What Startups Might Broaden Apple’s Services Push?

Early this month, Apple (Nasdaq: AAPL) CEO Tim Cook had warned of a bleak first quarter, the first-ever decline in a holiday quarter due to decline in Greater China. Last week, Apple announced the details of its earnings. The bright spot in its earnings was its performance in Services.

 Apple’s Financials

Apple’s first-quarter revenues declined 5% over the year to $84.3 billion. EPS was up 7.5% to $4.18. International sales accounted for 62% of the revenue. Analysts had estimated earnings of $4.17 per share on revenue of $83.97 billion.

Company gross margin was 38%. Products gross margin was 34.3% and services gross margin was 62.8%.

By segment, Apple’s iPhone revenues declined 15% over the year to $51.98 billion versus analyst estimates of $52.67 billion. Services revenue grew 19% to an all-time high of $10.9 billion versus analyst estimates of $10.87 billion. Revenue from Mac grew 9%, iPads grew 17%, and Wearables, Home and Accessories grew 33% to $7.3 billion, driven by sales of Apple Watch and AirPods. It sold 46.9 million iPhones and 9.7 million iPads during the quarter.

Revenue from Greater China declined by 27% to $13.17 billion, mainly due to price wars. China’s economic slowdown and the ongoing trade war between China and the US have added to uncertainties in the market.

For the second quarter, Apple forecast revenues of $55-$59 billion, ahead of the market’s forecast of $58.83 billion. Gross margin is expected to be between 37% and 38%. The company ended the quarter with $245 billion in cash plus marketable securities. It returned over $13 billion to its investors during the December quarter.

Apple’s Acquisitions

Apple has always believed in small but strategic investments. Over its 42-year history, it has acquired 103 companies but only one of them was over $1 billion. The acquisition in question is that of Beats Electronics in 2014 for $3 billion. Aided by its huge cash pile and Tim Cook’s new leadership, we expected Apple to take a bolder acquisitive route with the acquisition of Netflix, perhaps. However, it has shied away from any such big acquisitions and now the opportunity has passed.

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