Apple Continues Its Comeback Campaign, but iPhone Worries Persist -- 2nd Update

By Tripp Mickle Features Dow Jones Newswires

Apple Inc. extended its rebound in the latest quarter with rising profit and a second consecutive increase in revenue, but tepid iPhone demand will likely increase pressure to deliver a big hit with its new 10th-anniversary handset later this year.

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Sales of the iPhone 7, which Apple released last September, weren't enough to lift overall iPhone unit shipments, which fell 1% from a year ago in part, Apple said, because of reduced inventories. The 50.8 million phones shipped during the latest period also fell short of the record 61.2 million in the same period in 2015.

Still, an increase in the average selling price for the phone -- by far Apple's biggest product -- helped drive total revenue in the quarter up 4.6% to $52.9 billion.

Profit in the three months through April 1 rose 4.9% to $11.03 billion, or $2.10 a share. Analysts surveyed by Thomson Reuters expected earnings of $2.02 a share and $52.97 billion in revenue for the quarter.

Apple's overall performance in the latest period adds evidence that the world's most valuable company has stabilized its business after a bad slump in its last fiscal year, during which weak sales of its core products and rising competition -- especially in sent revenue and profit down.

The current flagship model, the iPhone 7, has helped Apple keep its position at the top of the smartphone market despite criticism from some reviewers saying it offered only incremental improvements over its predecessors. The average selling price of the iPhone overall rose to nearly $655 from about $641 a year ago.

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In an interview, Chief Executive Tim Cook said sales of the larger iPhone 7 Plus increased significantly in the latest quarter and noted that its higher price of $769, about $100 more than the iPhone 7, helped boost average selling price.

Investors have bet big that the next iPhone will be a hit with consumers. The much-anticipated 10th-anniversary device is expected to feature an upgraded display, wireless charging and augmented reality, according to analysts, who are projecting double-digit sales increases in the next fiscal year.

"Right now, it's really about the upcoming iPhone cycle and how that plays out towards the year's end," said Brian Fox, senior vice president at Boston-based Standard Life Investments, which counts Apple among its $350 billion in assets.

Apple's shares fell 1.3% in after-hours trading after finishing up 0.6% on Tuesday. The stock has soared to record highs this year behind investors' expectations for increased capital returns and optimism that the 10th-anniversary iPhone expected later this year will build on Apple's renewed momentum.

Apple also rewarded investors Tuesday by boosting its dividend 10.5% and its share-repurchase program by $35 billion, to $210 billion The increase was comparable to a year ago when dividends rose 10% and the share repurchase authorization rose by $35 billion. Apple committed to return $300 billion to shareholders through buybacks and dividends by March 2019. It had previously promised to return $250 billion by 2018.

Since it began its capital-return program in 2012, Apple said, it has returned $211 billion to shareholders. It has funded the program by taking on more than $88 billion in total debt.

The company's cash reserves swelled to nearly $256 billion during the quarter, an unrivaled milestone for a nonfinancial institution. The total exceeds the market value of 26 of the 30 companies that make up the Dow Jones Industrial Average.

Apple's cash hoard has soared behind the iPhone, which has sold more than 1 billion units since its introduction a decade ago. The product accounts for 91% of smartphone profits world-wide and remains popular among users because of its proprietary mix of hardware and software.

But the company has been losing market share in recent years to a wave of less-expensive Chinese brands like Huawei and Oppo. It also faces pressure from Samsung Electronics Co., which released a Galaxy S8 last month with a display and form some critics favored over the iPhone.

The competition has been most problematic for Apple in Greater China, where sales declined 14% to $10.73 billion in the quarter. Sales have declined from a year earlier for five straight quarters in the region, which includes Hong Kong and Taiwan. Many Chinese consumers are holding on to their iPhones longer, awaiting a new handset with different features and a new look.

"They're not abandoning" Apple, said Ben Bajarin, an analyst with the technology firm Creative Strategies. "They're just waiting for a product to splurge on."

The Mac was a bright spot for Apple in the quarter, as sales of the company's new MacBook propelled a 14% increase in revenue to $5.84 billion.

The iPad, however, the company's third-largest product by sales, recorded another decline in unit shipments, extending its long downturn. Shipments declined 13% to 8.9 million units despite Apple spending an estimated $28.7 million on a national TV advertising campaign during the quarter, according to advertising analysis by iSpot.tv.

Apple's services business -- which includes the App Store and its music and payment services -- delivered another strong quarter of double-digit growth, rising to $7.04 billion from nearly $6 billion a year earlier.

Mr. Cook said the services business benefited from a 40% increase in App Store sales and noted that there are 20% more app developers than a year ago. The services business has accelerated as the total number of people with iPhones has soared to more than 600 million, according to analysts. On a per-person basis, those customers spend more on apps the longer they have an iPhone, Mr. Cook said.

The services business has accelerated as the total number of people with iPhones has soared to more than 600 million, according to analysts. Those users increasingly download apps, games and pay for subscriptions on those devices, and Apple retains as much as 30% of what they spend.

For the current quarter, Apple expects revenue of $43.5 billion to $45.5 billion. It also projected gross margin, a closely watched measure of profitability reflecting the percentage of revenue that remains after manufacturing costs, of 37.5% to 38.5%.

The potential for lower margins come amid rising prices for memory chips. Investors have been watching the figure closely because the next iPhone is expected to include new, pricey components that could add to pressure on Apple's margins.

"You don't want to see too much of a drop off because it cuts into earnings power and increases the importance of pricing in the next model, " said Mr. Fox of Standard Life Investments.

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

(END) Dow Jones Newswires

May 02, 2017 16:58 ET (20:58 GMT)