UPDATED 17:00 EDT / JANUARY 31 2017

Apple CEO Tim Cook APPS

Big holiday for iPhones and apps helps Apple beat earnings forecast

In a big turnaround, heavy holiday sales of Apple Inc.’s high-end new iPhones and a boost in app and content revenues helped the tech giant post higher revenues year over year for the first time since early 2016.

Apple reported a first-fiscal quarter profit of $17.89 billion, or $3.36 a share before certain costs such as stock compensation. That’s down from $18.4 billion a year ago. Revenues rose 3.3 percent, to $78.35 billion.

The results beat analysts’ forecasts, prompting shares to rise by more than 3 percent in after-hours trading following a fractional drop in regular trading Tuesday, to $121.35. Analysts on average had expected adjusted earnings per share of $3.22, compared with $3.28 a year ago, on revenues of $77.4 billion, up a little over 3 percent in the year-ago quarter, according to a poll by Bloomberg. “With strength across virtually all products and geos, bears will have a tough time finding much to highlight,” Macquarie Capital analyst Ben Schachter wrote in a note to clients.

Apple Chief Executive Tim Cook (pictured) said the company set “all-time revenue records” for iPhones, Services, Macs and Apple Watches. Cook said on the earnings conference call that the company saw a higher percentage of sales from its higher-end Plus phones than ever.

In particular, Cook called out services: “Revenue from Services grew strongly over last year, led by record customer activity on the App Store, and we are very excited about the products in our pipeline.” He said it was the best quarter ever for services, including a record month for app purchases, at $3 billion in December. Cook also announced a goal to double services revenues in the next four years.

Apple also issued forecasts for the second quarter, in particular revenues between $51.5 billion and $53.5 billion and a gross profit margin between 38 and 39 percent.

Apple’s gross margin for the first quarter was 38.5 percent, a hair above what analysts polled by Bloomberg had expected. But it was down from 40.1 percent a year ago. After the fourth-quarter report, Apple Chief Financial Officer Luca Maestri forecast profit margins that disappointed investors, causing its shares to fall about 8 percent in the days following the report in late November.

Up to the first quarter, Apple’s year-over-year revenues had declined for three straight quarters as more people hang onto their iPhones longer and as the iconic device faces more credible competition. The iPhone accounts for about two-thirds of Apple’s revenues and three-quarters of its gross profits.

Image: Macquarie Capital

Image: Macquarie Capital

Investors have been hoping that Apple can hike its already industry-leading hardware margins, but some analysts have especially high hopes for its services business. That was a $24 billion business in 2016, second only the the iPhone. Services carry a juicy gross margin Schachter estimates at 73 percent.

In the first quarter, services revenues shot up 18 percent, to $7.2 billion. In a recent note to clients, Schachter said services expansion could add 1 percentage point of gross margin per year. “App Store revenues will be the key gross margin driver for Apple over the next five years,” he said. “In our view, the App Store is one of the best business models ever created.”

Patrick Moorhead, president and principal analyst for Moor Insights & Security, said Apple has been telegraphing a services push for awhile now. “They have delivered on those promises the last few quarters,” he said. “Apple’s strategy is sound, which is to add sticky services to stick products with loyal consumers.”

In another matter, Cook came down hard on Qualcomm Inc., which Apple has sued over royalties it pays to the chip maker. “They were insisting on charging royalties for technologies they had nothing to do with,” he said. “The more we innovated… the more money Qualcomm would collect for no reason.” He likened the situation to buying a sofa and getting charged a different price depending on the size of the house it goes into.

Image courtesy of Apple

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