China, iPhone demand drive profit up 19%; revenue advances for
fourth straight period
By Tripp Mickle
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 3, 2017).
Apple Inc. delivered its best quarterly growth in two years with
strong sales in all of its key products and a rebound in the
critical China market as it prepares to start shipping its most
important new iPhone model in a decade.
Demand for the iPhone, which accounts for about two-thirds of
total sales, along with an upturn in sales of Mac computers and
iPad tablets helped Apple deliver its fourth-consecutive quarterly
increase in revenue and third quarterly increase in profit, which
rose 19% to $10.71 billion. Shipments of the iPhone rose 2.6% from
a year earlier to 46.7 million units, and China sales rose for the
first time since early 2016.
Consistent revenue gains, combined with anticipation for a jump
in iPhone sales in 2018, have helped send Apple's stock up about
50% over the past year through Thursday's close and pushed its
market value to over $860 billion, after a steep decline in 2016
because of weak China revenue and iPhone 6s sales.
Shares rose about 3% in after-hours trading.
Questions remain about Apple's immediate future. The iPhone 8
and 8 Plus, which started shipping to customers Sept. 22, had the
weakest initial sales of any new iPhone in years, according to
estimates by market-research firms.
The iPhone X, which ships Friday and features facial recognition
and an edge-to-edge display, has been dogged by production
challenges that delayed manufacturing at least one month and
hounded by questions about its $999 price tag. Customers who
ordered iPhone Xs online in advance of Friday were told there would
be long shipping delays.
Apple Chief Executive Tim Cook said the two iPhone 8s have
outsold other models since shipping but added that he never
expected sales to exceed initial sales of last year's iPhone 7 and
7 Plus because it is releasing three phones this year. He said that
Apple had earlier planned to release the iPhone X even later than
Nov. 2, but decided to "be very bold and do it sooner." He declined
to offer specifics.
Mr. Cook acknowledged that Apple's approach this year has
brought challenges. "Having three models is new," he said in an
interview. "The staggered launch is new. There's a lot of firsts
here. So yes, it is complex [to forecast] and we don't profess to
be able to do it perfectly."
Still, he said orders for the iPhone X are "very strong" and
that Apple is making headway on production.
"The ramp, especially considering how advanced the product is,
is going well," Mr. Cook said. "Obviously, if it wasn't, we
wouldn't be able to guide" for record revenue for the current
quarter.
Apple expects revenue of $84 billion to $87 billion in the
current quarter, far above the company's previous record of $78.35
billion in the final three months of 2016.
"Apple has moved past that funk," said Michael Frazier,
president of Bedell Frazier Investment Counselling, which manages
about $500 million and counts Apple among its largest holdings.
"Things are back on track."
China has posed the biggest test for Apple. The iPhone, which
surged in sales in 2015 and 2016 behind the iPhone 6, declined in
market share during the September quarter to 8.5% from 10% a year
earlier as low-cost Chinese smartphone makers gained, according to
Counterpoint Research.
Still, revenue from Greater China -- which had declined each of
the previous six quarters -- rose 12% in the latest period to $9.8
billion. Mr. Cook said Apple increased its market share for
products including the iPhone, which he said increased unit
shipments by a double-digit percentage.
Tarun Pathak, Counterpoint's associate director, said he expects
demand for the X model among China's 100 million iPhone users to be
strong enough to lift volumes and sales in the quarters ahead.
Supply-chain issues have caused analysts to slash iPhone X sales
projections for the critical holiday sales period this year.
Market-research firm Strategy Analytics cut its projections to
fewer than 30 million units from 60 million earlier this year.
While some investors worry the delay could lead some Apple
customers to buy a less-costly $699 iPhone 8 or $549 iPhone 7, few
said they fear Apple will lose sales to rivals such as Samsung
Electronics Co. About 95% of iPhone owners who plan to buy a new
device say they will buy another iPhone, according to UBS, much
higher than the 53% of Samsung customers who say they plan to buy
another device from the South Korean phone maker.
Apple's services business -- which includes the App Store and
its music and payment services -- delivered another strong quarter
of double-digit growth, surging 34% to $8.5 billion. Mr. Cook said
the company now has 210 million subscriptions to Apple and
third-party services, an increase of 25 million over the past 90
days. Apple typically collects a 15% fee on subscriptions for
products such as Netflix and HBO if users sign up through its App
Store.
For its fiscal fourth quarter ended Sept. 30, Apple's revenue
rose 12% to $52.58 billion, and per-share profit jumped 24% to
$2.07 a share from $1.67 a share in the same period a year earlier.
Analysts polled by Thomson Reuters had expected earnings of $1.87 a
share. Annual revenue rose 6% in the latest fiscal year to $229.23
billion, still below the peak in fiscal 2015.
Sales of Mac computers jumped 25% in the quarter to $7.17
billion, capping the product lines' best year. Shipments of the
iPad -- which rose in the June quarter for the first time in more
than three years -- rose 11% to 10.3 million units in the latest
period. Shipments of Apple Watch rose 50% from the prior
quarter.
Apple said cash reserves swelled to $268.9 billion. It also
projected gross margin, a closely watched measure of profitability
reflecting the percentage of revenue that remains after
manufacturing costs, of 38% to 38.5%.
Apple has been locked in a legal battle with Qualcomm Inc.
centering on the chip company's patent-licensing prices and
practices. The Wall Street Journal reported this week that Apple is
designing iPhones and iPads for next year that would jettison
Qualcomm components entirely in favor of those from rivals
including Intel Corp.
Qualcomm on Wednesday sued Apple for breach of contract,
alleging Apple failed to protect software Qualcomm provided to help
Apple engineers develop iPhones that use Qualcomm chips, and tried
to share some information with an Intel engineer.
The suit, filed in state superior court in San Diego, alleges
that Apple broke an agreement with Qualcomm by failing to properly
restrict access to its development software. The complaint states
that Apple copied an Intel engineer in an emailed request for
details about Qualcomm's technology. The suit further alleges that
Apple refused to cooperate with an audit of Apple engineers' access
to the software, which Qualcomm says it requested in February and
which it claims the device maker is obligated to perform under the
agreement.
Apple declined to comment on the suit.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
November 03, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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