Apple's earnings forecast beat expectations, despite slumping iPhone sales. Here's why.
The vast majority of Apple’s AAPL, -1.93% revenue comes from sales of its smartphones, but as smartphone sales have stagnated, Apple has had to look elsewhere for growth. So far, the results in this fiscal year haven’t been great: Apple revenue declined 4.6% year-over-year in the fiscal first quarter, and 5.1% in the second quarter that Apple reported Tuesday.
As Morgan Stanley analyst Katy Huberty pointed out in the conference call Tuesday, that forecast would mean a much smaller sequential decline between the second and third quarters than Apple has historically posted. Huberty said that decline has been around 15% historically, and sales declined 12.7% last year and 15.1% the year before between the two quarters, but Apple’s guidance suggests sales will drop less than 10% sequentially this year.
The non-iPhone categories were a big help in the second quarter, when iPhone sales dropped more than 18%. Apple’s services revenue was the growth engine, with sales increasing nearly 25% to more than $11.5 billion, while iPad sales continued to show a strong rebound with an 18% increase and wearables jumped nearly 30%.
“The relative stabilization in China is a principal reason Apple can return to overall growth in the June quarter, two quarters earlier than we previously expected,” BTIG analyst Walter Piecyk wrote in a note Tuesday evening, while increasing his price target on Apple stock to $234 from $220. “To be clear, it’s still declining, just not as much and without impacting gross margins as much as we had feared.
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