Apple profits rise as services arm surpasses 1bn users

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Apple proved resilient in its latest quarter as the number of paying subscribers for its array of digital services crossed 1bn users worldwide, helping to lift profits from a year ago even as total revenue declined.

The world’s largest company by market value said on Thursday that total revenue fell 1 per cent to $81.8bn in the quarter that ended in June, a third straight year-on-year fall but slightly ahead of forecasts at $81.7bn, according to Refinitiv.

However, net profit rose 2.3 per cent to $19.9bn, well ahead of Wall Street estimates that it would slip 3.6 per cent to $18.7bn. Earnings per share also jumped 5 per cent to $1.26, ahead of forecasts for $1.20.

Shares of Apple, which have soared more than 50 per cent this year to take its valuation above $3tn, fell 2.2 per cent in after-market trading. Some analysts pointed to falling hardware sales as the cause.

“Both iPhone and iPad numbers were weak,” said David Wagner, portfolio manager at Aptus Capital Advisors. “There remains some hardware headwinds, which may give us a read on the overall consumer right now.”

Sales of iPhones, Macs and iPads were all lower than a year ago, led by iPad sales falling by 20 per cent. Sales of the iPhone, which accounts for 48 per cent of revenues, fell 2.4 per cent. Sales of wearables, such as AirPods and the Apple Watch, rose 2.5 per cent.

Revenue at Apple’s services division, which derives from App Store sales and digital offerings including iCloud and Apple Music, rose 8 per cent from a year ago to a record high of $21.2bn, as the number of subscribers rose by 150mn. Investors expected a 5 per cent rise to $20.8bn.

The number of paid subscriptions managed by Apple is now twice as many as the number of subscribers to Disney+, Netflix, HBO and Peloton combined. Services also have hefty profit margins of 71 per cent, roughly double that of Apple’s hardware division. The unit’s outperformance was largely responsible for Apple’s higher profit in the quarter.

Finance chief Luca Maestri told the Financial Times that the total number of subscribers was “double the number that we had just three years ago”.

He added: “The services business is important in many ways for us. It strengthens our ecosystem [and] it’s important because it makes the overall business less dependent on the performance of our products.”

Revenue in the greater China region grew by 7.9 per cent to $15.8bn, mitigating a 5.6 per cent decline in the Americas, Apple’s largest market, which brought in $35.4bn.

On a call with investors, chief executive Tim Cook said the company “did exceptionally well in emerging markets last quarter, and even better on a constant currency basis”. He called India, where Apple opened its first two flagship stores earlier this year, “a huge opportunity for us”, noting that Apple has “a very, very modest and low share in the smartphone market”.

Apple had struggled in the previous two quarters, owing to a mix of “significant” supply chain disruptions in China during the December quarter and a “tougher” macro environment in the March period, including international revenues that were pulled down by a strong dollar. In May, Cook referred to a “parade of horribles” but also touted but the company’s resilience.

Maestri said the worst was over, though foreign exchange headwinds did bring revenue down by 4 percentage points. “We didn’t have any silicon shortages, and thankfully we didn’t have any Covid disruptions either.”

The three-quarter streak of falling revenues is Apple’s longest period of stagnation since 2016, when full-year revenues fell 7.7 per cent.

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Maestri told investors Apple has been reining in costs, including by “decelerating” the pace of hiring. “We’ve been quite effective at slowing down the spend,” he told investors.

Apple has declined to give quarterly guidance since the outbreak of Covid-19, but the company projected operating profit margins between 44-45 per cent. In the June quarter, margins hit a record 44.5 per cent, up from 44.3 per cent a year ago and 37.6 per cent pre-Covid.

Meanwhile, Cook pushed back against the idea that Apple was “quite different” to its peers in terms of how it views artificial intelligence, which has become hyped in Silicon Valley following the success of generative AI chatbot and image rendering tools led by ChatGPT and Midjourney.

“We view AI and machine learning as core, fundamental technologies that are integral to virtually every product that we build,” Cook responded. “It’s absolutely critical to us, and of course we have been doing research across a wide range of AI technologies for years.”