Apple (NASDAQ:AAPL) reported its Q2 earnings Tuesday afternoon. While revenue was down and net income dropped 15.9% year-over-year, the results were better than analysts had expected. The numbers show that iPhone revenue continues to decline, but the company’s strategy of trade-in promotions and lower pricing in China is beginning to stabilize that division. There were also clear signs that AAPL’s plans to diversify and wean itself off iPhone revenue with services and through sales of other hardware like the Apple Watch are beginning to pay off. As a result, Apple stock surged 5% in after-hours trading.
Apple’s Q2 results are in. The company reported a record drop in iPhone revenue, down 17% compared to the previous year at $31 billion. Overall revenue was down 5% to $58 billion, while net income slid to $11.6 billion from $13.8 billion a year earlier.
That’s the bad news, but all of this was expected. In fact, AAPL did a bit better than analysts had projected on both the revenue and net income front. The performance of Apple stock on Tuesday — down in the lead-up to the earnings report followed by an after-hours surge of 5% — reflected the fact that despite the negative news, the company actually outperformed those estimates.
In addition, in the earnings call CEO Tim Cook said that Apple’s move to “adjust” prices in China plus ongoing trade-in and financing programs had resulted in iPhone sales numbers that had begun to recover by the end of Q2.
But the real good news for those who are looking to Apple’s future lay in the performance of other divisions. In particular, AAPL was excited about record revenue in its Services division, which hit $11.45 billion. The company is touting 1.4 billion active Apple devices, which currently combine for a total of 390 million subscribers for Apple and third-party services.
Also seeing substantial growth was Wearables, Home and Accessories. This division, which includes devices like the Apple Watch and AirPods, saw revenue grow from $3.94 billion last year to $5.13 billion. Mac sales slipped by $260 million compared to last year, but this was more than offset by iPad sales that grew by $870 million to hit nearly $4.9 billion.
Looking Forward
Apple says it saw a rebound in iPhone sales in the last several weeks of the quarter, with sales in China seeing an uptick. And despite the discounting to boost those sales, the company says its gross margin will still be in the 37% to 38% range in Q3, reassuring investors that it is not sacrificing profitability.
In addition, revenue from its Services division will continue ramping up, as subscribers start to pay the $9.99 monthly fee for Apple News+ (which had been offered on a free trial at launch). Other new subscription services — Apple TV+ and Apple Arcade — will be rolling out this year, as will the new Apple Card credit card. And there will be a new Apple Watch this fall, to join the recently released AirPods 2. As well as new iPhones.
Finally, the long legal battle with Qualcomm (NASDAQ:QCOM) was settled a few weeks ago. That eliminates a lot of uncertainty about future 5G iPhone development, and it also puts an end to several years of legal skirmishes and iPhone sales bans in various countries.
Add everything up and despite the fact that iPhone sales will never be setting records the way they once did, AAPL appears to be on the road to recovery, and Apple stock — continuing to be on a tear in 2019 — reflects that.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
