Apple's iPhone Is Still a Cash Machine

Summary

WSJ Your Money Briefing — Episode Summary
"Apple's iPhone Is Still a Cash Machine"
Date: May 3, 2018
Host: JR Whalen (Wall Street Journal)
Guest: Dan Gallagher (Heard on the Street columnist)

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Episode Overview

This episode explores Apple's latest quarterly earnings report, focusing on why Wall Street remains optimistic about Apple—even as iPhone unit sales growth slows. Host JR Whalen and columnist Dan Gallagher break down how Apple's shift toward higher device prices and a booming services business is keeping the company—and its investors—flush with cash.

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Key Discussion Points & Insights

1. Slowing iPhone Unit Growth, Strong Revenue

• Apple sold 52 million iPhones in the last quarter, marking only a 3% year-over-year increase.
• Dan Gallagher: "A 3% gain is pretty low... this used to be a business that grew double digits in units pretty well for its first several years. Now that it's such a big business, it's hard for them to deliver the unit sales." (02:21)
• Despite modest unit growth, Apple's revenue is bolstered by higher average selling prices and a thriving services segment.

2. Higher iPhone Prices & Services Segment

• Apple is making more money per iPhone sold due to higher pricing and bundling of services with devices.
• Dan Gallagher: "They're essentially raised the prices of the iPhone and they're getting more revenue per iPhone, both from these higher prices as well as the services segment that they have." (02:44)

3. The Rising Importance of Services

• Apple’s Services division grew more than 30% in revenue over the last quarter.
• Key services include:
  • Apple Music: Now a major streaming platform.
  • iTunes Store: Though less prominent, still generates income.
  • App Store: Revenue from app purchases, subscriptions, and in-app purchases.
  • iCloud Storage: A high-margin business as users pay for additional data storage.
• Dan Gallagher: "...service revenues grew more than 30% this last quarter... that's a positive sign." (03:32)

4. Services Explained and Their Margins

• JR Whalen prompts clarification on what falls under 'services.'
• Dan Gallagher: "When you buy an app or use an app for free and subscribe to some service... all that funnels through it. And one underappreciated segment is the iCloud storage business... that particular little slice is a very high margin business for Apple." (03:57)
• Memorable Moment: Gallagher notes that “Apple’s running these very large data centers very efficiently, and their incremental cost to providing you, you know, a few extra gigs of storage for that stuff is very, very, very small.” (05:01)

5. Earnings Stability Despite Weakening Unit Sales

• Higher iPhone prices and service revenues offset lukewarm hardware sales, allowing Apple to match Wall Street’s revenue expectations.
• Commentary on why component suppliers may report disappointing figures despite Apple's overall health.
• Dan Gallagher: "...the company's getting more money per iPhone, selling more services revenue, that's helping the overall business grow at a rate that was a little better than what Wall Street had been looking for." (05:39)

6. Apple's Cash Hoard and Shareholder Rewards

• Apple announced a $100 billion stock buyback and a 16% increase to its quarterly dividend.
• Discussion of the impact of repatriation of cash (post-tax reform).
• Dan Gallagher: “They generate a ton of cash every quarter. This is a positive sign, but I think a pretty expected one.” (06:26)

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Notable Quotes & Memorable Moments

• On Apple’s business transformation:
  “They're figuring out more ways to make money out of its installed base of users, which is not growing the way it used to.”
  — Dan Gallagher (03:20)

• On iCloud’s profitability:
  “That particular little slice is a very high margin business for Apple.”
  — Dan Gallagher (04:35)

• On investors’ confidence:
  “There's never been any worry that Apple doesn't have enough cash to run the business.”
  — Dan Gallagher (06:36)

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Timestamps for Important Segments

• 02:21 – 03:10: Slowing iPhone unit sales and Apple’s business evolution
• 03:10 – 03:51: Services segment and future growth
• 03:57 – 05:27: Detailed breakdown of Services; emphasis on high-margin iCloud storage
• 05:27 – 06:08: Revenue dynamics & Wall Street reaction
• 06:08 – 06:26: Apple’s buyback, dividends, and cash management

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Conclusion

Despite slower growth in the flagship iPhone business, Apple remains a "cash machine" for Wall Street thanks to price increases and a surging services division. The episode’s discussion reveals how Apple’s business model is evolving—from a focus on unit sales to maximizing value from its enormous installed base—pointing to a “rosy future” for investors.

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Guest Attribution:
All insights and analysis by Dan Gallagher, “Heard on the Street” columnist, The Wall Street Journal.
Host: JR Whalen

[End of summary]

Transcript

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[Small Business Owner 1]

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[Advocate/Activist]

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[Dan Gallagher]

