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  • 05.02.17

Apple’s Quarterly Earnings: Nothing Fancy, But Nothing Broken

iPhone sales were impacted by excitement over upcoming models. Macs showed signs of life. And services are a rising star.

Apple’s Quarterly Earnings: Nothing Fancy, But Nothing Broken
[Photo: courtesy of Apple]

Apple reported financial results for the first three months of 2017 that were mainly in line with expectations, with a couple of concerning line-item misses.

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The company earned $11 billion on revenues of $52.9 billion. The revenue number just missed the $53 billion most analysts expected, but landed toward the top end of Apple’s own projections for the quarter. The company said earlier it expected to report between $51.5B and $53.5B.

iPhone: The Waiting Game

Apple sold around 50.8 million iPhones during the March quarter—a one percent increase over Q2 last year.

The first quarter of the calendar year is typically a seasonally down quarter, so expectations weren’t high. Last quarter (including the holiday season) Apple sold a surprising 78.3 million of the devices, ending a three-consecutive-quarter trend of declining sales.

Also, the hype cycle about the Apple’s next phones—likely announced in the fall—is well under way and many people are probably holding off upgrading their iPhone in the meantime.

Apple CEO Tim Cook acknowledged this during the earnings call with analysts Tuesday. “We’re seeing what we believe to be a pause in purchases on iPhone, which we believe is the result of earlier and much more frequent reports of future iPhones,” he said.

Services: Big And Getting Bigger

Investors have been emboldened by the impressive growth of Apple’s services business, including all the digital content we buy from the App Store or iTunes. Apple reported services revenue of $7.0 billion, off 2% from last quarter but up 18% from the March-ending quarter last year. Analysts had expected about $6.78 billion.

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Services also grew 18% in final calendar quarter of 2016, contributing $7.2 billion of revenue (Cook said the services business contributed $20 billion in revenues in full year 2016).

“It’s well on its way toward being the size of a Fortune 100 company,” Cook said during the earnings call.

Apple has big plans for the business: Cook said Apple is trying to double its services business in the next four years.

China: The Slipping Giant

In the nearer term, Apple is depending on strong revenues from sales in China, which it expects to be its largest market in the world. But China sales haven’t been growing as hoped, slipping below European sales in the last three quarters.

This quarter was a continuation of the theme. Apple reported China revenues of $10.7 billion, a drop of 14% from the $12.49 billion in sales from China in the March-ending quarter last year. Analysts had expected sales of less than $12 billion.

Cook did his best to spin the situation to the positive, pointing out during a call with investors that the first two fiscal quarters combined had significantly more China revenue than the final two quarters of the previous year. “We continue to be very optimistic about our opportunity in China,” he said.

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Macs: Still Life In The Old Platform Yet

Mac sales are a pleasant surprise this quarter. Apple says it sold 4.2 million units, an increase of 4% from the same quarter last year. Mac sales had slid down for a whole year before growing slightly year-over-year last quarter. The continued growth is welcome news, especially as some users (creatives and professionals) have questioned Apple’s commitment to the Mac.

iPad: The Doldrums Continue

We’ve been waiting for some good news on the iPad front for a good while now, and we didn’t get it today. iPad sales fell again to 8.9 million units, a 13% slide from last year’s March quarter.

Apple recently announced (in early April) a competitively priced $329 iPad, but it’s too early to see exactly how enthusiastically the market is receiving that device.

Apple has been trying hard to sell iPads (and iPhones) into enterprises, and is apparently making some progress. CFO Luca Maestri said Apple set an enterprise sales record in the March quarter, and he expects the same kind of growth in enterprise sales over the next few quarters. But so far, the enterprise growth hasn’t been enough to move the needle on iPad sales.

Cook spun the iPad picture by citing a 451 Research study saying that satisfaction levels for the iPad were 95% and above. (He smartly avoided mentioning the most recent J.D. Power user satisfaction report that put Microsoft’s Surface Tablet ahead of the iPad for the first time.) But later on in the earnings call one analyst pointed out that the same 451 Research study reported a nine-year low in iPad purchasing intent, as well as a drop in retention rates. Spin unspun.

Apple Watch: Doing The Math

Apple doesn’t report unit sales or revenue numbers for the Apple Watch, lumping it in with “Other Products” that include accessories and AirPods. But the numbers suggest that Watch sales had a solid quarter. Total Other Products revenue for the quarter was $2.8 million.

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Above Avalon analyst Neil Cybart calculated that if Other Products revenue was close to $3 million for the quarter it would indicate that Apple sold more than 3 million Watches. If the revenue number had been closer to $2 billion, Cybart said, Watch sales would have probably been closer to 1 million units.

Analysts were looking for signs that Watch sales sustained somewhat after a breakout holiday quarter in which the wearable may have sold as many as 5 million units worldwide. A strong performance this quarter would suggest the Watch is making progress toward being a mass market product.

Finally, Apple gave some encouraging guidance numbers for the June-ending quarter, predicting between $43.5 and $45.5 billion in revenue.