Apple knows how to make investors happy, even when it disappoints

Image: Reuters/Stephen Lam
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Apple announced its fiscal first-quarter earnings today, Feb. 1. And in what should come as a shock to literally no one, they were impressive.

This quarter was expected, by Apple’s own estimation, to be its best ever in terms of revenue. The company said it expected to generate between $84 billion to $87 billion for the quarter, far outstripping its previous revenue record of $78.4 billion that it set in the same quarter last year. In the end it pulled in $88.2 billion, a jump of 12.5% over last year. That resulted in profit of more than $20 billion for the quarter, up over 12% from last year.

But it was not all good news for the Cupertino, California, company. Apple did not break its record for the number of iPhones sold in a quarter (it sold 77.3 million this quarter, about 1 million fewer than it sold in the same quarter last year), and its guidance for the current quarter was below what analysts had been expecting, initially sending its stock price down about 1.5% in after-hours trading.

But when Apple announced that it would reduce its net cash pile (cash net of debt) to “approximately zero” after the changes to the US tax code, the stock price shot back up. Shedding around $160 billion in cash could mean either big payouts for shareholders, or massive acquisitions ahead for Apple, either of which would excite Wall Street. The company’s stock was up nearly 3% from its close on Thursday at the time of publication.

Apple also announced on its earnings call that the quarter’s results may have been marginally underwhelming because it was one week shorter than the same reporting period a year ago.

The company said in its release that it expects to generate between $60 billion to $62 billion in revenue in the current quarter, traditionally one of its quieter periods. Analysts had been expecting around $65.7 billion. That being said, it generated $52.9 billion in the quarter last year, so even the low guidance still means Apple isn’t anticipating slipping back into the slow-growth period it saw in 2016.

This quarter, over the Western holiday period, was the first that Apple’s $1,000 flagship smartphone, the iPhone X, was on sale. It was also the first full quarter of sales for Apple’s other new gadgets, including the Apple Watch Series 3, and its 8 and 8 Plus iPhones. There have been reports suggesting that demand for Apple’s most expensive phone ever has not been as strong as the company had hoped over the holidays. But there’s no way of knowing which phones were selling in what quantities, given that Apple doesn’t break its sales out by model. In a release, CEO Tim Cook said the X has been the company’s top-selling phone every week since it went on sale in November.

The iPhone is still Apple’s cash cow, this quarter accounting for a massive 70% of its total revenue. That can partially be down to the costliness of the iPhone X: Apple may have sold about 1 million fewer phones this quarter, but many of the ones it did sell were far more expensive than any phone it’s sold before.

The expensive iPhone X sent the average price of an iPhone to new heights this quarter. The average price customers paid for an iPhone over the holidays was $796, the highest average price ever, and the largest jump in price since Apple introduced the larger Plus iPhone model at the end of 2014. It’s an increase of about 15% over the average price of a phone in the same quarter last year, meaning a significant chunk of customers buying iPhones this holiday season either went for an iPhone X or an iPhone 8 Plus.

Even as Apple’s iPhones are getting more expensive, the company is generating more revenue than ever from its other businesses. In particular, its services business—sales of apps, games, music, subscriptions, and after-sales services—has been on a tear in recent quarters. It’s now Apple’s second-largest business, generating $8.5 billion this quarter alone—more than the annual revenue of many Fortune 500 companies, including Salesforce and Hershey. And it shows that individual sales of iPhones, especially very expensive ones, matter less to Apple than they ever have before.

Although revenue from services was up over 18% from the same period last year, it was down slightly from the previous quarter. But it’s still a bucketload of cash outside of Apple’s traditional hardware businesses. CEO Tim Cook added on the earnings call that it has 230 million subscribers across its various subscription services, like Apple Music and iCloud.

It seems that consumers were fans of the iPad this holiday season. Sales of Apple tablets were up about 6% over the same period last year, to about $5.9 billion, which was the third consecutive quarter of growth, Cook said on the call. The Mac still outsold the iPad, however, generating $6.9 billion in the quarter, meaning that unlike the kid in Apple’s exceedingly annoying ad, its customers know what a real computer is. Mac sales were down roughly 4.7% over the same quarter last year, however. Perhaps one day Apple will just merge the two platforms and make a touchscreen computer.

One of the biggest mysteries over the last few years is how many Apple Watches the company has been selling. Initially released in 2015, it was the first major new product released under Cook, and after mixed reviews, it hasn’t yet hit the heights that the iPad or Mac—let alone the iPhone—have hit. Apple hides watch sales away in its “Other products” business line, which also includes Beats headphones, and other accessories, like AirPods, which themselves appear to have been a bit of a surprise hit. This quarter, the segment generated $5.5 billion, up a whopping 37% from the same period last year. It seems like something really lived up to Apple’s stocking-stuffer hopes.

Cook did say on the call that it was the “best quarter ever” for the Apple Watch, with sales up 50% from the same period last year, but didn’t provide further details. “Other products” is still Apple’s smallest business line, but it’s closing in quickly on the iPad. Perhaps soon Apple will actually break out watch sales, so we’ll be able to see if pundits suggesting the watch is a success have any truth in their claims.

Apple’s most important revenue-generating region is its home turf of the Americas, but some believe it will eventually need to sell as well in developing markets like China and India to continue its run of success. Apple chief financial offer Luca Maestri said many emerging markets, including India, the Middle East, and Eastern Europe, experienced “double-digit growth” over the same period last year. Revenue from China was also up about 10% from last year, to about $18 billion, but the region still lags behind Europe as Apple’s second-largest region. China held the title briefly in 2015.