Apple Beyond the iPhone

For the past few quarters, Apple (Nasdaq: AAPL) was struggling because of the saturated smart phone market. iPhone sales were lagging and the market wasn’t too happy with the growth on its other initiatives. But the recently reported quarter seems to prove that things may have turned around. This was a big quarter for Apple. Not only was it the holiday quarter, but it was also the first full quarter for iPhone 7 sales.

Apple’s Financials

Apple’s fiscal 2017 first quarter revenues grew 3% over the year to $78.4 billion, ahead of the Street’s forecast of $77.3 billion. EPS of $3.36 was also ahead of the market’s projected earnings of $3.22 per share. This was the highest quarterly revenue ever in Apple’s history, along with all-time unit and revenue records for iPhone and Apple Watch; all-time revenue records for services and Mac; and all-time revenue records for four out of their five geographic segments.

By segment, Apple’s iPhone revenues grew 5% over the year to $54.38 billion. iPhone sales increased 5% over the year and 72% over the quarter to 78.29 million units. The market was expecting 77.42 million units to be sold. iPad sales fell 22% over the year at $5.5 billion driven by a 19% reduction in units sold. Mac sales grew 7% to $7.24 billion as units sold improved 1% to 5,374 million. Services revenues grew 18% to $7.17 billion, surpassing market expectations of $6.91 billion. Revenues from other products, which include sales from Apple Watch and AppleTV, fell 8% to $4.02 billion.

By region, Apple’s revenues from the Americas grew 9% over the year $31.97 billion and sales from Europe grew 3% to $18.5 billion. Revenues from Japan grew 20% to $5.77 billion and rest of Asia Pacific improved 8% to $5.86 billion. Revenues from the Greater China region continued to fall and declined 12% over the year to $16.23 billion. Apple had earlier blamed the declining revenues on macro economic conditions, but the country has also been a difficult market to crack. Chinese buyers favor buying phones from local manufacturers such as Huawei and Xiaomi that offer high-end features at a lower price point. On top of that Apple has to deal with China’s regulatory authorities that have banned media services.

For the current quarter, Apple forecast revenues of $51.5 billion-$53.5 billion with gross profits of 38%-39% and operating expenses of $6.5 billion-$6.6 billion. The numbers translate to an EPS of $1.89-$2.06. The market was looking for revenues of $52.79 billion and EPS of $2.09 for the quarter.

Apple’s Growth Engine

iPhone sales did help Apple deliver a strong quarter, but the growth also highlighted how dependent Apple is on its phones. Apple is trying to change that for the future by trying to find a new breakthrough market by experimenting in Homes, Cars, and TVs.

One such experiment is in the services segment, which saw revenues grow 18% to $7.2 billion. Apple believes that it will be able to double that number in the next four years. Part of the growth for the segment is expected to come from original content. It has already tested the waters for content development in Apple Music where it continues to roll out new programs. It is now looking to expand the content to cover Apple TV’s programming as well. The foray into content development would mean that Apple users could become even more entrenched in the Apple ecosystem. I think as part of this initiative, Apple could also look at acquiring Netflix. Apple will be able to leverage Netflix’s library of content to provide a proprietary content service that could be integrated into Apple TV and iTunes.

Apple is expanding its ecosystem to be able to connect with people all the time – both in their homes and on the go. Within home automation, it is a leading player in the industry. It has pioneered the integration of home automation into a major platform with iOS 10. It launched a new Home app on iOS 10 that is integrated with Siri and allows users to easily and securely manage all their home accessories through iPhone, iPad, or the Apple Watch. As market adoption increases, so will the number of devices that connect to the Home. At present, some of the connected HomeKit-compatible accessories include video cameras, motion detectors, light dimmers, sensors for doors, windows, and water leaks. Clearly, this is a high competition market with Alphabet also investing in the technology.

For consumers on the go, Apple is trying to remain connected with them through other devices and services besides the phones. It has enhanced the CarPlay service by integrating it with Siri as well. CarPlay is now available on more than 200 different models, including five of the top ten selling models in the United States and has over a million users on the platform. It allows users to use their iPhones while in the car by putting the things the user wants to do with their iPhone right on the car’s built-in display. Users can get directions, make calls, send and receive messages, and listen to music, all the while driving safely and through communication with Siri.

Finally, within the enterprise segment, it appears to be making significant progress as well. Its partnership with Cisco Technology is helping improve the user experience for mobile employees by offering networking performance that has 8x faster roaming, higher reliability for apps, and native voice experience. Similar results are seen in its IBM partnership where enterprises are using IBM’s new mobile-at-scale design and development model to deploy multiple iOS apps. Later this year, SAP will be rolling out its SDK for iOS to provide over 2.5 million developers the tools to build powerful, native iOS apps that will leverage the SAP HANA cloud platform.

The market is pleased with Apple. Its stock is trading at $128.75 with a market capitalization of $675.4 billion. It touched a 52-week high of $130.49 following the result announcement. It has recovered from the 52-week low of $89.47 it had fallen to in May last year.

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Photo credit: Lawrence Wang/Flickr