Apple Earnings: Has Apple recognised that hardware is not its future?

Apple Earnings: Has Apple recognised that hardware is not its future?
Despite a jump in its revenues and profits, Apple failed to impress Wall Street with its fourth quarter earnings report. However, the quarter may be remembered as the starting point for Apple’s big pivot towards services. Shashank Venkat reports

Despite a healthy fourth fiscal quarter, Apple’s shares took a tumble by 6% taking it briefly below its $1 trillion market cap, underlining the vagaries of Wall Street. Top analysts were apparently not too impressed with a major shift in Apple’s quarterly reporting structure. Going forth, the company will not report the number of iPhones, Macs and iPads it sells each quarter. Instead, Apple will report the progress of these three product lines through a consolidated revenue figure.
Apple has made it clear that the number of units sold is a less important metric for them, given their wide portfolio of offerings. The Cupertino-based tech giant missed its iPhone sales expectations but ended up with a higher average selling price for each iPhone on the back of its new, pricier models. So, the slowdown of iPhone sales has been offset by the increasing price of iPhones. Wall Street analysts, though, said that it was a tough pill to swallow and hinted the lack of transparency may dent Apple’s standing in the market.
However, the shift in Apple’s reporting mechanism is also indicative of the strategic direction for the company. For the first time ever, Apple will now report ‘Services’ gross margin – a metric which will allow investors to determine the profits generated from its services such as Apple Music subscriptions, App Store revenue and Apple Pay. While we have been hinting for some time that Apple’s next growth phase may be driven by services, this new inclusion affirms that the company is indeed thinking along similar lines.
In fact, Apple brought in $10 billion of revenue from its services segment in the fourth quarter of 2018, up 17% from the same period last year. 330 million Apple users now subscribe to Apple’s various services, a number that has risen by 50% over the last year. Apple CEO, Tim Cook, also emphasised that the company is entering the holiday season with its strongest ever lineup of products and services. He also spoke about its large customer base and the growing opportunity to monetise the services business
With a video streaming subscription service and a combined tv, news and music subscription bundle in the works, there are lots of reasons to be excited about its services. Tim Cook is targeting $14 billion in services revenue per quarter by 2020, a figure that is easily attainable considering Apple’s current momentum.
Morgan Stanley analyst, Katy Huberty, has also predicted that services may generate more than 50% of Apple’s revenue growth in the next five years, making it more important than its hardware segment. Little wonder then that Apple is trying to slowly move away from its positioning as a pure-play hardware company. And that may be reason enough to cheer for those with a long-term view of things!
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