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Apple Increasingly Dependent on Services Revenues as iPhone Sales Slip

- By Sangara Narayanan

Apple (AAPL) reported second-quarter earnings that beat expectations but fell short of forecasts.

The world's No. 1 premium smartphone maker sold 50.763 million iPhones during the quarter, compared to 51.193 million units sold last year, a drop of 1%. The higher-cost iPhones sold this year compared to last year made for the unit shortfall as iPhone revenue increased by 1% during the quarter to touch $33.249 billion.


Apple posted adjusted earnings per share (EPS) of $2.10 and revenue of $52.9 billion while the market was expecting adjusted EPS of $2.02 and revenue of $53.02 billion. Apple blamed rumors of future products for hurting second-quarter iPhone sales numbers as buyers delayed their decisions to purchase.

"We are seeing a kind of delay in purchasing behavior that we think is a consequence of the number of rumors and reports about future products," Apple CEO Tim Cook told CNBC 's Josh Lipton.

Apple's revenues for the quarter grew 5% compared to last year, and the solid growth number was made possible by Apple's Services division, which saw its revenue climb by 18% to reach $7.041 billion during the quarter. Apple Services is now the second-largest moneymaker for Apple, and it is well on its way to crossing combined revenues from iPad and Mac products over the next few years.

The lack of iPhone unit volume growth is not a good sign for the recently launched iPhone model because now Apple has to wait for the next iPhone to hit the market to keep the sales numbers moving. As usual, there are plenty of rumors around when the new iPhone will actually hit the market, but no one other than Apple knows for sure.

With nearly 70% of revenues still coming from iPhone, and sales being dependent upon product refreshes and user upgrades, Apple will be looking at the Services unit to keep its overall sales numbers moving while trying to hold its ground on the iPhone front.

With device sales all over the world expected to grow at an extremely slow pace, things are difficult for device manufacturers. But despite overall market conditions being difficult for Apple, its stock price has been on a steady upward march over the past few months. The stock is up by nearly 25% since the start of the year, and continues to edge higher and higher; and the upward move continued well after the second-quarter earnings release as well.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.