Even Apple will need to eke out some growth

APPLE

Apple Inc. reported a good quarter of financial results this week, earning the ebullient congratulations that analysts like to give in investor calls. But it wasn’t easy, and it could be a while before it’s repeated.

Revenue climbed 8%, only slightly better than expected. When technology peers like Intel Corp. (-20%) and Meta Platforms Inc. (-4.5%) are faltering, there’s consolation in knowing at least one company can expand the top line. Its shares were down around 1% in post-market trading, following an earlier drop of as much as 5%. The tech-heavy Nasdaq composite index fell 1.6% Thursday after a 2% drop the day before.

Timing was a crucial factor in Apple’s numbers. This year’s iPhone release was the earliest in six years, adding a few more days to the September quarter and helping it hit sales growth of 9.7%. The standout, though, was a dramatic 25% jump in Mac revenue to $11.5 billion. “It was the best quarter we've ever had in the history of the company," Chief Executive Officer Tim Cook said of his company’s computer lineup.

Cook was transparent about this boom. Struggles to get products shipped out of its factories in the prior quarter delayed sales, so the September period was driven by a combination of pent-up demand and refilling the retail channel coupled with excitement over its new MacBook Air and Pro that feature its new M2 chip. Such a growth spurt won’t happen often.

Against these one-time boosts, a rising greenback once again popped up as a headwind. This is a recurring theme this quarter as US companies battle the deleterious effect of a strong home currency. Apple’s services business was among those impacted. Its 4.5% growth would have been in the double-digits on a constant currency basis, Chief Financial Officer Luca Maestri said in Thursday’s earnings call.

This services business is likely to be the cornerstone of growth in coming quarters. Once a collection of music downloads and App Store sales, this division has doubled in the past four years to become a $78 billion annual business that accounts for 20% of total revenue. And that share is likely to expand further in the coming year.

Earlier this week, the company raised prices on its Apple Music and Apple TV+ services. The monthly subscription for Music was raised 10% to $10.99 while TV jumped 40% to $6.99. Higher costs for music and its much broader range of video offerings were cited as reasons for the change. Even though both services have plenty of competition from the likes of Spotify Technology SA and Netflix Inc., it’s unlikely that customers are going to dump them over this: Netflix has already raised its fee and Spotify is considering following suit.

Apple also tweaked the rules for its App Store this past week to ensure it gets in on the crypto game. While it’s not (yet) selling cryptocurrencies or non-fungible tokens, new regulations require that related transactions made on iOS apps go via Apple’s in-app purchasing system. And attempts to take users off the platform, such as through links to alternative payments platforms, are forbidden. This could end up being a very lucrative move by Apple to extract revenue from crypto without actually being exposed to its instabilities.

With the global macroeconomic environment likely to remain weak for the coming year, Apple needs to grab revenue wherever it can. The iPhone remains popular, but recent reports indicate that demand may be softening. Its Watch had a fantastic quarter, but supply problems continue to constrain that business. We already know that the Mac boom won’t be repeated.

That leaves services. The company has over 900 million users who have paid for at least one subscription across its suite of digital products. Not all will be Music or TV+ clients, some may be buying cheaper offerings such as iCloud. But each one is a potential customer for further products, including its credit card and growing payments ecosystem that are used both online and offline. That’s a ubiquity no other company can boast, and in this current economic environment will be the bulwark against recession that few others enjoy.