What Apple Wants You To Know

The Street mostly seems to be in agreement about Apple‘s (NASDAQ:AAPL) fiscal third-quarter results: They were solid all around. Thanks to strong performance in every geographic segment and big lifts from iPhone, services, and the Other Products segment, revenue increased 17% year over year while earnings per share soared 40%.

But for investors to get a full understanding of just how well the tech giant is doing, it’s worth checking on Apple’s third-quarter earnings call with analysts, where management provided details beyond the headline metrics. Important topics discussed during the call included lengthening iPhone replacement cycles and an interesting key catalyst for services.

Here are some of the most insightful quotes from the call.

1. Apple’s answer to lengthening replacement cycles

Though Apple’s third-quarter iPhone revenue was up 20% year over year, unit sales increased just 1% during this time frame. This means if Apple faces headwinds related to increasing the iPhone’s average selling price in the future, the important product segment could run into trouble. Asked whether Apple attributes its challenges with growing unit sales to lengthening replacement cycles, Apple CEO Tim Cook acknowledged this is a factor:

In terms of replacement cycles, as I’ve mentioned I think on a previous call, some replacement cycles are lengthening. I think that the major catalyst for that was probably the subsidy plans becoming a much smaller percentage of total sales around the world than they were at one time.

To combat lengthening replacement cycles for iPhones, Cook says Apple is turning to product innovation: “But I think for us, the thing that we always have to do is come out with a really great, innovative product.”

This is easier said than done, of course. To Apple’s credit, Cook and his team have proven they can pull this off in recent years with the launch of higher-end iPhones — namely the iPhone X — that customers are willing to pay more for and with the introduction of new products, including the Apple Watch in 2015 and the AirPods in late 2016. Both products went on to help drive significant growth in Apple’s Other Products segment.

2. Apple Watch and AirPods remain star products

Speaking of the Other Products segment, it continues to be integral to Apple’s growth story. Other Products revenue was up 37% year over year, driven primarily by a 60% year-over-year increase in wearables revenue — or revenue from Apple Watch, AirPods, and Beats products.

Apple CFO Luca Maestri spoke highly of the continued success of Apple Watch and AirPods:

Apple Watch continues to be the best-selling smartwatch by a wide margin, and units and revenue grew dramatically during the quarter. AirPods continue to be a runaway success, and we’ve been selling them as fast as we can make them since their launch a year and a half ago.

3. Subscriptions: A significant boon for services

The services business is also among Apple’s fastest-growing segments. Services revenue increased 31% year over year in Q3, to a record $9.5 billion. Services accounted for 18% of total revenue — second only to iPhone and handily beating Apple’s third-place Mac segment, which made up 10% of total revenue.

While a range of factors are helping drive services’ strong growth, one noteworthy catalyst is the rapid growth in revenue from subscriptions to apps in the App Store.

“Revenue from subscriptions accounts for a significant and increasing percentage of our overall services business,” Cook said. “What’s more, the number of apps offering subscriptions also continue to grow.”

With nearly 30,000 apps now offering subscriptions, total paid subscriptions across Apple’s platform have surpassed 300 million, Cook said. This is a 60% year-over-year increase in paid subscriptions.

source: fool.com