Apple Beats On Earnings As Services Soar

“There’s a lot to feel great about.”

Such began Apple CEO Tim Cook’s remarks on Apple’s latest round of earnings.

Now in fairness, Tim Cook feels pretty great about all of Apple’s earnings reports — but his latest, released yesterday, has the distinction of being the only report out of 2016 that investors and analysts are also feeling great about the day after.

After three straight quarters of falling revenue, Apple looks a bit more like its old self yesterday — with big numbers for the iPhone 7 leading the turnaround charge and putting to bed rumors that Apple’s latest design fizzled with consumers.

So, what were the highlights?

By The Numbers

For the three months that ended December 2016, Apple logged net income of $7.8 billion, or $3.36 per share. That marks a pick up of 2.4 percent year-over-year, which is modest, but also reflects a big beat on analyst estimates. The Thomson Reuters consensus was revenue of $3.22 a share.

Revenue was also up — an impressive beat for Apple. Revenue clocked in at $78.04 billion, up 3.3 percent year-over-year and beating analyst estimates by over a $1 billion.

iPhone sales were the big story — not surprisingly, since they drive two-thirds of Apple’s business — and the story was, again, better than expected. Apple said it sold 78 million iPhones, up from 75 million sold in last year’s holiday quarter. Analysts expected 77 million units, so again, another beat on expectations.

However, there is an asterisk worth noting. The iPhone 7, while clearly the wind in Apple’s results sails this time around, didn’t kick off the sort of double-digit increase in overall sales of iPhones that previous new models did in their first full quarter on the market. For example - unit shipments of the iPhone jumped 46 percent in the October-December quarter of 2014 after the launch of the iPhone 6 (as opposed to the 5 percent noted this time around).

And then there are Apple’s cash reserves, which rival the GDPs of some countries. As of the newest count, their enormous cash hoard grew to $246.09 billion in the fiscal fourth quarter, up $8.49 billion from the previous quarter. In context, that number is larger than the GDP of Sri Lanka but still slightly smaller than Denmark’s. Apple said it returned nearly $15 billion to investors via buybacks and dividends during the quarter.  All in , its capital return program payments total over $200 billion.

It’s All About The Services

While the iPhone was the star of yesterday’s show — as well it should be given the amount of revenue it throws off — there was another bright star as well. Services — the uber-category that captures revenues from Apple Music, Apple Pay, The App Store and Apple Care — had a very, very good quarter.

All in all, services grew 17.5 percent year-over-year to $7.17 billion, also topping forecasts of $6.91 billion. To put that number in some perspective, that figure triples what Netflix sold during the same time period.

“Revenue from Services grew strongly over last year, led by record customer activity on the App Store, and we are very excited about the products in our pipeline,” Cook noted.

Apple Pay even got a special shout out — though not so much in the way of real numbers to back up that shout out.

“Apple Pay continued its strong momentum, with the number of users more than tripling over the past year and hundreds of millions of transactions and billions of dollars in purchases in the December quarter alone. Transaction volume was up over 500 percent year-over-year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apple Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.”

How many people are using it? What exactly was that transaction volume that was up 500 percent? The answers to these questions were not disclosed.

Also getting a special shout out was the Apple Watch — though again, short on details.

“Apple Watch is the best-selling smartwatch in the world and also the most loved, with the highest customer satisfaction in its category by a wide margin. Apple Watch is the ultimate device for a healthy life, and it is the gold standard for smartwatches. We couldn't be more excited about Apple Watch,” Cook noted.

Details, details, details.

Areas Of Some Concern

China remains a soft spot, the ebullient Cook said, though less soft than it had perhaps been in the quarters immediately prior. Sales in Greater China, the world’s largest smartphone market, were down 12 percent to $16.2 billion in the quarter. Executives blamed part of that on currency effects and pointed to positives such as its Services sales.

“I’m encouraged with the significant improvement, but we’re not without challenges there,” Cook said.

Operational issues were also called out — Cook admitted that insufficient supply, including the Apple Watch, the new AirPod's wireless earbuds and the iPhone 7 Plus likely cost Apple some sales.

Demand for the larger, pricier version of its new smartphone was “the most we’ve ever seen by far, and we under-called it,” Mr. Cook said. “We clearly missed some sales because of that.”

Also worth watching is margin, since Apple products now cost more to make. The company expects gross margin to run between 38 percent and 39 percent. Notably, this is the first time in several quarters that Apple’s gross margin forecast — typically at 38.5% on the high-end range — has approached 39%.

Still, on the whole, the market very much liked what they saw yesterday out of Apple.

“If they’re an eight-cylinder sports car, then they’re firing on seven out of eight cylinders, which is very, very impressive in the context of expectations,” said David Rolfe, chief investment officer at Wedgewood Partners Inc., a St. Louis firm that counts Apple as its largest holding.

Apple’s shares rose more than 3 percent after normal trading hours Tuesday to more than $125 each. The stock is now only about 6 percent down from its all-time closing high of $133 reached in February 2015, after having fallen to about $90 last May. Some analysts are currently predicting a share price of $138 by 2017’s end.



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