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Life after the iPhone? Apple recovers shine

Ed Monk

Ed Monk - Fidelity Personal Investing

Apple made sure the market wasn’t going to be disappointed by yesterday’s fall in quarterly revenues by warning that it would happen a month ago.

Sure enough, Apple’s revenues in the latest quarter fell 5% to about $84.3bn, as was forewarned, yet Apple’s shares were trading around 6% higher in after-hours trading because the update also included plenty of signs that the sales slowdown may be short-term and recoverable.

life-after-iphone

A month ago, Apple blamed an economic slowdown in China for faltering sales there. The results this week give a more complete picture, with revenue in the Greater China region including Taiwan and Hong Kong indeed down a hefty 25%. European sales slipped only 3%, however, and in the Americas, the biggest sales region, they rose almost 5%.

Most encouraging of all, revenues from Apple’s services business rose 19% to $10.9bn. This is the division than includes the App Store, AppleCare, Apple Pay and the proceeds of deals such as the one that allows Google to be the default search engine on iPhones, iPads and Macs.

The services division is crucial - and will become even more crucial - because it represents life after the iPhone. Or rather, life after the beginning of the decline of the iPhone, where revenues rely not only on shifting millions of handsets but also (and perhaps primarily) on the recurring revenue of subscriptions and a platform of captive users which can be leveraged in all sorts of ways.

Services still only comprise a small part of the current Apple business, but it’s worth dwelling on the progress that has been made. One line in the Financial Times’ coverage this morning stands out: revenue from Apple services are now larger than those from many other blue-chip companies including Oracle, Nike and Coca-Cola, and are approaching those of Facebook.

That’s a pretty good starting point as Apple attempts to diversify away from the iPhone, and necessary given the slowing of iPhone sales. Even taking account of economic slowdowns and a strong dollar - which makes the iPhone more expensive in emerging markets, in particular - iPhone sales appear to be under pressure.

Figures from researchers BayStreet claim that iPhone owners in the US now wait almost 36 months to upgrade, up from 24 months in 2014. iPhone owners in developed markets aren’t rushing to get the latest model as they once did and price rises for Apple products have accelerated markedly in the past year, with many users concluding that the latest models aren’t enough of an upgrade to justify the cost.

It will be fascinating to watch how Apple, which depending on when you look is the biggest company in the world, perform this intricate pivot away from its star product. It does at least have, as was confirmed in the results yesterday, a huge $245bn cash pile to help in the effort.

Apple is one of the largest US companies and makes up a large part of the indices for that market. One way to access the whole market - including a stake in Apple - is through an exchange traded fund covering the market. The iShares S&P 500 UCITS ETF does the job and features on our new Select ETF list.

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