AAPL Apple Inc

By Tripp Mickle 

Apple Inc.'s move to jack up prices on the iPhone paid off with record quarterly revenue and profit even though the world's most valuable company sold fewer of its most important product.

Sales of the iPhone X -- released in November at a starting price of $1,000 -- lifted the average selling price for iPhones by nearly 15%, Apple said on Thursday. That helped propel total revenue up 13% to an all-time high of $88.29 billion in the quarter, which was a week shorter than the same period a year earlier, even though the number of iPhones sold actually fell 1% to 77.3 million units. Apple's profit rose 12% to $20.07 billion, also a record.

Apple tempered the positive news with a weaker-than-expected revenue forecast for the current quarter of between $60 billion and $62 billion. That would represent a healthy rise from a year earlier, but was well below analysts' recent consensus estimate of $66.54 billion, a number that had fallen over the past several weeks on concerns about demand for the iPhone X and uncertainty around the new iPhone 8 and 8 Plus models launched in September.

Still, the results offered hope that Apple can sustain its solid performance even amid stagnating global demand for smartphones. Analysts and investors have worried the company is too dependent on the iPhone, which accounts for about two-thirds of its sales, in part because many customers are holding on to their phones longer. Annual sales of iPhones in Apple's latest fiscal year, through September, were still well below their peak two years ago, and no other product has caught on with nearly the same intensity.

But Apple is showing steady progress in growing other lines of business -- especially its services arm, which includes the App Store and its music and payment services. Results in the latest period also were buoyed by strong growth in the division that includes its smartwatch and AirPods wireless earbuds.

Shares gained more than 3% in after-hours trading Thursday, after falling over the past two weeks.

Apple's share price soared more than 45% last year as many investors bet that the feature-rich X model, launched to commemorate the iPhone's 10th anniversary, would reignite the kind of boom in sales that recent models have failed to deliver. At an unveiling event in September, Apple marketed the iPhone X as the smartphone of the future and touted its improved display and facial-recognition system.

In an interview, Chief Financial Officer Luca Maestri said the X model has been the best-selling of Apple's iPhones since its release. "We're really, really happy with the way it's going," he said.

Apple doesn't break out for shipments by model, but analysts have said that sales of the X are softer than the company anticipated. Canalys, a market-research firm, estimated before Thursday's results that Apple shipped 29 million units of the iPhone X in the three months through December, about 6 million fewer than it says the company targeted for production during the period. It said shipments were generally lower than the company's projections because some consumers are choosing less-expensive iPhones.

Stephen Fleming, a 55-year-old education administrator in Tucson, Ariz., said he preferred to save about $200 by buying an iPhone 8 Plus, which was released in September. "I could have easily bought the X but there was nothing about the X that said: I have to have this thing," said Mr. Fleming.

With overall lackluster overall demand for smartphones and growing competitive pressure, some analysts and investors have worried about Apple's reliance on the iPhone.

"They have to figure out how to get recurring revenue streams so they're not holding their breath on each new product launch," said Tom Plumb, president of SVA Plumb Financial, a Madison, Wis.-based wealth-management firm with $2.7 billion in assets that counts Apple among its top holdings.

Apple has more than tripled spending on research and development under Mr. Cook to $11.58 billion last year but its products like smartwatches and wireless earbuds haven't delivered enough revenue to reduce its iPhone dependency. And efforts to push into autonomous vehicles, augmented reality and health aren't expected to generate revenue anytime soon.

The sheer number of devices it has sold, though, already is helping its efforts to diversify. Apple now has 1.3 billion iPhones and other devices in active use, Mr. Maestri said, a 30% increase over the past two years. That helped the services business report an 18% increase in revenue to $8.47 billion in the period -- accounting for a 10th of total revenue in the period. The number of paid subscriptions across Apple and third-party services passed 240 million in the quarter, an increase of 30 million over the past 90 days.

Like other big tech companies, Apple is contending with a backlash from lawmakers, investors and others over its clout and the impact of its products.

The company received a letter in early January from leading activist investor Jana Partners LLC and the California State Teachers' Retirement System, or Calstrs, which control about $2 billion of Apple shares, urging the company to address a potential health crisis due to youth-smartphone addiction. Apple said it plans to continue enhancing the parental controls on the iPhone it has had for years.

Apple also is facing investigations from regulators and lawmakers in the U.S. and Europe over a software update that throttled back performance on older iPhones to preserve battery life. The company in December said it had made the change to avoid sudden shutdowns of such phones, but the news angered many customers. The company later apologized for the issue and slashed the price of an iPhone battery replacement, hoping to win back customer goodwill.

After years of criticism about how it outsources manufacturing to China and parks its global profits offshore, Apple in mid-January said it would pay $38 billion in taxes on the cash it held overseas in response to the major U.S. tax overhaul that President Donald Trump signed into law late last year.

Mr. Maestri said Apple will discuss specific plans for its pile of overseas cash when it reports results for the current quarter, which runs through March. But he said Apple's goal is to target a "net cash neutral" position over time, compared with the large gap between its current holdings of $285 billion in cash and $122 billion in debt.

"We can now really look at a more optimal capital structure for our company," Mr. Maestri said.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

February 01, 2018 19:14 ET (00:14 GMT)

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