Strength of tablets provides big surprise; iPhone is steady even as new versions near
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 (August 2, 2017).
Apple Inc. delivered strong revenue in the June quarter, typically its weakest period, by re-energizing iPad and Mac sales and keeping purchases of iPhones steady as consumers anticipate a new phone this fall.
The company's revenue jumped 7.2% from a year earlier, its best growth in seven quarters, as shipments of Apple's flagship product rose 1.6% to 41.03 million iPhones.
The biggest surprise was a revival of the iPad business, and the continued momentum of the Mac, which both had waned in recent years as consumers shifted more money into smartphones. Mac sales rose 6.7%, the third consecutive quarter of gains, while iPads avoided a fourth consecutive quarterly slide with 1.9% growth. For the first time in 14 quarters iPad shipments increased, rising 15% to 11.42 million units amid strong sales to schools and businesses.
Profit for the period rose 12% to $8.72 billion -- the company's second consecutive quarterly increase in earnings after a yearlong downturn.
"We've got some momentum," Chief Executive Tim Cook said. "A lot of things we've been working on a long time are beginning to show in the results."
The results came during what is historically Apple's softest quarter -- a time when consumers often hold off buying iPhones in anticipation of an autumn release of a new device.
Mr. Cook said discussions of future iPhones was greater than normal and affected sales, particularly of its highest priced devices, the iPhone 7 and iPhone 7 Plus. "We believe there is a pause, but that probably bodes well for the future," he said.
The iPad's resurgence and Mac's momentum helped bring balance to Apple results that had grown increasingly dependent on the iPhone in recent years.
The iPad benefited from a recent refresh of the product line, including the introduction in March of an upgraded, basic iPad and in June a new, iPad Pro, Mr. Cook said. He said he expects the introduction of a new mobile operating system this fall, iOS 11, will strengthen sales as it introduces features such as file storage and drag-and-drop that are common on laptops.
Mac sales increased despite a 4% contraction in PC sales world-wide, Mr. Cook said.
Apple projected a wide revenue range of $49 billion to $52 billion for the current quarter, mostly eclipsing the analysts' consensus estimate of $49.2 billion in sales, according to Thomson Reuters. Had the company's estimates fallen short of analysts' expectations it would have indicated the company may be running into production problems with the next iPhone, said Brian White, an analyst with Drexel Hamilton. But the estimates suggest at least some of the product will be delivered on time in late September, rather than slipping entirely into the holiday quarter.
Apple last gave a $3 billion range for its September quarter in 2014 when it released the iPhone 6 and iPhone 6 Plus, the first time it brought two phones to market. Sales of those devices were initially limited by supply constraints.
The company is widely expected to release three phones instead of the usual two -- updated versions of the current iPhone 7 and 7 Plus as well as a special 10th-anniversary iPhone with a different display and new features like wireless charging and facial recognition technology.
The complexities of the new hardware led several analysts to predict for months that the iPhone would run into production challenges and supply constraints. Analysts have largely shrugged off that possibility, believing the iPhone will be delivered in time for Christmas and loyalists will wait for it to arrive in stores.
"In a way, that could be a marketing tool for them -- a way to flame more excitement around the iPhone 8 because anything you can't get you want more," Mr. White said.
Apple showed some improvement in Greater China. Sales there fell 9.5% to $8 billion in the quarter, marking the first time in five quarters the company hasn't reported a double-digit sales decline in the region, which includes Hong Kong and Taiwan.
The company has run into a host of challenges in China as many Chinese consumers hold on to their iPhones longer and others switch to lower-priced devices from rivals like Huawei Technologies Co. and BBK Electronics Corp. The market, which accounts for about 20% of total sales, is seen as critical to the success of the next iPhone.
Mr. Cook said sales were flat in mainland China and rose 20% in Taiwan but fell in Hong Kong, where a strong currency has cut into tourism and shopping.
Underscoring the market's importance, Apple recently named its first executive with oversight of its China business, Isabel Ge Mahe. She will manage government relations and help develop new operating-system features with local appeal, such as a function that allows iPhone owners to filter text-message scams common in China.
"One of the things we like about Apple is once you become an Apple customer you stay for the long haul, but that seems more difficult in China because there's more competition," said Jeff Dillon, chief executive of Dillon & Associates, a Jackson, Mich.-based investment firm and Apple investor with $300 million in assets. He said he was encouraged to see Apple "stabilizing that business and starting to right the ship."
In addition to facing pressure in China, Apple has run into pressure in its local market where President Donald Trump renewed his push for the company to start manufacturing more products in the U.S. Mr. Trump last week said Mr. Cook promised to build three plants in the U.S., something the company hasn't done in more than a decade.
Mr. Cook declined to comment on Mr. Trump's remarks. A White House aide referred requests for clarification on Mr. Trump's remarks to the company.
In May, Apple announced a $1 billion investment fund for advanced manufacturing in the U.S. and injected $200 million of that into a Corning Inc. facility in Harrodsburg, Ky.
"There will be more -- a lot more than three," Mr. Cook said, speaking to future investments in U.S. manufacturing. "There will be many."
Apple's cash reserves continued to swell during the quarter to $261.5 billion, compared with $237.6 billion at year-end. About 94% of that cash is held overseas, and investor hopes have been rising that the Trump administration's plan for a tax holiday would allow Apple to bring the cash home without paying steep taxes.
Apple's services business -- which includes the App Store and its music and payment services -- delivered another strong quarter of double-digit growth, rising 22% to $7.27 billion. The business has become a major driver of the company's growth over the past year and a key part of its success in keeping more than 600 million iPhone customers world-wide. Analysts say iPhone users are less likely to ditch the device after loading it up with apps and using Apple Pay.
Mr. Cook credited the rise in popularity of subscription services such as Apple Music, Netflix and HBO Now for propelling the App Store's growth. Subscriptions rose 12% in a 90-day period to more than 185 million subscribers world-wide.
"We reached the size of a Fortune 100 company before we thought we would, " Mr. Cook said, noting that services revenue eclipsed $27.8 billion over the past four quarters.
Apple's gross margin -- a closely watched measure of profitability reflecting the percentage of revenue that remains after manufacturing costs -- moved up to 38.5% from 38% a year ago. Analysts expected a margin of 38.2%, according to FactSet. For the current quarter, Apple projected a gross margin of 37.5% to 38%.
Margins across the smartphone industry have been pressured by a surge in memory prices, which have risen more than 50% on the spot market over the past year, according to DRAMeXchange, which tracks sales and prices. The rise in component costs helped Samsung top Apple in net profit in the June quarter with $9.9 billion.
High expectations for sales of the new phone have sent Apple's stock up 28% so far this year, nearly three times as much as the S&P 500. The number of iPhone owners due for an upgrade is at peak levels and the phone is expected to cost as much as $1,000, a total that would likely lift average-selling prices and boost profits.
On a per-share basis, earnings in Apple's third quarter totaled $1.67. Analysts surveyed by Thomson Reuters expected per-share earnings of $1.57 and $44.9 billion in revenue for the quarter.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
Corrections & Amplifications Apple delivered the second-best revenue in company history for the June quarter. An earlier version of this article incorrectly said it was the second-best revenue for the September quarter. (August 1)
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August 02, 2017 02:47 ET (06:47 GMT)