billion transactions in the quarter, well over twice the volume of the year-ago quarter, Apple Chief Executive Tim Cook said.
Readership of Apple News climbed to over 85 million monthly active users, despite being available in only three countries to date: the U.S., U.K. and Australia.
Apple Music Hits 50 Million Subscribers
Apple Music now has more than 50 million paying subscribers, Cook said. Spotify (SPOT) still leads the streaming music market with 87 million paying subscribers as of Sept. 30.
Apple is managing over 360 million paid subscriptions across its services portfolio, up 120 million from a year ago, Maestri said. Those include subscriptions from Apple and third parties. The company expects to grow to over 500 million paid subscriptions during 2020.
"Our subscription business has become very large and diversified, covering many different categories from entertainment to health and fitness to lifestyle," Maestri said. "In fact, more than 30,000 third-party subscription apps are available today on the App Store and the largest of them accounts for only 0.3% of our total services revenue."
Video Service Seen Launching In April
Apple plans to participate in the burgeoning online video market in a variety of ways, Cook said. It will continue to sell third-party video subscriptions and push its Apple TV streaming devices and app. It also intends to offer original video content, but declined to give specifics.
Apple is eyeing a mid-April launch for a subscription streaming video service, the Information reported Monday. It will join an increasingly crowded market, led by Netflix (NFLX), Amazon (AMZN) and Hulu.
The video market is seeing "huge changes in customer behavior," leading to the "breakdown of the cable bundle," Cook said. The shift is likely to accelerate this year, he said.
IPhone Sales Dinged By China, Longer Upgrade Periods
Weak macroeconomic conditions in some markets, especially China, depressed iPhone sales, Cook said. Also, iPhone owners are holding on to their devices for longer periods between upgrades, he said.
While iPhone revenue dropped in the December quarter, Mac computer revenue climbed 9% and iPad revenue grew 17%.
Apple's Wearables, Home and Accessories unit saw revenue jump 33%. The Apple Watch smartwatch fueled much of the growth.
March-Quarter Sales Guidance Misses Target
For the current quarter, Apple expects revenue of $55 billion to $59 billion, or $57 billion at the midpoint. It did not give a target for earnings per share. Analysts had predicted Apple would earn $2.64 a share, down 3% year over year, on sales of $59 billion, down 3.5%, in the March quarter.
"We don't measure our success in 90-day increments," Cook said. "We manage Apple for the long term. And when we consider the keys to our success over time there are three that stand out: our highly satisfied and loyal customers, our large and growing active installed base and at the heart of it all, our deeply ingrained culture of innovation."
Wall Street Cautious After Apple Earnings Report
At least six Wall Street analysts cut their price targets on Apple stock after the earnings report. Of those three have buy ratings on the stock, while three are neutral.
Meanwhile, analysts with Monness Crespi Hardt and UBS raised their price targets on Apple stock on Wednesday. Both firms have buy ratings on Apple.
"Fiscal Q1 results and Q2 guidance were largely in line with expectations, which may prompt a modest relief rally," KeyBanc Capital Markets analyst Andy Hargreaves said in a report. "However, hardware sales appear likely to continue declining, while services appear likely to decelerate. This leaves little to drive multiple expansion."
Hargreaves rates Apple as sector weight with a fair value of 161.
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