If Apple Inc.'s (AAPL - Get Report) iPhone X had seen a high-volume September launch similar to the launches witnessed for prior flagship iPhones, investors probably be thrilled with the December quarter sales outlook the company just gave.
But since the iPhone X is seeing an early-November launch featuring relatively limited volumes, Apple is mostly getting a thumbs-up for the outlook, which dispels worst-case fears that were already on shaky ground following the late-October start of X pre-orders. It also doesn't hurt that the guidance was accompanied by fairly strong September quarter results driven in large part by healthy growth for many non-iPhone businesses.
Apple reported September quarter (fiscal fourth quarter) revenue of $52.58 billion (up 12% annually) and GAAP EPS of $2.07, topping consensus analyst estimates of $50.69 billion and $1.87. Those numbers, it should be noted, benefited from a $640 million Services revenue accounting adjustment. But even if one backs out that adjustment, sales beat consensus by $1.25 billion.
For the seasonally big December quarter, Apple is guiding for revenue of $84 billion to $87 billion. That implies 9% growth at the midpoint and is in-line with an $85.16 billion consensus.
In response, shares rose 3% in after-hours trading on Thursday, and opened Friday up 2.4% to $171.82, a new record high. Suppliers Broadcom Ltd. (AVGO - Get Report) , Skyworks Solutions Inc. (SWKS - Get Report) and Cirrus Logic Inc. (CRUS - Get Report) also moved higher. Apple now sports an $889 billion market cap and is up almost 50% on the year.
Shares closed Friday up 2.6%, or $4.29 at $172.50.
One caveat for Apple's guidance: The company's December quarter revenue consensus had fallen by nearly $2 billion since the company's Sep. 12 iPhone event, as analysts reacted to news that iPhone X deliveries wouldn't start until Nov. 3 along with ongoing reports of production challenges. If not for those estimate cuts, guidance would've been below consensus.
But considering how high fears were running until recently about iPhone X supply constraints -- a KGI Securities report had indicated only "tens of thousands" of units were being made daily as of late September, and various other firms had reported of production delays -- the guidance was far from a doomsday scenario. As it is, the fact that iPhone X shipping times have largely stood at a better-than-feared 5 to 6 weeks since pre-orders started on Oct. 27, together with industry research pointing to strong consumer purchase intent for the phone, had calmed some nerves and propelled Apple shares higher.
Reasonably healthy iPhone 8/8-Plus demand might also have something to do with Apple's guidance. On the earnings call, Tim Cook -- perhaps looking to counter a carrier store survey that suggested the discounted iPhone 7 has been outselling the 8 -- asserted the 8 and 8-Plus have been Apple's best-selling models since they launched. He later added that the 8-Plus, which unlike the standard 8 sports dual rear cameras, has "gotten off to the fastest start of any Plus model."
iPhone 8/8-Plus sales helped iPhone unit sales rise 3% annually last quarter to 46.7 million (a little above consensus), and iPhone revenue rise 2% to $28.8 billion (55% of total revenue) -- in spite of iPhone X anticipation, soft Japanese demand and a relatively small seasonal increase in channel inventory. But with Apple's iPhone average selling price (ASP) dropping by $1 annually to $618 in spite of the 8 and 8-Plus higher starting prices relative to 7 and 7-Plus, strong demand for cheaper iPhones in emerging markets also seems to have helped.
On the call, CFO Luca Maestri stated Apple saw double-digit iPhone unit growth "in many emerging markets including mainland China, the Middle East, Central and Eastern Europe, India and Mexico." Apple's total Indian revenue doubled, and -- though it should be noted sales to the region were down 30% a year ago, making growth easier -- the company's Greater China revenue broke a string of revenue declines by rising 12% to $9.8 billion. Total emerging markets revenue rose over 20%.
Of course, that emerging-markets growth, as well as the 14% and 20% sales growth Apple respectively saw in the Americas and Europe, was driven in large part by the fact that Apple's various non-iPhone businesses collectively saw their revenue rise 24% to $23.1 billion, even after backing out the $640 million Services adjustment. And that growth, in turn, is bound to have influenced Apple's guidance.
There were several non-iPhone standouts last quarter. Specifically:
- iPad revenue grew 14% to $4.8 billion, with unit sales rising 11% to 10.3 million. Though unit sales growth slipped from the June quarter's 15%, revenue growth rose sharply from 2%, as Apple's June iPad Pro refresh led its sales mix to shift towards costlier models. China and India were singled out as markets seeing strong iPad growth.
- Mac revenue grew 25% to $7.2 billion, with units rising 10% to 5.4 million. Strong demand for MacBook Pros sporting OLED Touch Bars seems to be the main driver. Mac ASP was $1,331 -- eye-popping by PC industry standards.
- "Other Products" revenue, which covers the Apple Watch, headphones, Apple TV set-tops, iPods and accessories, grew 36% to $3.2 billion. Cook stated Apple Watch unit sales rose over 50% (no number was given, as usual), and that Apple's total wearables sales (they also appear to cover headphones) rose 75%.
- Not counting the adjustment, Services revenue grew 24% to $8.5 billion, slightly topping the June quarter's 22% growth. The App Store (new revenue record), Apple Music (paid subs up over 75%), iCloud ("very strong" double-digit growth) and to a lesser extent Apple Pay (annual transactions up 330%) all contributed.
Services revenue is also benefiting from rising ad revenue-sharing payments from Alphabet Inc./Google (GOOGL - Get Report) , whose search engine has long been integrated with Apple's Safari browser. Google's Q3 earnings call commentary suggests it may have agreed to new deal terms with Apple in exchange for Google replacing Microsoft Corp.'s (MSFT - Get Report) Bing as the default search engine for iOS and macOS' built-in search features.
There were only two notable soft spots in Apple's report. Namely:
- Sales to developed Asian markets appear to be light. Japanese revenue fell 11% to $3.9 billion (a weak yen played a role), and the "Rest of Asia Pac" reporting segment only saw 5% revenue growth even though Indian sales doubled.
- Though revenue growth is expected to rise and the iPhone X and 8/8-Plus will boost iPhone ASPs, Apple is only guiding for a December quarter gross margin of 38% to 38.5% compared with a year-ago GM of 38.5%. Maestri attributed the outlook to high initial costs for new products (presumably the iPhone X) and a 1.1 percentage point headwind from high DRAM and flash memory prices.
Outside of those things, it's hard to find fault with the numbers Apple provided while dealing with a very unique and challenging flagship iPhone launch. Among other things, the company may have succeeded in convincing a few more investors that it's something more than just an iPhone play. And with shares still only trading for 15 times expected fiscal 2018 EPS even before one accounts for a giant overseas cash balance, there could be more room to run between now and year's end.
TheStreet's Eric Jhonsa previously covered Apple's earnings report and call through a live blog.
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Editors' pick: Originally published Nov. 2.