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Can Apple's Services Counteract Flagging iPhone Sales?

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Late last month, Apple (AAPL - Free Report) released fiscal first-quarter earnings that barely came in above estimates. However, revenues experienced a year-over-year slump, largely due to a slide in iPhone sales. A large part of the softness emanated from a drastic decline in sales in China and other emerging markets.

However, the software giant witnessed continuing momentum in services, which experienced strong growth over last year. A popular theory doing the rounds is that Apple’s service lines will help to negate the impact of falling iPhone sales.

In fact, Apple is shortly expected to launch its highly anticipated video streaming service. A publishing service is expected to follow shortly. However, the jury is still out on the subject following skepticism over its revenue sharing models.

iPhone Sales Slide, Services Grow

In fiscal first-quarter 2019, declined 15% from the year-ago quarter to $51.98 billion, lagging the consensus mark of $52.27 billion. Top-line growth was negatively impacted by weakness in Greater China and emerging economies.

In contrast, Services increased 19.1% year over year to $10.88 billion and accounted for 12.9% of sales. (Read: Apple Q1 Earnings Beat Estimates, Revenues Down Y/Y)

Despite its recent troubles, shares of Apple are up 8% year to date. Other members of the much-vaunted FAANG group have also enjoyed a strong recovery this year.

Shares of Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Netflix (NFLX - Free Report) and Facebook (FB - Free Report) are up 7.1%, 6.2%, 33.3% and 24%, respectively, over the same period. Incidentally, Facebook is the only one of these stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Apple Responds to Sales Slide With Services Push

Notably, slowing iPhone sales caused Apple to trim its revenue forecast for the first time in 16 years. It comes as no surprise then that analysts and market watchers are touting services as Apple’s big savior in the days to come.

Apple Music is the company’s big success and the iPhone maker is trying to capitalize on this and the strong performance of cloud services by launching other such lines. A video streaming service is likely to be unveiled on Mar 25 along with a publishing service.

However, per CNBC, Apple is pushing for a 30% cut on every customer who subscribes to the service instead of 15% that it currently charges on revenues from customers signing to HBO Now service through App Store.

Revenue sharing has also been a bone of contention between Apple and a host of major publishers for the upcoming paid news service. Reportedly, Apple has demanded a revenue cut of roughly 50%. (Read: Apple Likely to Unveil Video Streaming Service on Mar 25)

Services Unlikely to Boost Sagging Fortunes

According to Tim O'Shea of Jeffries, Apple’s video streaming service can at best garner 250 million subscribers in the next four years. Even then it would contribute only 5% of last year’s revenues. This would be completely insufficient to make up for falling iPhone sales.

Meanwhile, the revenue-sharing model for Apple’s services is reportedly deeply flawed. For instance, the company is demanding 50% for its subscription service and won’t provide publishers with subscriber data.

This means that these new services may collapse even before getting off the ground. Clearly, the powers that be at Apple have a lot of thinking to do. Merely launching new services will not be able to negate Apple’s falling iPhone sales.

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