Apple Shares Up Despite iPhone Sales Drop, Conservative Next-Quarter Guidance

The stock closed 10.6 percent higher to $165.25 Wednesday. D.M. Martins Research cited Apple’s 6 percent premarket gain, seeing as positives the services report, that iPhone softness was mostly confined to China and “the realization that the stock may have been discounted as much as could be reasonably expected, given the company's challenges.”

Apple revenue in China fell by $4.8 billion from the year-ago quarter across the iPhone, Mac and iPad, said Cook. Most of the shortfall vs. the company’s original guidance, and all of its worldwide revenue decline, was driven by lower sales in greater China, he said. Weaker-than-expected iPhone sales -- $51.9 billion vs. $61.1 billion -- contributed to a 5 percent revenue decline to $84.3 billion, said the company. Outside of the iPhone, Apple revenue grew 19 percent, Cook said.

The company's services business has grown from $8 billion in 2010 to over $41 billion last year, Cook said. The largest category accounts for less than 30 percent of total revenue, and new services launched in the past few years are experiencing “tremendous growth,” he said. Services brought in $10.9 billion vs. $9.1 billion in the year-ago quarter.

Some analysts focused on deceleration in services growth. BTIG's Walter Piecyk wrote investors Tuesday: “The sub 20% growth in services is undoubtedly going to generate a good amount of dialogue among investors attempting to put its numerous pieces together.” Investors will want to know how growth will occur given a “fairly wide variety of possible drivers,” he said: Recurring services revenue provides predictability, but the range of elements in Apple’s services portfolio “and its relatively low penetration of subscriptions among the installed base do not provide us that level of confidence yet.”

It's not the only smartphone maker suffering in China. Canalys reported Monday smartphone shipments there fell to their lowest level since 2013, at 396 million units, as consumers keep phones longer during an economic slowdown. In Q4, shipments dropped 15 percent, for the seventh straight quarter of decline. Huawei and Vivo grew 16 percent and 9 percent, but Xiaomi 2018 shipments dropped 6 percent and Apple 13 percent, it said, with Apple’s falloff in China marking the third consecutive year.

China’s weak macro conditions were “significantly more severe than we originally foresaw,” Cook said, but disappointing Q1 results were also hit by lower foreign exchange rates due to the strong dollar, a reduction in iPhone subsidies from carriers and fewer-than-expected iPhone upgrades after fall launches of the iPhone XS and XS Max and the XR. “Customers are holding on to their older iPhones a bit longer than in the past,” Cook said. Part of that owed to company’s battery upgrade program. Analysts questioned the program due to its impact on upgrades, but “we strongly believe it was the right thing,” Cook said.

Timing of the three latest phone introductions made for difficult year-over-year comparisons, with the iPhone X not shipping until December 2017, Cook said. Of the three new models, the least expensive XR is most popular, followed by the XS Max and XS.

The iPad’s Q1 growth rate was strong at 17 percent, but unit sales and average selling price comparisons weren’t given under Apple’s new reporting structure, making it “difficult to predict an outlook for this segment,” said BTIG’s Piecyk, noting the tablet category "has underperformed for years." Apple claimed half of purchases in the quarter for first-time tablet buyers, and Verizon showed higher tablet sales for the quarter.

For Q2, Apple projected 'conservative" revenue between $55 billion and $59 billion.