Apple

Apple Revenue Soars, Device Sales Drop

To say that Apple didn’t sell a lot of phones during the holiday season would not be fair. It did.

Saying Apple didn’t make money during its first fiscal quarter of 2018, would not be fair, either. It did — and a “boatload” of it, too, to use the precise technical term.

But it would be fair to say that Apple’s latest earnings report managed to underwhelm nearly everyone, despite the impressive company milestones recounted by Apple CEO Tim Cook in his opening remarks.

“We’re thrilled to report the biggest quarter in Apple’s history, with broad-based growth that included the highest revenue ever from a new iPhone lineup,” Cook said. “iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November. We’ve also achieved a significant milestone with our active installed base of devices reaching 1.3 billion in January. That’s an increase of 30 percent in just two years, which is a testament to the popularity of our products and the loyalty and satisfaction of our customers.”

The rest of the watching world, however, appears to be somewhat less taken with Apple’s results.

One diplomatic market watcher described the company’s earnings with the classic of faint praise — “just fine” — while the team at Reuters included the term “muted” in its headline. On the somewhat less diplomatic side, one investor has proclaimed Q1 2018 was  “not a quarter to brag about,” while Bloomberg led with “It’s not time to hit the Apple panic button yet.”

Apple beat on earnings and revenue expectations, thanks to higher-than-expected device prices. But iPhone sales by unit — the engine driving the Apple machine — missed expectations, and guidance for the quarter ending in March also came in below forecasts.

By the numbers, Apple reported revenue of $88.3 billion and a profit of $3.39 per share. That’s compared to Wall Street’s predictions of $87.3 billion and profits of $3.86 per share, and up from the $78.4 billion and $3.36 per share registered a year earlier, respectively.

The better-than-expected revenue result was driven by an average selling price for iPhones that came in ahead of predictions. After all, the average price of an iPhone during the quarter was $796 versus expectations of $756.

Apple’s CFO, Luca Maestri, credits that result to the success of the iPhone X.

Apple’s services business — which includes Apple Music, the App Store and the iCloud — grew 18 percent to $8.4 billion. That was a slight miss, though, as analysts were looking for $8.6 billion. Maestri said the lower services revenue was because the holiday quarter was only 13 weeks rather than 14. It was down slightly from $8.5 billion the quarter before, though Cook maintained the sector is on pace to meet and surpass the goals the firm has set for its progress.

“We’re on pace to achieve our goal of doubling our 2016 services revenue by 2020,” Cook said. “The number of paid subscriptions across our services offerings passed 240 million by the end of the December quarter, [and] that’s an increase of 30 million in the last 90 days alone, which is the largest quarterly growth ever.”

Cook even took time to praise Apple Pay, one of the features that fall under the heading of Services.

“Apple Pay has reached an important milestone in the U.S.,” he added. “As a result of 50 percent year-over-year growth in merchant adoption, it’s now accepted at more than half of all American retail locations, which includes more than two-thirds of the country’s top 100 retailers. Now available in 20 markets, global Apple Pay purchase volume more than tripled year-over-year and we’re delighted to be expanding to Brazil in the coming months.”

Cook also gave props to the Apple Watch which is selling at “double” last year’s rate — though there’s been no word on what that rate is — and the iPad, which managed its second straight quarter of growth, built mostly on enthusiasm for the device in the Chinese market.

The number that people found particularly eye-catching, and the one for which everyone was waiting, was the number of iPhones shipped. On that count, Apple disappointed.

The company sold 77.3 million iPhones during the December quarter. Wall Street was looking for 80 million. In fact, Apple sold fewer phones during this holiday season than it did in the one prior, as it sold 78.3 million iPhones a year ago. Hence the “panic button” talk, as iPhones remain solidly the core of the Apple revenue generating machine.

Cook, for his part, did his best to assuage those concerns.

“U.S. customer satisfaction ratings of 96 percent or higher across iPhone models,” he explained. “In fact, combining iPhone 8, iPhone 8 Plus and iPhone X, consumers reported an amazing 99 percent satisfaction rating. And, among business customers planning to purchase smartphones in the next quarter, 77 percent plan to purchase an iPhone. Our customers are also incredibly loyal, with Comcast’s latest U.S. research reflecting a 96 percent iPhone loyalty rate — the highest ever measured.”

Despite those remarks, investors also weren’t crazy about Apple’s below-expectations performance forecast for the current quarter. The company predicted revenue of $60 billion to $62 billion and gross margins of between 38 and 38.5 percent for its fiscal first quarter ending in March. Analysts were expecting $65.7 billion in sales and a gross margin of 38.9 percent.

Investors did, however, like the news that Apple’s legendarily large pile of free cash would soon be reducing.

“We’re going to take that balance down from $163 billion to zero,” Maestri noted. He did not say whether the reduction in net cash would come in the form of returning capital to shareholders, capital expenditures or acquisitions.

While the Street liked the larger-than-expected revenue talk — and the massive stock buyback program Apple announced during earnings — those falling iPhone figures are making everyone a bit nervous, particularly because the long-anticipated super-cycle seems to have fizzled.

It’s admittedly tough when a company’s overall performance is so wrapped up in producing “the next big thing” every year.

Apple is still the largest company in the world by market cap as of this morning (Feb. 2), but it seems clear that 2018 could be a tough year for it — tougher than it’s known in the era of the iPhone, anyway.

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