You’re not threatened by the war
You’re not shaken by the storm
I know you’re in control
Even in our suffering
Even when it can’t be seen
I know you’re in control
–Look Up Child
At the end of Apple’s quarterly conference call with analysts on Tuesday, the company played Lauren Daigle’s song Look Up Child. It was likely no coincidence that CEO Tim Cook and his team ended their pitch to investors with a strong reminder about the power of resiliency and optimism.
The pitch is much needed. Apple’s (AAPL) surprise warning on Jan. 2 of a revenue shortfall due to falling iPhone sales, especially in China, shook investor and customer confidence. Apple’s stock plunged 10% the next day. And while it has since recovered nearly all of that day’s loss, it remained down more than 33% on Tuesday from its all-time high in early October.
So on Tuesday, Cook and chief financial officer Luka Maestri detailed a number of ways in which the company would take action to boost sales and profits, even if consumer spending in some parts of the world remained depressed because of weakening economies.
“It’s not in our DNA to just stand around and wait for macroeconomic conditions to improve,” Cook said, as he began outlining some of Apple’s strategy and tactics “to improve our results.” The pitch seemed to work, as Apple’s stock price rose about 6% to $163.76 in afterhours trading on Tuesday.
The moves could be divided into three basic categories:
Apple’s fastest growing business is its service unit, which includes everything from AppleCare extended warranties and iCloud online storage to Apple’s cut of app sales and digital movies. Service revenue of $10.9 billion in the quarter ending December 31 was up 19%, while all the remainder of Apple’s sales, including everything from iPhones to Mac computers, declined 7% to $73.4 billion. This quarter, for the first time, Apple revealed the profit margin of its service business, which at nearly 63%, also impressed Wall Street.
Services added in the past few years such as Apple Pay and Apple Music have contributed significantly to the growth, Maestri said. And he promised that multiple new services were planned. Earlier on Tuesday, rumors emerged that Apple was considering a subscription video gaming service, for example.
Cook was asked about one fairly obvious expected addition: a Netflix-like online video service. Apple has made no secret of its plans to get into the Internet video business and has disclosed programming deals with everyone from Oprah Winfrey to Steven Spielberg. The CEO confirmed the service was coming, but he didn’t disclose much else about it.
“The breakdown of the cable bundle has been talked about for years and I think it will likely take place at a much faster pace this year and so we’re going to participate in that in a variety of ways,” Cook told analysts. “We will participate in the original content world. We have signed a multi-year partnership with Oprah. But today I’m not ready to extend that conversation beyond that point…we’ll have something more to say on that later.”
Apple’s 2018 line of iPhones carried among the highest prices ever for new mobile devices. While the mid-range iPhone XS kept the same starting price of about $1,000 as 2017’s iPhone X, a new larger-screened iPhone XS Max started at $1,150 introduced in September. And the new bottom-of-the-line iPhone XR started at almost $750 versus $700 for the year-earlier iPhone 8.
Cook conceded on Tuesday that the higher prices may have hurt sales somewhat, although he downplayed the basic hikes. Regardless, he offered several tactics Apple has started to add to attract more price conscious shoppers.
For one, Apple is getting more aggressive with its trade-in offers, making it simpler for customers to turn in an old iPhone on the spot when they purchase a new device. Also, Apple is introducing monthly installment payment plans in more countries, particularly to help customers get over the sticker shock of paying full price when they were used to having their mobile carrier subsidize phones.
In the U.S. market, subsidies have been widely declining for a few years, but the end of subsidies just hit the Japanese market hard in 2018, Cook said. Finally, foreign currency moves have magnified Apple’s new higher dollar prices in some developing countries with weak currencies, like Turkey for example. Cook said Apple would begin absorbing the impact of some of those currency movements itself, in effect cutting prices for consumers in those countries.
The Apple Watch was one of Apple’s most successful products last year, though the company still doesn’t disclose much detail about exactly how many it sells. Maestri said Apple’s wearables segment, which also includes headphones and the AirPod wireless earbuds, was “approaching the size of a Fortune 200 business.” Number 200 on the Fortune 500 list last year was Aramark with $14.6 billion of revenue.
Tim Cook noted that adding ECG-reading and fall detection to the Apple Watch was only the start of Apple’s aspiration to add health features or perhaps new products altogether. The rumored second generation of AirPods may include health monitoring sensors to measure body temperature and blood oxygen levels, for instance.
“We believe we are just beginning to see the impact we can make to improving health and are deeply inspired by the possibilities,” he said.