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Apple’s Services Surprise Pleases Wall Street

July 31, 2019, 12:24 AM UTC

Apple managed to surprise investors in a good way on Tuesday by reporting better-than-expected quarterly results and by giving an upbeat forecast for the current quarter.

But the encouraging performance had nothing to do with the iPhone, Apple’s growth engine over the past decade that propelled the company from also-ran computer maker to one of the world’s most profitable corporations. Instead, it was strong growth in services like Apple Music, Apple Pay, and app sales that excited investors.

CEO Tim Cook is increasingly turning to services as smartphone sales slow worldwide. Customers are now holding onto their phones for three to four years on average before upgrading, so Apple’s growth these days depends partly on selling more services. Later this year, the company plans to introduce a couple of important ones, for video gaming and video streaming.

Additionally, Apple is trying to push beyond its reliance on iPhone, iPad and computer sales. Apple Watch and AirPod earbuds are central to that strategy.

For the just-completed quarter, Apple said it had $53.8 billion in revenue, up 1% from a year earlier and about $400 million more than Wall Street analysts had expected. Profit per share of $2.18 was down 7% from last year, but 8 cents better than analysts had expected.

The biggest surprise was in Apple’s forecast for revenue in the current quarter of between $61 billion and $64 billion. Wall Street had expected only $61 billion.

Apple’s stock price, already up 33% in 2019, jumped another 4% in aftermarket trading on Tuesday, putting the company’s stock market value again near $1 trillion.

Breaking down the results, sales of iPhones plunged 12% to $26 billion, the third straight quarter of decline (Apple no longer discloses how may devices it sold–just the sales total). But services sales, now the company’s second-largest business, jumped 13% to $11.5 billion.

Although rivals like Google and Facebook usually get more credit for attracting consumers to their services, Apple said it now has more than 420 million customers paying for at least one service, which could be anything from $10 monthly for Apple Music to $199 for two years of extended warranty coverage on an iPhone XS. “Our subscription business continues to grow strongly and is extremely diversified across many categories,” chief financial officer Luca Maestri told analysts on a call on Tuesday afternoon.

Asked about the company’s surprisingly strong forecast for growth in the current quarter, Maestri again pointed to services along with the “wearables” division that includes Apple Watch and AirPods. “These two categories have become really important and really large for us,” he said.