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Apple dialling in on non-phone services, devices, to remain viable

Apple did not have a great 2018, and 2019 isn't looking much better. Apple can no longer hitch all its hopes and dreams on the iPhone anymore.

Q1 2019 results show that the iPhone is no longer Apple's poster boy The new results also indicate a focus shift Apple announced in Q4 2018 that it will no longer disclose number of iPhones it sells, sparking investor uncertainty

Things did not go so well for Apple in 2018, and 2019 might not be looking any better.

While Apple celebrated becoming the first US publicly traded company to hit $1 trillion market capitalization, its joy was short-lived.

Not only was it overtaken by Huawei in terms of smartphones sold in Q2, it was also losing ground in China, a key market for the company.

Now, Apple has released its Q1 2019 report, and there’s an indication of a focus shift.

The bad: iPhone less popular, sales down

(Graph by Business Insider Intelligence, based on Apple data)

Apple is starting the new year with a lackluster start.

Dave Lee, the BBC’s Technology Correspondent, said that this quarter is “Apple’s worst performing quarter years.”

Most notably, iPhone sales fell 15% in the latest quarter. This is quite troubling: For a quarter marked by major spending during the winter holidays to show reduced iPhone sales, means that the iPhone isn’t the smartphone superstar it once was. Apple will need a course correction (more on this in a bit).

The company posted quarterly revenue of $84.3 billion, a decline of 5% from the year-ago quarter.

After going through a rollercoaster of a year, Apple stock has declined 7.9% today year-on-year from $167.96 to $154.68. On the upside, and perhaps breathing a sigh of relief that the results and forecast weren’t even worse, investors reacted positively to the report, bidding the stock up nearly 6% in after-hours trading to $163.45, Business Insider reported.

(Graph based on Bloomberg data, excerpted from the BBC)

As for the upcoming Q2, Apple isn’t too confident. It predicted revenue for the three months to 31 March of $55bn-$59bn – suggesting a drop of at least 3.4% year-on-year, the BBC noted.

In the earnings call, Apple CEO Tim Cook noted that iPhone users were holding on to their phones for much longer than before. 2018 showed clear signs of this.

“Lines outside Apple stores when the iPhone XS and iPhone XS Max went on sale were smaller than they were in years past,” Business Insider revealed last year.

Citi Research Innovation Lab also discovered that online Google searches for the word iPhone have also decreased in recent years.

(Graph by Citi Research Innovation Lab)

“We believe this indicates the market has been maturing, and customers are getting less excited for each new generation of iPhone,” they said. “We suspect this is because of a slowdown in innovation and the saturation of iPhone in the addressable market.”

To make matters worse, the falling value of foreign currencies, such as the Turkish lira in direct relation to the US dollar, has consequently made iPhones even more expensive than they already are in countries like Turkey. To counter this, it was announced during the report that the iPhone’s retail price would be dropped in affected countries.

The good: Apple’s fortune lies with services and other devices

What this Q1 report showed is that Apple will have to diversify its income streams to stay afloat. While it’s in no critical danger, the falling sales of the iPhone indicate that the company will need to shift its focus.

Tuesday’s report has clearly illuminated the direction the company needs to take.

According to the company’s statement, total revenue from all other products and services (other than the iPhone) grew 19%. Services revenue reached an all-time high of $10.9 billion, up 19% over the prior year.

Revenue from the Apple Mac and wearables, home devices and accessories, also reached all-time highs, growing 9% and 33%, respectively, and revenue from the iPad grew 17%. The AirPods, for example, have become a resounding success, with renowned Apple analyst Ming-Chi Kuo forecasting that the company could sell 50-55 million units in 2019.

“The gross margin for the services business (iCloud, Apple Music, etc.) — the difference between the revenue Apple garners from those offerings and its direct costs of providing them — was 63% in the quarter, up from 58% in the year-ago period,” Business Insider explained.

“Our active installed base of devices reached an all-time high of 1.4 billion in the first quarter, growing in each of our geographic segments,” Cook said. This is up 100 million from the beginning of last year.

As for the iPhone, despite a drop in sales, its “installed base” tallies 900 million current active users. This is up 75 million from the previous year, the company said. So, while not everyone is buying new iPhones, many users have remained loyal and stuck with their older Apple handhelds.

With this new data, “Apple is transitioning, slowly, into a different kind of company that isn’t so reliant on hardware, and these numbers show that so far that transition is going well,” Lee said in a report for the BBC.

“While it was disappointing to miss our revenue guidance, we manage Apple for the long term, and this quarter’s results demonstrate that the underlying strength of our business runs deep and wide,” Cook said.

Q2 2019 forecast

Apple is providing the following guidance for its fiscal 2019 second quarter:

– revenue between $55 billion and $59 billion

– gross margin between 37% and 38%

– operating expenses between $8.5 billion and $8.6 billion

– other income/(expense) of $300 million

– tax rate of approximately 17%