Apple Inc. is showing it has life beyond the iPhone, reporting growth in other gadgets and services in the latest quarter that outweighed further pain in its bedrock business.
The tech giant reported revenue rose 1.8% in the September quarter to $64.04 billion, driven by rising sales of wearables including its smartwatch and services such as apps, streaming-music subscriptions and mobile payments. Those gains helped offset a 9.2% decline in iPhone sales, which have been falling for the past year.
Profit fell 3% to $13.69 billion. That topped expectations but marked the first time since Chief Executive Tim Cook took over in 2011 that Apple’s profit has declined in all four quarters of a fiscal year. The company’s operating expenses have risen considerably since 2017 when it introduced a pricier new iPhone with facial-recognition technology and increased its spending on research and development. Revenue and profit for the fiscal year through September both edged down, their first annual declines since 2016.
Apple has responded to the challenge of a maturing smartphone market by accelerating sales of software, services and accessories across the 900 million iPhones in use world-wide. The company said sales of its services business rose 18% in the latest quarter, while sales in its wearables business soared 54% on the popularity of its AirPods wireless earbuds. The company is expanding on its entertainment push with the launch Friday of its new Apple TV+ streaming service.
Still, services and wearables together brought in $19 billion in quarterly revenue, less than 60% of the iPhone. Apple reassured investors that its new iPhone 11 models are being well received, offering guidance for the current period that largely exceeded Wall Street’s projections. It expects sales between $85.5 billion and $89.5 billion for the period, an improvement on the $84.31 billion it posted in the current quarter last year.
In an interview, Chief Financial Officer Luca Maestri said Apple is on track for a strong Christmas sales season thanks to customer interest in the newest iPhones and the addition of new wearables, including a pricier version of AirPods that went on sale this week. He added that the company’s China business has improved considerably and said Chinese customers’ initial response to the new iPhones has been “very, very good.”
“We think the iPhone performance will improve versus what we’ve seen in fiscal 2019,” Mr. Maestri said. “We think wearables will be very strong.”
Some investors have feared new iPhone models introduced in September would fail to catch on with consumers, and weigh on sales in the coming year because they offer limited new features. The iPhone still accounts for more than half of Apple’s revenue.
“The new phones are proving to be enough,” said Stephen Lee, principal at Logan Capital Management, an Ardmore, Pa.-based investment adviser with $3 billion under management that counts Apple among its largest holdings. “It’s been a year where smartphones are transitioning and management has done the things necessary to be relevant when 5G is ready.”
Apple said per-share earnings in the latest quarter were $3.03. Analysts surveyed by FactSet expected earnings of $2.83 a share.
Shares of Apple rose nearly 2% in after-hours trading. Before the report, the stock ended basically flat Wednesday at $243.26.
Apple shares have surged in recent months, partly in anticipation that the company will release its first 5G iPhone in September 2020. Wall Street analysts expect the company to return to iPhone revenue growth in the fiscal year ending in September 2021.
Apple’s operating expenses rose 9% in the quarter, outpacing revenue growth. Spending has jumped in recent years as it added features such as facial-recognition technology to iPhones and poured more money into research and development.
Other tech giants have been in a similar pattern, and tech shares, which have surged in recent months, gave up some gains this week as companies reported spending more to fuel their core businesses. Google parent Alphabet Inc. on Monday posted a 23% decline in profit as spending on people and infrastructure rose. Last week, Amazon.com Inc. reported a 26% profit decline, partly because of increased shipping costs.
“To find new categories of innovation at these companies that are hitting up against the law of large numbers, you have to really invest to sustain existing categories or add new categories,” said Mike Olson, an analyst with Piper Jaffray & Co. He said investors are accepting of that if the spending eventually translates to faster growth.
The past year has been one of Apple’s rougher stretches. It started with the company slashing guidance for the first time in more than a decade because of weak iPhone sales and a downturn in its China business. Later, two of its top executives—design chief Jony Ive and retail chief Angela Ahrendts —announced their departure.
On Friday, the company is scheduled to charge into the streaming wars with the launch of its Apple TV+ video service. It is betting its distribution and brand power will help persuade people to spend subscription money on a $4.99 service with a handful of shows.
“It’s a bold move, and…the price is very aggressive as well,” Chief Executive Tim Cook said on Wednesday’s earnings call, where he praised the quality of the shows.
Meanwhile, the company’s core iPhone business is showing signs of improvement. The 9% decline in sales for September marked an improvement from the 15% decline reported over the three previous quarters.
Mr. Maestri said iPhone sales had improved in the past two quarters as Apple reduced prices in some markets because of the strong dollar and made it easier to trade-in old iPhones, which essentially subsidized a new smartphone purchase. The company also slashed the price on its new, entry-level iPhone by $50 from the predecessor model.
The pricing moves have been particularly helpful in China, which has been crimped by an economic slowdown and battered by competition from domestic rivals including Huawei Technologies Co. Sales in Greater China, which includes Hong Kong and Taiwan, fell 2.4% to $11.13 billion, an improvement from the first half of the fiscal year when sales dropped more than 20%.
In China, the company shipped an estimated 5.1 million iPhones in the September period, a 28% decrease from a year earlier, according to Canalys, a market research firm. Apple offset that partly through strong App Store sales, which rose nearly 30% to $4.1 billion, according to app-tracking firm Sensor Tower, as approval of new gaming apps has resumed after being halted last year.
Dow Jones & Co., publisher of The Wall Street Journal, has a commercial agreement to supply news through Apple services.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
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