Your Money briefing Money in Market stories

[JR Whalen]

from the Wall street journal. I'm JR Whalen in New York. Apple iPhone sales rose just 3% in the last quarter. So why is Wall street still smiling from ear to ear? We'll explain in a moment. First, these news headlines. Hiring at private US Employers grew more than expected in April as firms across the country added 204,000 workers last month. That's according to payroll processor ADP and forecasting for Moody Analytics. Economists surveyed by the Wall Street Journal had expected the addition of 190,000 jobs in April. Don't expect much change in the robust pace of hiring or investment by companies. That's the word from the Federal Reserve, which elected to keep interest rates steady this week and remains on track to raise them gradually in the next several months. And there could be a substantial correction ahead for cryptocurrencies like Bitcoin. Investment bank GP Bullhound predicts a heavy correction will obliterate cryptocurrencies by about 90% within a year, liquid, leaving few survivors. But the investment bank predicts the expected sell off will be unique in that it'll have a minimal effect on financial institutions. And the projected sell off is also expected to spur substantial growth for the virtual currencies that survived the fall. This is your Money briefing from the Wall Street Journal. Welcome back, everybody. Those clouds of uncertainty that had been gathering around Apple's quarterly earnings report were quickly replaced with golden sunshine when the company cast aside any doubt that iPhone sales declines at any pace be spelling doom for the tech giant. And heard on the street columnist Dan Gallagher joins us to discuss. So Dan, Apple reported it sold 52 million iPhone units in the last quarter and that's just an increase of about 3%. But that number is a figure that some companies would just short of kill for.

[Dan Gallagher]

Well, actually a 3% gain is pretty low and that's part of where people are readjusting how they thought of Apple. This used to be a business that grew double digits in units pretty well for its first several years. Now that it's such A big business. It's hard for them to deliver the unit sales. What they did do, which was a different change from when they had some weak unit sales before, is that they are getting more. They're essentially raised the prices of the iPhone and they're getting more revenue per iPhone, both from these higher prices as well as the services segment that they have.

[JR Whalen]

Yeah, I was going to say for investors, whether iPhone sales rise or fall going forward, it's Apple services business that will bring a smile to Wal Wall Street's face because that really does show. It kind of paints a rosy future.

[Dan Gallagher]

It's helpful to them. Investors aren't going to be able to ignore the iPhone because it's still more than two thirds of the business, as long as it has that kind of weight on it, especially the weight from hardware sales. And that that's going to be a very big important factor. But what services is showing is that Apple has a way to beyond just selling more devices. They're figuring out more ways to make money out of its ins installed base of users, which is not growing the way it used to. But because services grew more than 30, service revenues grew more than 30% this last quarter is a big jump and it's taking up a little bit more of the business. And that's a positive sign.

[JR Whalen]

You just give us an idea, if you would, about what entails services at Apple.

[Dan Gallagher]

It's a combination of a lot of things. The one that probably a lot of people think of is Apple music, because that's a relatively new one. It used to encompass the itunes store, still encompasses itunes, but people aren't, you know, buying and downloading music and movies as much as they used to anymore. Those are now streaming services. So Apple music is a part of that. You know, the old itunes business is still a part of that. The app store is a big part of that. You know, when you, when you buy an app or use an app for free and subscribe to some service or, you know, have a gaming app on your phone and buy things to that game, all that funnels through it. And one, one underappreciated segment is the icloud storage business that now when people have iPhones, often they're prompted to pay, you know, a dollar a month or so for extra icloud storage because we have so many things on our phones now. That particular little slice is a very high margin business for Apple.

[JR Whalen]

Oh, yeah, those photos and videos, they add up pretty quickly. And I get those reminders pretty often, especially after vacations.

[Dan Gallagher]

Yeah. And it's and again, it's like it's maybe not as big a huge revenue line at $0.99 a. You know, the margins on that are very large because Apple's running these very large data centers very efficiently, and their incremental cost to providing you, you know, a few extra gigs of storage for that stuff is very, very, very small. So when you add that up over their very large user base, that turns into a very high margin business for them.

[JR Whalen]

And a significant part of the earnings report was the fact that the higher iPhone prices helped the company's overall revenue match what Wall street was expecting, despite the relatively small increase in overall iPhone sales.

[Dan Gallagher]

The mo Wall street was pretty sour on Apple over the last couple weeks because we've had a lot of companies that supply components to the iPhone report kind of either disappointing results or have dim outlooks because a lot of them are tied to unit sales. And as we see, unit sales aren't growing that much, but because overall, the company's getting more money per iPhone, selling more services revenue, that's helping the overall business grow at a rate that was a little better than what Wall street had been looking for.

[JR Whalen]

And then there's Apple's infamous cash hoard. A $100 million buyback plan and a 16% boost to Apple's quarterly dividend is a way to chip into that, but it's an invitation to investors. It seems that the skies above Cupertino are going to remain bright, wavering iPhone sales or not.

[Dan Gallagher]

Yeah, I mean, they certainly have a lot of cash, and people knew that. And because of the last year's tax reform package, they're able to push a lot more of that back to investors again. I think a lot of that was expected to. This is going to help them control the shares. Outstanding returns, a lot of cash to shareholders. That's, again, an attractive point for shareholders. There's never been any worry that Apple doesn't have enough cash to run the business. They generate a ton of cash every quarter. This is a positive sign, but I think a pretty expected one.

[JR Whalen]

That's hurt on the street columnist Dan Gallagher joining us from our San Francisco bureau. Dan, thanks for being with us.

[Dan Gallagher]

My pleasure.

[JR Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner 1]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Small Business Owner 2]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate/Activist]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.