The headline on Apple’s second-quarter financial report came as no surprise to anyone familiar with the company’s new rhetoric. “Services Revenue Reaches New All-Time High of $11.5 Billion,” the company, once more famous for making iPhones, trumpeted on Tuesday night.
As has been the case for several quarters, Apple and its top brass went over and above to tout the brilliance of the company’s services business, which develops software such as Apple Music, the streaming service, and Apple Pay, for digital payments. The theory is that there are 1.4 billion active iPhones, iPads and other Apple devices out there, giving the company a huge distribution platform through which it can sell software. At a showcase in March, Apple unveiled new subscription services for games, news and video, although most of these have yet to be launched.
Services revenue climbed from $9.9 billion in the same quarter a year ago and was slightly ahead of estimates of $11.3 billion. On a call with analysts on Tuesday night, Luca Maestri, 55, chief financial officer, said that there were 390 million paying subscribers to Apple services and platforms at the end of March, up by 30 million from the end of December and 120 million compared with a year ago. At some point next year there will be more than 500 million paying subscribers, he predicted.
The outperformance of Apple’s services business was one of several factors that helped the company to beat Wall Street’s sales and profit forecasts for the three months to March. Sales of iPhones were not among the other factors — and the earnings beat came on second-quarter analyst forecasts that had been reined in by Apple’s lukewarm guidance in January. Second-quarter profit fell to $11.6 billion from $13.8 billion last year and sales were down to $58 billion from $61.1 billion.
The best news for investors came in the form of a higher dividend, up by 5 per cent, a new $75 billion share buyback programme and an upbeat sales forecast for the present quarter of between $52.5 billion and $54.5 billion. The midpoint of that forecast range would represent year-on-year growth, whereas analysts were expecting a slight decline. This was a genuine surprise even to the bulls, who had foreseen continued pressure on Apple’s iPhone business in China, where sales have slumped since late last year. Tim Cook, chief executive, said that iPhone sales had strengthened in the last few weeks of March, including in China.
Apple’s shares climbed by about 5 per cent in after-hours trading on Tuesday night and closed up by 4.9 per cent, or $9.85, at $210.52 in New York last night, valuing the company at $995.4 billion.
Yet the fact remains that Apple’s iPhone business is still its most important and it isn’t doing nearly as well as it used to: iPhones accounted for $31.1 billion, or nearly 54 per cent, of sales in the second quarter, whereas services accounted for $11.5 billion, or nearly 20 per cent. True, the services business is growing as the iPhone business declines, but it is not enough to make up the difference. Sales of iPhones were $6.5 billion lower in the second quarter compared with a year ago; services sales were $1.6 billion higher.
With yesterday’s share price pop, Apple’s price-to-earnings ratio broke through the 17 mark, to 17.3, which is close to a record for the company. If iPhones were still flying off the shelves, that might be reasonable, but they are not and it takes a big leap to believe that Apple’s services business, so much of which remains untested, can make up the shortfall to justify such a valuation.
Advice Avoid
Why A bet on Apple’s services business is too risky while iPhone sales continue to slump
STV
The broadcast of The Victim on BBC One last month was a landmark for STV — it was the first prime-time drama that the company had made for another television channel (Greig Cameron writes).
For Simon Pitts, chief executive since January last year, the critical acclaim and strong viewing figures for the show appear to be vindication of his strategy for the broadcaster, which operates the channel three licence in Scotland, to beef up its output. Mr Pitts, 44, inherited a stable balance sheet and a well-run business from Rob Woodward, his predecessor. Indeed, The Victim was commissioned during Mr Woodward’s tenure, while STV also makes popular entertainment shows such as Antiques Road Trip and Catchphrase for other channels.
A second prime time drama Elizabeth is Missing, based on Emma Healey’s novel of the same name, will be shown on BBC One this year. At last month’s annual meeting Mr Pitts said that the company had ten drama scripts in development.
Results for 2018 show an 8 per cent rise in turnover to £125.9 million, underlying operating profit up 6 per cent to £20.1 million and the dividend rising 18 per cent to 20p per share. Advertising revenue increased by 4 per cent to £97.4 million, helped by the 2018 World Cup.
Mr Pitts has revamped the organisation’s senior management and is investing to develop digital operations, particularly through the STV Player catch-up and live streaming service. Content partnerships will mean that more shows are available through the STV Player this year, while a paid-for subscription version, offering programmes without advertising and the ability to watch overseas, has been launched.
The speculation that ITV may try to snap up STV at some point never seems that far away. Delivering a few more hit shows would not make the Glasgow-based company any less attractive. Its shares were 325p just before Mr Pitts, a former ITV executive, started and were 5p, or 1.3 per cent, down at 370p yesterday. The stock was changing hands for more than 450p in July last year amid takeover speculation.
Advice Hold
Why Early days for production and digital strategy, but dividend should still tick up
