Apple Beats The Street, Share Price Soars

The wait is over — Apple’s Q3 earnings are in, and as the markets open everywhere today, investors and journalists are happy with Cupertino yet again.

“Apple Crushes Earnings” is the headline editorial out of Business Insider this a.m., and while that was probably the most effusively enthusiastic summary of last night’s figures, it was far from unique in tone. Apple, the consensus is, Blew.The.Street.Away. Meaning the only thing left for us all to do is to break out the proverbial party hats.

The surprising thing about this consensus is that it is attached to an earnings report that as recently as a year ago might have seemed more like something to be mourned than celebrated.

According to the report, profits were down, revenue is falling and gravity has at long last caught up with Apple’s flagship product, the iPhone. And, if the figures are to be believed, Apple still hasn’t found its “what’s next” when it comes to balancing out the iPhone’s declining fortunes. There are a lot of irons in the fire – but so far, none seem to be glowing red hot.

Which isn’t to say Apple didn’t beat the Street – they did by a fair clip — but expectations ahead of today’s earnings weren’t exactly stratospheric. And while there were some interesting tidbits about those other irons in the fire — Apple Pay, in particular, got some color added to its portrait — it is hard to say what those tidbits might mean, absent other context.

Ready for a closer look?

By the Numbers

Apple, as we noted, did beat the Street, but not exactly in the prettiest way possible. Quarterly profit was down 27 percent year over year, and net income fell from $10.68 billion this time a year ago to $7.8 billion in the quarter that ended June 25. Earnings per share fell to $1.42 from $1.85 and revenue declined 14.6 percent to $42.36 billion from $49.6 billion a year earlier.

Apple’s stock is down 22 percent over the same time a year ago.

And then there is the iPhone: The running eight-year growth streak in iPhone sales ended last quarter with the product’s first decline, and the decline has (as expected) followed them through the June quarter. The company said it sold 40.4 million units of iPhone during the three-month period, compared with sales of 47.5 million units a year earlier. That’s slightly better than the 40 million units Apple analysts were predicting.

Still, probably not a report card that one would normally send home to mom.

Unless, of course, mom was expecting F’s and all of those C’s are actually good news — and one might thusly feel compelled to brag about them.

“There are a number of encouraging signs in the results,” CEO Tim Cook noted in a call with investors. “This last quarter was surprising because it was better than we expected from so many different points of view, not just one thing.”

Cook further noted that iPhone sales demand is better than the numbers indicate because inventory was actually reduced by 4 million units in its retail channels. He also called out the iPad’s return to growth for the first time in a decade, the boost in sales from the early spring introduction of the iPhone SE and the continually strong growth in revenue for Apple’s services.

All true, though we should note that the increases in these areas don’t begin to offset the iPhone declines simply because of how much the iPhone contributes to Apple’s margin. One expert we talked to noted that if one took off Apple’s revenue from everything that isn’t the iPhone and stacked it up against the iPhone’s — in pure dollars, the non-iPhone revenue would be roughly the size of a “rounding error” compared to the iPhone revenue — and not where Apple gets its all-important margin.

Also, as The Wall Street Journal noted, the iPad’s return to growth isn’t because a mass of more people are buying them; unit sales were actually down 5 percent. Instead, it’s because the iPad pro is very expensive, hence the bump in iPad revenue.

Apple Pay Update

Though Apple Pay didn’t make the big show when it came to prepared comments about earnings, the analysts were interested in how it’s doing – and what the plan for the product is. Piper Jaffray’s Gene Munster asked Cook point blank during the call if the point of Apple Pay was actually to ignite a payments platform, or if it is just a feature designed to sell more iPhones.

“Is this a business that ultimately impacts the Services line in any measurable way, or is Apple Pay generally about selling iPhones?”

Cook noted that Apple Pay’s monthly users are up over 450 percent year over year. Out of the nine markets in which Apple Pay is live, more than half of the service’s transaction volume is coming from outside the U.S. He also noted that 3 million retailers now accept Apple Pay in the U.S. Worldwide (including vending machines) there are more than 11 million points of sale across all participating Apple Pay countries.

But, Cook also noted that Apple Pay revenues are less about profits, and more about a “great feature for our customers” with iPhones. Cook said that while growth is astronomical, the base is relatively very small, as compared to the overall Apple user base, but it is growing.

If you’d like to see our latest on Apple Pay usage and adoption, click here. In the U.S., at least, it’s declining.

So what’s the moral of the Apple earnings?

Everyone gets a trophy! The good news this time around was mostly that the bad news wasn’t as bad as analysts expected.

But the iPhone is unmistakably in decline — and given its central importance to the Apple margin machine, it looks like something new will have to happen soon because it’s hard to imagine Apple getting rewarded for the news simply not being bad all that many more times.