Apple Continues Its Comeback Campaign, but iPhone Worries Persist -- 3rd Update

Apple Inc. extended its rebound in the latest quarter with rising profit and revenue, but reported tepid iPhone demand that adds pressure on the technology giant to deliver a hit with its new 10th-anniversary handset later this year.

Shipments of its flagship product slipped 1% from a year earlier to 50.8 million iPhones, owing partly to continued weakness in China and to customers waiting for the forthcoming phone model, which is expected in the autumn. Within the overall lackluster trend, sales of the iPhone 7, which Apple released last September, were relatively strong, which helped push up average selling prices and drive a 4.6% increase in total revenue to $52.90 billion.

Profit in the three months through April 1 rose 4.9% to $11.03 billion -- Apple's first quarterly increase in earnings in more than a year.

The overall performance adds evidence that the world's most valuable company has stabilized its business after a slump in its last fiscal year, during which weak sales of its core products and rising competition sent revenue and profit tumbling. The latest quarter's increase in revenue was the second in a row, following three consecutive quarterly declines.

Reflecting its continued strength, Apple said its cash reserves swelled to $256.8 billion during the quarter, an unrivaled milestone for a nonfinancial corporation. The total exceeds the market value of 26 of the 30 companies that make up the Dow Jones Industrial Average.

Apple has been sending more cash to shareholders. In just the past six months, it returned $25 billion in buybacks and dividends -- more than the annual revenue of McDonald's Corp. Apple on Tuesday boosted its dividend by 10.5% and its share-repurchase program by $35 billion, to $210 billion -- comparable to increases a year ago -- and committed to return $300 billion to shareholders through buybacks and dividends through March 2019. It had previously promised $250 billion by 2018.

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.

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.

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.

However, Mr. Cook also said that anticipation of the next iPhone -- which Apple hasn't publicly discussed -- is hurting current sales.

"We're seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhones," Mr. Cook told analysts. Apple also said unit shipments in the latest quarter fell because of a decrease in inventories.

Apple's shares fell 1.9% 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 will build on Apple's renewed momentum.

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 has been losing market share in recent years to a wave of less-expensive Chinese brands such as 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.

Apple's sales in Greater China fell 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.

Mr. Cook told analysts that iPad results exceeded expectations and said the product gained market share in several markets, including the U.S. and Japan.

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.

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.

On a per-share basis, earnings in the latest quarter totaled $2.10. Analysts surveyed by Thomson Reuters expected earnings of $2.02 a share and $52.97 billion in revenue for the quarter.

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%.

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

(END) Dow Jones Newswires

May 02, 2017 19:47 ET (23:47 GMT)