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Apple Beats Estimates on iPhone Strength: 7 Key Takeaways

Apple's iPhone revenue was well above analyst estimates, and its wearables franchises had another big quarter.
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The iPhone’s return to growth and continued wearables strength helped Apple  (AAPL)  deliver a strong report for its seasonally biggest quarter.

On Tuesday afternoon, Apple reported December quarter (fiscal first quarter) revenue of $91.82 billion (up 9% annually) and GAAP EPS of $4.99 (up 19%), comfortably beating consensus analyst estimates of $88.48 billion and $4.54.

Apple also guided for March quarter revenue of $63 billion to $67 billion, which implies 12% annual growth at the midpoint and is above a $62.41 billion consensus.

Apple’s stock, which had gone into earnings up over 30% from where it traded when a September quarter beat was posted on Oct. 30th, rose 1.5% in after-hours trading to $322.50, leaving it close to a recently-set high of $323.33. A few chip suppliers, including Cirrus Logic  (CRUS) , Skyworks  (SWKS)  and Qorvo  (QRVO) , also rose moderately.

Here are some notable takeaways from Apple’s earnings report and call.

1. The iPhone Drove Much of the Quarter’s Revenue Beat

iPhone revenue, which was down 15% annually in the year-ago quarter, rose 8% to $55.96 billion, equal to 61% of total revenue and easily beating a $51.38 billion consensus. The beat comes after a number of reports and supplier comments pointing to stronger-than-expected demand for Apple’s 2019 iPhone lineup.

On the call, CEO Tim Cook declared iPhone 11/11 Pro demand to be “exceptional,” and disclosed that total iPhone revenue grew by double-digits in the U.S., the U.K. France and Mainland China, as well as collectively in emerging markets.

2. The Apple Watch and AirPods Had Another Big Quarter

Apple’s Wearables, Home & Accessories revenue, which covers all hardware sales outside of iPhones, iPads and Macs, rose 37% to $10.01 billion, beating a $9.85 billion consensus. Cook noted the segment’s wearables revenue, which covers the Apple Watch, AirPods and Beats headphones, grew 44%, and that over 75% of Watch buyers were first-time buyers.

Wearables growth did slow from the 50%-plus rates reported for the June and September quarters, amid a tougher annual comparison (sales were up over 50% a year ago) and supply shortages for the AirPods Pro and Apple Watch Series 3. Cook said he’s hopeful that Series 3 supply and demand will come into balance this quarter, but declined to say when the same could happen for the AirPods Pro, which currently has about a 4-week wait time for deliveries on Apple’s website.

3. Apple’s Guidance Takes the Coronavirus Outbreak Into Account

Cook and CFO Luca Maestri both mentioned that Apple provided a wider-than-usual revenue guidance range for the March quarter due to the uncertainty caused by China’s recent coronavirus outbreak, as well as the extending of the Chinese New Year holiday. Cook also noted that Apple has begun limiting its Chinese travel, and that Chinese retail traffic has been impacted over the last few days.

In the December quarter, Apple’s “Greater China” segment revenue was (after being down 27% in the year-ago period) up 3% to $13.58 billion. In addition to the iPhone, wearables and services saw double-digit growth in Mainland China.

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4. The Active Device Installed Base Has Topped 1.5 Billion

That’s up from the 1.4 billion active devices Apple reported for its ecosystem a year ago. The iPhone, iPad and Mac installed bases were all said to have reached new highs.

No new disclosure was made regarding the size of the iPhone installed base, which was reported a year ago to be above 900 million and might now be closing in on 1 billion. A larger iPhone installed base, of course, gives Apple more consumers to cross-sell hardware and services.

5. It was Business as Usual for Services

Services segment revenue rose 17% to $12.72 billion, a little below a $13.06 billion consensus. App Store revenue was said to have grown by a strong double-digit clip, and records were set for Apple Music, cloud services (iCloud storage), Apple Pay and the App Store search ad business.

Apple Pay transactions and revenue once more rose over 100% annually, with the annual run rate for transactions now above 15 billion. The total number of paid subscriptions that Apple either provides or takes a revenue cut on rose by another 30 million sequentially to over 480 million, and Apple now expects to have more than 600 million of them by year’s end.

As usual, there was no mention of how Alphabet's  (GOOGL)  giant search ad revenue-sharing payments to Apple (provided in exchange for making Google the default search engine for Safari and iOS) grew during the quarter. In September 2018, Goldman Sachs forecast that these payments would total $9 billion in 2018 and $12 billion in 2019.

Cook said that Apple Arcade is “fast off the block,” that Apple TV+ is “off to a rousing start,” and that his company is “thrilled with the continued growth” of the Apple Card, whose monthly payment options for iPhone purchases were said to be a major contributor to the “very strong double-digit” iPhone sales growth that Apple’s retail operations saw. However, no subscriber or active user figures were shared for the businesses.

6. iPad and Mac Revenue Fell

iPad revenue fell 11% to $5.98 billion, missing a $6.73 billion consensus. Mac revenue fell 3% to $7.16 billion, putting it near a $7.18 billion consensus.

Maestri observed that iPad and Mac sales were facing tough annual comparisons due to fall 2018 product launches and the related channel inventory buildup (they were respectively up 17% and 9% a year ago). He indicated that iPad and Mac sales were roughly flat in terms of customer sell-through, and mentioned that about half of all iPad and Mac buyers were first-time buyers.

7. Stock Buybacks Didn’t Let Up

A rising stock price didn’t keep Apple from remaining an aggressive buyer of its stock: $20 billion was spent on buybacks in the December quarter, up from $18 billion in the September quarter.

$10 billion was spent to buy 40 million shares via open-market transactions (implied average purchase price of $250), and Apple also started a $10 billion accelerated buyback program in November that led 30.4 million shares to be retired during the quarter.

TheStreet’s Eric Jhonsa previously covered Apple’s earnings report and call through a live blog.