Apple Investors Take Out Their iPhone Worry Beads

With another quarter of results in, Tim Cook is very pleased with everything that’s going on at Apple.

“Today we are reporting strong March quarter results, with accelerating revenue growth and earnings per share up 10 percent over last year. We feel great about this performance.”

And there was a fair amount to feel positively about, as Q2 2017 was actually Apple’s second-best second-quarter earnings ever (its best quarter ever was Q2 2015, following the release of the overwhelming popular iPhone 6 redesign). Earnings grew and beat the street, revenue grew but didn’t, the iPhone 6 sold over 50 million units and Apple’s Services business topped $7 billion in revenue is and is heading toward Fortune 100 company status.

Plus there’s that quarter of a trillion dollars cash hoard Apple has on hand for an exceptionally “once in a millennia flood” level rainy day.

But to whom much is given, much is expected — and despite logging all that growth, it still wasn’t quite all that investors had dreamed prior to the earnings release. Apple’s stock promptly dropped in after-hours trading after spending the day (and the better part of the last week) running up in price in anticipation of the latest round of official figures.

Of particular concern — the continuing cool-down in the iPhone figures.

So what to watch?

By The Numbers

Apple managed to beat analysts’ expectations on earnings per share, but fell a bit short on revenue. Apple reported EPS of $2.10, beating the $2.02 the street was looking for. Revenue clocked in at $52.9 billion — up 4 percent from the same period in 2017, but short of the $53.02 billion analysts had predicted.

iPhone — Apple’s profit center — also fell short of analyst expectations. Apple reported selling 50.8 million iPhones, as opposed to the 51.4 million iPhones. Despite the miss, Cook remained positive on the iPhone, noting that sales were “in line with our expectations” and that Apple remains “thrilled to see the continued strong demand for iPhone 7 Plus.”

Cook also noted that iPhone’s active installed base grew by “double digits year over year.”

Investors pushed the issue some — UBS Securities’ Steven M. Milunovich noted recent figures that indicate a “nine-year low in iPhone purchase intent,” and that iPhone’s retention rate had in fact declined to the 80 percent range.

Cook acknowledged the slow-down, but nodded at the upcoming release of an iPhone redesign that might at least be contributing to the slowdown.

“We’re seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhones. And so that part is clearly going on, and it could be what’s behind the data.”

And that data on weaker sales is apparently expected to continue. Apple forecast revenue between $43.5 billion and $45.5 billion in Q3. On the low end, that is a 3 percent increase on Q3 2016 — but still fall short of Wall Street’s low end estimate of $45.6 billion.

The iPhone numbers are the critical figures for Apple, since the product still drives over 60 percent of Apple’s total revenue and, as one analyst noted, “may not be the rocket ship” it once was.

But Apple’s other revenue streams — particularly its rapidly growing services segment — also managed to draw some rather keen investor interest this time around.

Services Step In The Spotlight

Apple brought in $7 billion in revenue from its “services” category, up from around $6 billion in the second quarter last year. Services is the category that captures the sales of apps, movies, music, insurance, Apple Pay, and other digital offerings.

Cook called out the singular performance of services as a category — noting it was “well on the way to being the size of a Fortune 100 company,” and that the firm is “very happy to see the deep level of customer engagement with the Apple ecosystem.”

A particularly strong performer, according to the Q2 figures, was the Apple Store, which saw revenue up 40 percent since this time in 2016. The number of developers offering apps for sale in the App store was also on the increase — up 26 percent over last year.

Subscription services were also reportedly a strong performer, with Apple reporting paid subscriptions exceeding 165 million (though during the investor Q&A, it was clarified that isn’t 165 million unique users, since Apple users will have more than one kind of paid subscription account). Apple Music subscriptions and iCloud storage both saw “double digit” growth.

Apple Pay even got a shout out — albeit one mostly devoid of any specific numbers, still.

“Apple Pay is experiencing phenomenal traction. With the launch of Taiwan and Ireland in the March quarter, Apple Pay is now live in 15 markets with more than 20 million contactless-ready locations, including more than 4.5 million locations accepting Apple Pay in the U.S. alone.”

Cook also touted transaction volume “up 450 percent over the last 12 months.” It does continue to be amazing that in the more than 2.5 years of its existence, Apple has not released any specifics regarding the number of Apple Pay users. Cook did note that Apple Pay’s area of coverage is also expanding — and with it, its usage.

“In the UK, for example, points of acceptance have grown by 44 percent in the last year, while monthly Apple Pay transactions have grown by nearly 300 percent. In Japan, where Apple Pay launched last October, more than 0.5 million transit users are completing 20 million Apple Pay transactions per month. And we’re always excited to see our partners bring their customers new ways to use Apple Pay. You can now even send a Starbucks gift card via iMessage with just a touch.”

How many customers are actively using Apple Pay? Cook still won’t say after 2.5 years. Here’s our own estimates using our long standing Apple Pay adoption tracker stats, and back of the envelope math regarding the number of users and share of retail here.

But Apple continues to have high hopes for its services business — and continues to anticipate doubling the size of its services business by 2020.

For yesterday, the promise in services was not enough to stop the sell-off and 1 percent drop in Apple’s share price in overnight trading. But Apple’s stock price is up 50 percent over the last year — and briefly reached a 52 week high yesterday afternoon before earnings were released north of $750 billion.

Investors may be clutching their worry beads a bit about the future of the flagship iPhone product — and eagerly awaiting whether the next redesign will really kick off the “super-cycle” of replacing 300 million or so iPhones that analyst Gene Munster is predicting.