Apple aims for iPhone 11 rebound even as current iPhone sales dip

The company's rosier outlook is largely prompted by wearables and a raft of new services like Apple Arcade and Apple TV Plus.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
5 min read

Apple is counting on services to boost its financial results. 

Angela Lang/CNET

Apple's iPhone business may be struggling, but the company is pretty optimistic about the services running on the device. In its third-quarter earnings report Tuesday, Apple offered a rosier-than-expected prediction for the next period thanks to things like the App Store as well as other products like wearables, even as iPhone sales have continued their trend of declines.

The company no longer breaks out the number of smartphones it sells each quarter, but Apple said iPhone sales slid 12% to $26 billion in its fiscal third quarter. Higher services revenue, combined with rising iPad , Mac and wearables sales, helped the company eke out a gain in third-quarter revenue. Its overall sales and profit were better than expected.

CEO Tim Cook noted that the period was Apple's biggest June quarter ever. In a press release, he highlighted "all-time record revenue from services, accelerating growth from wearables, strong performance from iPad and Mac and significant improvement in iPhone trends."

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At the same time, Apple projected that its fiscal fourth-quarter revenue would total $61 billion to $64 billion, an optimistic forecast compared with what Wall Street was looking for. Analysts had expected Apple's revenue for the quarter ending in September to total $61.02 billion, according to a poll by Thomson Reuters.

"The balance of calendar 2019 will be an exciting period, with major launches on all of our platforms, new services and several new products," Cook said in a press release. Chief Financial Officer Luca Maestri noted that the better-than-expected revenue projection came from "continued strong growth from the non-iPhone categories," particularly services and wearables. 

"These two categories have become really important and really large for us," Maestri said during a call with analysts. "And so as we continue to grow quickly, that is going to help us as we go through the year."

Apple shares rose 2.9 percent, to $214.90 apiece, in after-hours trading. 

Though Apple has been diversifying its operations into new services and products, the iPhone remains its biggest moneymaker. The company's fiscal fourth quarter, which runs through September, likely will include the first couple of weeks of sales of the next iPhones. Apple is expected to release three new models in September, with at least one reported to have three rear cameras. The new devices likely will maintain the same basic design as 2017's iPhone X and last year's iPhone XS and XS Max

We're all holding onto our phones longer (in the US, people upgrade about every three years instead of every two), and the biggest change to come to smartphones this year -- super fast 5G connectivity -- likely won't arrive in the iPhone until late 2020 at the earliest. The changes expected in this year's iPhones may not be enough to get people to rush to stores. 

"This is the first time since 2013 where iPhones did not account for the majority of Apple's revenue in a quarter," eMarketer analyst Yoram Wurmser said. "With iPhone sales dipping, Apple is trying to get more money from existing iPhone owners by promoting new services." 

Cook noted that while iPhones sales tumbled 12%, it was a smaller decline than the second quarter's 17% drop. 

"We're encouraged by the results we're seeing from the initiatives that we spoke about in January, including strong customer response to our in-store, trade-in and financing programs," he said during a call with analysts. "In fact, iPhone in our retail and online stores returned to growth on a year-over-year basis in the month of June."

Apple challenges and opportunities

Apple's iPhone business has struggled in recent years. In 2016, the company reported its first iPhone sales drop since the device launched in 2007, despite the introduction of the iPhone 7 and 7 Plus in mid-September of 2016. It wasn't until the iPhone X arrived the following year that sales again surged. But the reprieve was short-lived. In January of this year, Apple issued a rare warning -- its first in nearly 17 years -- that its fiscal first-quarter financial results wouldn't be as strong as the company had anticipated.

It's not just the iPhone slowdown that could hurt Apple. The company is facing possible government investigations into its App Store business practices, and it also could see tariffs on many of its products: President Donald Trump last week tweeted that his administration won't grant exemptions for Mac Pro parts made in China. "Make them in the USA, no Tariffs!" he said.

Cook on Tuesday said Apple would like to build the Mac Pro in the US, and it did with the older generation of the product. A report previously said Apple planned to build the computer in China

"The vast majority of our products are kind of made everywhere," Cook said. "We've been making the Mac Pro in the US, and we want to continue doing that. And so we're working and investing currently in capacity to do so because we want to continue to be here."

Maestri said Apple's fourth-quarter guidance includes almost $1 billion of foreign exchange headwinds.

Apple sees services as its next big opportunity. The area, which includes the App Store and Apple Music, has soared thanks to all of us who own the 1.4 billion active Apple devices out there. In March, Apple hosted its first services-focused event, where it unveiled its first TV streaming service. Along with jumping into TV and music streaming, Apple introduced a gaming service called Apple Arcade and launched news subscriptions. It even plans to offer its own credit card, the Apple Card, this summer. Whether these services will be successful remains an open question until they actually launch.

Cook noted that services strength was "broad based." There are now over 420 million paid subscriptions across Apple's services, and the company remains on track to double its fiscal 2016 services revenue, which totaled $24.3 billion, in 2020. 

"We set new all-time records for AppleCare, Music, cloud services and our App Store search ad business, and we achieved a new third-quarter revenue record for the App Store," Cook said. "What's more, we had double-digit services revenue growth in all five of our geographic segments." Cook added that the company's Apple Card credit card will launch in August

Cook also touted a "blowout quarter" for Apple's wearables business, which generated $5.5 billion. He said the wearables business, powered largely by the popular AirPods headphones, is bigger than 60% of the Fortune 500. 

Overall, Apple on Tuesday reported third-quarter earnings of $10 billion, or $2.18 a share, down from $11.5 billion, or $2.34 a share, a year earlier. Analysts had anticipated per-share earnings of $2.10 a share, according to a poll by Thomson Reuters.  

Apple also said its revenue increased slightly to $53.8 billion, from $53.3 billion, for the three months ended June 29. Analysts expected the tech giant to report $53.4 billion in revenue, according to Thomson Reuters. 

Services revenue increased 13% to $11.5 billion; wearables, home and accessories rose 48% to $5.5 billion; iPad sales increased 8.4% to $5 billion; and Mac sales rose 11% to $5.8 billion. 

"When you step back and consider wearables and services together ... they now approach the size of a Fortune 50 company," Cook said.

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Originally published June 30, 1:46 p.m. PT
Updates, 2:44 and 2:55 p.m.: Adds comments from conference call.