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Apple has been trying to persuade investors to focus less on iPhone sales — and it may finally be working

Key Points
  • Apple soared nearly 7 percent Wednesday after reporting 15 percent lower iPhone sales compared with last year and disclosing its active installed base for iPhone for the first time.
  • Apple has been trying to persuade investors to focus more on its Services business over iPhone revenue. This quarter it did not disclose unit sales for the iPhone for the first time.
  • The stock jump suggests investors may finally be buying into Apple's narrative.
Apple CEO Tim Cook greets shoppers at a Palo Alto Apple store on Sept. 21, 2018 for the release of the iPhone XS and iPhone XS Max. 
CNBC

Apple's stock climbed 6.8 percent Wednesday after the company reported that iPhone sales — once considered the most important metric for the company — were down 15 percent compared with the same period last year. The stock jump suggests that investors are buying into Apple's narrative that iPhone sales is no longer the bedrock of the business and what matters is growing the number of active devices that can generate recurring revenue as users buy additional services.

Apple introduced this narrative in its last quarter, when it first announced it would stop breaking out unit sales for iPhone, iPad and Mac. This quarter, the company pushed that narrative forward by providing new metrics that gave investors insight into other parts of the business.

For the first time, Apple disclosed the number of active iPhones: 900 million. Its total active installed base, which represents all active Apple devices, reached an all-time high in each major product category with 1.4 billion active devices by the end of December, the company said.

The active installed base represents a blank canvas for Apple where it hopes to grow revenue by selling services such as iCloud storage and Apple Music to people with existing devices. While Apple has admitted that product upgrades have slowed down, in part due to its own initiatives such as cheap battery replacements, services have the potential to bring in consistent, recurring revenue over a long period of time.

Services have already seen gross margins of 62.8 percent in Apple's first quarter 2019, compared with overall gross margins of 38 percent. Apple Music now has 50 million paid subscribers, CFO Luca Maestri said on a call with investors after the report. Spotify, its main competitor in the streaming music space, reported 87 million paid subscribers in its last quarterly report in November, marking 40 percent growth from the previous year and 5 percent growth from the previous quarter. Apple reported in April that it had 40 million paid subscribers to its Music service, marking a 25 percent increase in paid subscribers in less than a year.

Apple News claimed 85 million monthly active users, setting a new record high, according to the company. Those users would likely be the target audience for a new subscription service Apple is expected to launch following its acquisition of the magazine subscription app Texture in March. Bloomberg reported in April that Apple was planning to integrate Texture into Apple News to create the new subscription service.

CEO Tim Cook also hinted at Apple's new video subscription plans on the call with investors. Cook said traditional cable bundles will continue to break down this year at a rapid pace, and Apple plans to gain a share of viewers through both third-party video subscriptions and new original content. Cook predicted "people [will] begin to buy likely multiple services in place of their current cable bundle."

The company has been ramping up its original content arm, announcing a multiyear deal with Oprah in June, bought a show from NBA star Kevin Durant in December, and was in advanced talks as of December to buy an Israeli TV show that would star Richard Gere, according to sources. This is all part of Apple's plans to develop a new digital video service that would come pre-installed on Apple devices through the "TV" app, CNBC reported in October.

Apple sees these initiatives as opportunities to gain consistent subscription revenue from those 1.4 billion active installed devices. With Tuesday's disclosures of services margins, investors finally seem to be buying in.

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Watch: Apple must pivot away from iPhone revenue dependency, analyst says

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Apple must pivot away from iPhone revenue dependency, analyst says