Apple’s Focus On Cloud Services Pays Off

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Earlier last week, Apple (Nasdaq: AAPL) announced its fourth quarter results that surpassed market expectations. The stock fell 5% in the after-hours trading session, primarily due to disappointing iPhone sales.

Apple’s Financials

Apple’s fourth quarter revenue grew marginally to $64.7 billion, significantly ahead of the market’s forecast of $63.7 billion. EPS of $0.73, was ahead of the Street’s forecast of $0.70 for the quarter.

By segment, iPhone revenue fell 20.9% to $26.4 billion, significantly short of the market’s forecast of $27.06 billion. Mac sales grew 30.4% to $9 billion and iPad sales grew 45.9% to $6.8 billion. Revenue from Wearables grew 20% to $7.8 billion. The services segment revenue grew 16% to $14.5 billion. Apple now has over 585 million paid subscribers across its Services portfolio, growing 135 million over the year.

For the fiscal year, revenue declined 2% to $274.5 billion compared with $260.2 billion a year ago. Net income was $57.4 billion or $11.89 per share. iPhone sales declined 13.6% or by 22.5 billion to $142.4 billion. Given the current uncertainties, Apple did not provide any forecast for the current quarter.

Apple’s Service Upgrades

During the quarter, Apple released many new products to expand its market reach. It recently released a HomePod Mini that delivered unmatched sound quality and Siri, along with smart-home capabilities in an affordable and small format. Apple also continues to upgrade its connected devices and recently announced its first 5G enabled devices.

The much-awaited iPhone 12 was released recently along with an iPhone 12 Mini. The phones boast of breakthroughs like an edge-to-edge Super Retina XDR display and unprecedented durability with a new ceramic shield. The phones have been developed with partners at Corning and feature new MagSafe charging and accessories, the fastest ever A14 Bionic chip, and a new dual-camera system powered by computational photography. The iPhone 12 Pro and 12 Pro Max are even more focused on photography and include an all-new LiDAR scanner and the ability to shoot an Apple ProRAW and full Dolby video. Apple claimed that the early product reviews have been positive and it is optimistic of seeing improved revenues in the holiday quarter for the phones.

Earlier this quarter, it also announced a new Apple Watch Series 6 that comes with several powerful new health and wellness features including a blood oxygen sensor, a next-generation altimeter, and a wide variety of new colors and bands. Within the health segment, Apple recently entered into a tie-up with the government of Singapore. As part of the partnership, the two launched LumiHealth, a first of its kind program designed to encourage healthy activity and behaviors using Apple Watch. The program has been created in collaboration with a team of physicians and public health experts and uses technology and behavioral insights to encourage residents of Singapore to stay healthy and complete wellness challenges through their Apple Watch and iPhone.

Its iPad is also not to be left behind. The new iPad Air is now shipping with the A14 Bionic. Other upgrades include Apple Fitness Plus that delivers deep personalization and integration across fitness tools and Apple One, which is an integrated digital service that will allow users to use Apple’s services like Music, TV+, Arcade, iCloud, News+ and Fitness+ on a single family plan.

Despite the better than expected results, and a growing list of new products, the market was not too impressed with the iPhone’s performance. A recently released IDC report also proved to be a dampener. For the third quarter of the year, IDC reported Samsung as the leading vendor with 80.4 million smartphones sold globally, translating to a 3% growth over the year. Huawei and Xiaomi were the second and third largest vendors with Xiaomi delivering an impressive 42% growth over the year. Apple, on the other hand, is the fourth largest vendor with 41.6 million units shipped in the third quarter of the year, but reporting a 10.6% decline over the year. Apple doesn’t appear too worried and expects iPhone revenues to grow in the holiday season.

App Store Growth

The good news for Apple, though, was the impressive growth of its cloud services. During the quarter, Gaming accounted for 66% of its App Store spend and delivered revenue growth of 24% over the year. The recent loss of Fortnite was a worry for Apple gaming revenues, but Apple’s gaming revenue grew 25% in October itself. App downloads in all regions except China also remained impressive at a y-o-y growth of 6% in October. Analysts believe that in the near-term, App Store net revenue growth will continue to grow as users remain more engaged with the App Store primarily due to the launch of the new iPhones and the continued lockdown conditions that are keeping people at home, and more glued to their screens.

Its stock is trading at $118 with a market capitalization of $2.01 trillion.

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Photo credit: Lawrence Wang/Flickr