Apple CEO Tim Cook published an investor letter on Wednesday explaining why Apple (AAPL) revised its fiscal first quarter revenue down from a range of $89 billion to $93 billion down to $84 billion. He blamed the problems on iPhone sales in China, cheaper battery replacements on older iPhones, lower iPhone subsidies, and more. The move immediately worried analysts, industry watchers, and investors.
But let’s put this concern into context.
A Revenue Problem
Apple noted that it was only revising revenue down. The company’s 38% gross margin held, its operating expenses were inline, and its other income of $500 million was a bit higher than it had anticipated. The revenue drop meant Apple generated about $32 billion in gross margin last quarter. It had anticipated at least $34 billion.
In other words, Apple might take a $2 billion hit on gross margin. But when all is said and done and it gets to a net income figure, Apple will still be trucking billions of dollars in cash to the bank.
Let’s stay on the topic of cash for a moment. Apple said that it has $130 billion in net cash. And despite some softness in its iPhone division, it’s still making billions each quarter. It’s safe to say Apple’s business is stable. It’s also safe to say that if it needs a boost in one area or another, an acquisition is just a wire transfer away.
Investors often judge a company’s health by trends. The fact is, Apple’s iPhone business has some softness. But there’s no compelling trend to show people are actually leaving iPhone. In fact, a recent study found more Americans are switching from Android to iPhone than before.
Apple’s real problem is that its customers aren’t upgrading quickly enough to new iPhones. That matters. It means there’s a shift in how people are buying iPhones, but there’s no shift in their desire to have one. And say what you will about pricey iPhones, but their pricing is inline with other high-end handsets from Samsung, its chief competitor. And customers know that.
An Eye on Services
Finally, let’s talk Services.
During its last-reported quarter, Apple’s Services revenue hit $10 billion, a 27% year-over-year jump and enough to make it the second-largest division behind iPhone. Apple anticipates Services revenue rising at similarly fast rates in 2019. And as I’ve written before, the highly profitable Services division at Apple is a far more important contribution to its performance than many acknowledge.
In his note on Wednesday, Cook discussed Services and its success. But there’s so much more to be done. Apple is working on a long-awaited subscription-TV service that could launch this year. And all that cash on hand could be used to acquire content providers or streaming services. And despite iPhone worries, developers and companies hoping to make some cash on iPhone software aren’t going anywhere. All of that contributes to the Services department’s success.
Services is still too small to overtake the iPhone division anytime soon. But its rapid growth and strong profitability make absorbing iPhone division softness a bit easier. And we can’t forget that.
There’s no debating Apple had an awful Wednesday. But looking ahead, even with the challenges, it’s conceivable—if not likely—Apple’s 2019 could be an awfully good year.