Apple Shows Greatest Strength in Years -- WSJ

By Tripp Mickle Features Dow Jones Newswires

China, iPhone demand drive profit up 19%; revenue advances for fourth straight period

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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.

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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)