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Apple Earnings: Diversifying Away From iPhone Is Finally Working

By Evan Niu, CFA - Updated Nov 22, 2019 at 12:34PM

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The Mac maker continues to reduce its reliance on the iPhone, paving the way for a busy holiday shopping season for other offerings.

With shares hovering near all-time highs, Apple (AAPL -2.46%) reported fiscal fourth-quarter earnings last night. Many familiar themes that have been playing out over recent quarters -- continued iPhone stagnation, booming services and wearables growth, and stable margins -- were present. Further boosting investor confidence, Apple also issued strong guidance for the quarter ending in December that topped Wall Street's best guesses.

Let's dig in.

AirPods Pro launch in an Apple store

Apple also launched AirPods Pro yesterday. Image source: Apple.

Strength in wearables, iPad, and services offset iPhone weakness

Revenue in the fiscal fourth quarter rose by 2% to $64.04 billion, ahead of the high end of the company's guidance. iPhone revenue declined by 9% to $33.4 billion, and Mac sales fell 5% to $7 billion. The all-important services segment put up solid growth of 18% to hit a record $12.5 billion, while wearables (up "over 50%") and iPad were similarly strong. Incredibly, Apple's wearables, home, and accessories segment is now approaching the size of the Mac business.

Apple now has 450 million paid subscriptions on its platforms, adding another 30 million during the quarter. It's only been a couple of weeks since the first Apple Arcade subscribers exited the one-month free trial, so it's too early to tell how that mobile gaming service will ultimately perform, CEO Tim Cook said. Cook did acknowledge he was "pleased with the number of people that entered the trial period."


Fiscal Q4 2019

FY 2019


$33.4 billion

$142.4 billion


$7 billion

$25.7 billion


$4.7 billion

$21.3 billion

Wearables, home, and accessories

$6.5 billion

$24.5 billion


$12.5 billion

$46.3 billion

Data source: SEC filings.

Cook also noted that Apple topped $100 billion in U.S. revenue for the first time this fiscal year. (That occurred in the fiscal second quarter when trailing-12-month U.S. revenue hit $100.5 billion.) All told, Apple posted net income of $13.7 billion, or $3.03 per share.

$98 billion to go

Apple continues to work toward its "net cash neutral" goal first set in early 2018, with gross cash of nearly $206 billion. The company returned to the debt markets in early September after a borrowing hiatus, issuing $7 billion while retiring $3 billion of maturing debt and reducing outstanding commercial paper by $4 billion. That puts total debt including commercial paper at approximately $108 billion, leaving a net cash position of $98 billion.

Chart showing Apple's net cash position

Data source: Apple. Chart by author. Calendar quarters shown.

The company has now reduced its net cash position by nearly $50 billion since setting the goal in early 2018, or roughly a third. Apple repurchased $17.9 billion in stock during the quarter, all in open market transactions, while paying out $3.5 billion in dividends.

Bullish outlook despite the trade war

With the holiday shopping season on the horizon, Apple issued a bullish forecast for the coming quarter. Revenue is expected to be in the range of $85.5 billion to $89.5 billion; that midpoint of $87.5 billion is ahead of the $86.9 billion in sales that analysts are currently modeling for. Baked into that top-line outlook is a $1 billion hit related to foreign exchange, which CFO Luca Maestri noted "continues to be probably the biggest headwind that we've got right now."

Gross margin is expected to be 37.5% to 38.5%, or sequentially flat at the midpoint. Apple typically enjoys a sequential uptick in gross margin thanks to operating leverage in the holiday quarter, but this time around the company is grappling with other factors, including President Trump's tariffs. A new round of tariffs is expected to be implemented in December but that could change, and Cook is still optimistic about U.S. trade tensions with the Middle Kingdom.

"So we are paying some [tariffs that have] been comprehended," Cook said. "But in general, my view is very positive in terms of how things are going, and that positive view is obviously factored in our guidance as well."

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