Apple’s Q2 earnings: iPhone sales continue to drop as services keep growing

Apple just reported its second quarter financial results, posting quarterly revenue of $58 billion (down 5 percent from the same quarter a year ago) earnings per share of $2.46. The company said its crucially important services division hit an all-time high of $11.5 billion in revenue. iPhone revenue came in at $31.05 billion, still down year over year but enough to make up over 53 percent of Apple’s entire revenue. Mac sales were down, but the iPad, wearables/home/accessories, and services units of Apple’s business all saw gains.

“We delivered our strongest iPad growth in six years, and we are as excited as ever about our pipeline of innovative hardware, software and services,” CEO Tim Cook said in the accompanying press release. “We’re looking forward to sharing more with developers and customers at Apple’s 30th annual Worldwide Developers Conference in June.”

Analysts had been projecting $57.4 billion in overall revenue (led by $30.5 billion in iPhone sales) and earnings per share of $2.37.

Q2 was bound to be an improvement over Apple’s bruising first quarter results when the company tried to get out in front of disappointing iPhone sales by revising its earnings guidance and publishing a letter from CEO Tim Cook that warned of weak upgrade demand over the holidays. iPhone sales had fallen 15 percent from the year prior. Cook also cited Apple’s temporarily discounted battery replacement program and the phasing out of carrier subsidies as reasons why consumers are slower to step up to a new phone nowadays. This last quarter, US carriers including Verizon and AT&T reported record lows for smartphone upgrades.

Since that bad news in January, Apple’s stock has rebounded and added almost $300 billion in market value. But the company continues to face significant challenges in China where the iPhone must contend with phones from Huawei and other brands that cost much less money. Apple reported sales of $10.2 billion in China for Q2, and Cook told CNBC in an interview that momentum had picked up as the quarter went on. “I believe that the trade relationship — I don’t mean the tariff, I mean the tone — is much better today than it was in the November / December timeframe. That affects consumer confidence in a positive way,” he said.

Today’s earnings update comes in the weeks after a string of product releases from Apple that included new models of AirPods, iPad Air, iPad mini, and the iMac desktop. On the subject of AirPods, Cook said “this is nothing short of a cultural phenomenon.” The company’s Beats brand is now nearing the release of its first true wireless earbuds, the Powerbeats Pro.

Apple attributed the iPad’s strong performance this quarter to the iPad Pro. The company’s flagship tablet has been on sale frequently for between $100 and $200 off at retailers like Best Buy, which is likely fueling sales. On the sagging Mac business, Cook said “we faced some processor constraints in the March quarter” during the earnings call, and he added “we believe our Mac business would have been up last quarter without those constraints.” Apple’s CEO also noted that the company took in four times the volume of trade-ins in this March quarter compared to last year. “Now our goal is to pick up the pace,” he said of iPhone sales.

But Wall Street and investors have their attention fixed on Apple’s services more so than hardware right now. Last month, the company announced several new software initiatives including News Plus, Apple Arcade, and Apple TV Plus. “These aren’t hobbies,” Cook said during the afternoon call. “We wouldn’t introduces services if we didn’t think they could be meaningful.” The subscription news service, which bundles popular magazines with some newspapers including The Wall Street Journal, launched immediately for $9.99 per month.

However, Apple shied away from discussing pricing for the gaming offering, which will give subscribers access to a package of titles that are exclusive to Apple’s platforms, and Apple TV Plus, which will be home to the many original TV shows and movies that the company is pumping billions of dollars into creating. Cook said he expects consumers will have multiple over-the-top streaming services. “We’re going to do our best to convince them that the Apple TV+ product should be one of them,” he said.

Both of those services are scheduled to launch sometime this fall, likely as part of iOS 13 and macOS 10.15. Apple will outline its plans for those major software updates at its Worldwide Developers Conference in June, and it’s expected that the company will push for developers to begin porting their iOS apps to Mac computers with new tools that will make it far easier to do so. “You are not going to want to miss this one,” Cook said of WWDC.

Qualcomm and Apple recently settled their contentious legal battle, with Apple making an undisclosed payment to Qualcomm and signing a new deal to utilize the company’s parts for the next several years. That agreement doesn’t impact today’s earnings report.