Apple’s earnings were a lot better than they look

Apple (AAPL) announced its Q1 earnings on Thursday, reporting a rare miss on analysts’ expectations, as revenue fell 5% year-over-year to $117.2 billion. What’s worse, iPhone sales, which make up more than half of Apple’s total revenue, declined 8% year-over-year to $65.7 billion.

For any other company, those results would have been a disaster. Just look at Amazon (AMZN), which reported a full-year net loss of $2.7 billion. As of Friday, shares of the e-commerce giant were off more than 4%. Microsoft (MSFT)? After announcing slowing cloud growth last week, its shares were down about 1%. Shares of Google parent Alphabet (GOOG, GOOGL), meanwhile, were off more than 1% after the company reported declining ad sales.

You’d think Apple would face the same kind of reckoning on Wall Street as its peers. But as of noon Friday, shares of the iPhone maker were up more than 3%. The reason? Apple’s report wasn’t as bad as it could have been. In fact, despite a decline in iPhone, Mac, and Wearables revenue, there was good news as well.

The standout from the report was that Apple’s install base now comprises a whopping 2 billion devices. The iPhone install base in particular is at an all-time high, and saw double-digit growth in emerging markets, with CFO Luca Maestri specifically calling out both Mexico and India during the company’s earnings call. And that, he said, helped push the company’s Services revenue to a record of $20.8 billion.

Apple CEO Tim Cook presents the new iPhone 14 at an Apple event at their headquarters in Cupertino, California, U.S. September 7, 2022. REUTERS/Carlos Barria

What’s more, Apple said the number of paid subscribers for its various services topped out at 935 million users. That’s 150 million more than the company had a year ago and four times as many as it recorded five years ago.

Apple has been pushing its services growth for years as a means to help offset its dependence on iPhone sales, and with the business now raking in $20.7 billion in Q1, it’s the company’s second largest money maker behind the iPhone.

“Both paid and transacting accounts grew double-digits [year-over-year]…which tells us that Apple continues to penetrate the installed base and increase monetization,” BofA Global Research analyst Wamsi Mohan wrote in a note following Apple’s report.

As Morgan Stanley’s Erik Woodring pointed out in his own investor note, Apple’s ecosystem growth means that there is still “meaningful room to increase spend per user.”

Apple’s gross margins are also expected to come in between 43.5% and 44.5% in the coming quarter, something that Wedbush’s Dan Ives says is a result of Apple’s push to bring more of its device components, including its chip development, in house.

What’s more, Apple CEO Tim Cook says that iPhone production is back to normal following worker protests over COVID lockdowns at a Foxconn plant in China in November and December. That should address at least some of the decline in iPhone sales moving forward.

There still could be trouble ahead

That’s not to say that the story out of Cupertino is sunshine and rainbows. Apple is still a company that lives and dies on the spending habits of consumers, and with consumer confidence low, Mohan says there is concern about end market demand for Apple’s products.

The decline in iPhone sales wasn’t just a supply problem, either. According to IDC’s Worldwide Quarterly Mobile Phone Tracker, smartphone shipments declined 18% in Q4, on slowing demand for phones as consumers pull back on spending following the boom companies saw during the pandemic.

What’s more, Apple is forecasting that Mac and iPad sales will decline double digits in the coming quarter. And that’s after Apple released new MacBook Pros and Mac minis with the company’s latest M2 Pro and M2 Max chips. New computers would normally drive sales growth, but it looks like they simply can’t match the same increases Apple saw last year.

Still, unlike its other Big Tech cohorts, Apple’s business has seemingly remained resilient enough to keep it from having to lay off any of its employees. And Wall Street appears to have taken notice.

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