UPDATED 16:53 EDT / AUGUST 01 2017

APPS

As services boost Apple earnings, investors look for a big lift from new iPhones

In a quarter that’s about as meaningless as any quarter can be for the world’s most valuable tech company, Apple Inc. today still managed to beat earnings forecasts thanks partly to record revenue from services such as Apple Music and mobile apps.

Perhaps more important, the iPhone maker also signaled that sales of its new flagship smartphones are likely to be strong, issuing a better-than-expected revenue forecast for the current quarter. The new models of the iPhone, the overriding driver of Apple’s business, are due out this fall.

Investors are especially interested in the outlook for the next couple of quarters, because reports indicate the iPhone 8 and upgraded iPhone 7 models could come out in October, later than the usual mid-September, which threatened to make for a more difficult fourth quarter. But although Apple declined to reveal timing today, the forecast indicated to one analyst, at least, that one or more of the new iPhones would likely come out by the end of September.

“Despite investor concerns that OLED iPhone shipments could push to Nov/Dec or even next year, management guided September quarter bullishly and sounded confident on upcoming product launches this fall,” Morgan Stanley analyst Katy Huberty wrote in a note to clients.

Apple’s fiscal third quarter didn’t disappoint either. Profit rose 17 percent, to $8.7 billion, or $1.67 a share, on a 7 percent rise in revenue, to $45.4 billion. Both easily beat analysts forecast of a profit of $8.2 billion, or $1.57 a share, on revenue of $44.9 billion. Apple also said it sold 41 million iPhones, spot-on what analysts on average had projected.

Investors liked the results, or more likely Apple’s forecast, so much that they pushed Apple’s shares to a new record high of about $159 in after-hours trading. They were rising more than 6 percent after the report. In regular trading, shares closed at $150.05, up just under 1 percent. Apple stock had gained 4 percent in the past three months, about the same as the S&P 500 index.

“With revenue up 7 percent year-over-year, we’re happy to report our third consecutive quarter of accelerating growth and an all-time quarterly record for Services revenue,” Apple Chief Executive Tim Cook (pictured) said in a statement. On the call, he added that “the App Store continued to be a major driver of the performance and we couldn’t be happier with how the services business is growing.”

But Apple also saw strength both in iPhones and in other products from AirPod earbuds to Mac computers to iPads and Apple Watches.”Apple had a very good Q2 driven by strong iPhone sales, but all product and service categories had improvements,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy.

Looking ahead, the iPhone 8 is expected to sport an OLED display that spans the entire phone, wireless charging, facial scanning technology and augmented-reality technology. And an April 2017 Morgan Stanley survey showed that about 92 percent of iPhone owners are at least somewhat likely to buy a new iPhone in the next year, even with a top-end model price that could exceed $1,000.

Sparse supplies of displays and other components could mean a later and slower ramp-up, according to some analysts, perhaps not getting up to full speed until November or December. The uncertainty on the arrival date not only makes projections of iPhone sales dicey, it means that the holiday quarter matters most of all.

But Apple issued a new fiscal fourth-quarter forecast of $49 billion to $52 billion in revenue, appearing likely to exceed analysts’ forecast of $49.2 billion, which mollified investors. Analysts also forecast a profit of $1.81 a share. Apple didn’t provide a profit figure but said gross margin would range between 37.5 and 38 percent with operating expenses of $6.7 billion to $6.8 billion.

Still, Apple faces stronger competition than ever, especially from a resurgent Samsung Group. “What matters most is how competitive and the timing for the iPhone 8,” Moorhead said. “Samsung is on its game as of late and has seen Galaxy 8 sales outpace Galaxy 7, and all eyes are on the expected Note8.”

Cloud computing, which is driving so many other companies from Google Inc. to Microsoft Corp. and disrupting others, doesn’t figure much directly in Apple’s results. But arguably it has a big play in the cloud as online services such as the App Store, Apple Music and iCloud storage are becoming increasingly important. In the third quarter, services came in at $7.3 billion, up 22 percent from a year ago and from last quarter’s $7 billion as well. Cook said on the conference call that services reached the size of a Fortune 100 company sooner than expected.

In any case, they’re becoming a significant revenue stream, one with better margins than on hardware. “While there are legitimate concerns about what happens to the stock post the next iPhone launch, we believe that as the Services business continues to deliver upside, it can be a significant driver of profits post the ‘super cycle,'” Macquarie Research analyst Benjamin Schachter, who has posed services as Apple’s next big business, wrote in a note to clients last week.

Concept images from Handy Abovergleich

A message from John Furrier, co-founder of SiliconANGLE:

Your vote of support is important to us and it helps us keep the content FREE.

One click below supports our mission to provide free, deep, and relevant content.  

Join our community on YouTube

Join the community that includes more than 15,000 #CubeAlumni experts, including Amazon.com CEO Andy Jassy, Dell Technologies founder and CEO Michael Dell, Intel CEO Pat Gelsinger, and many more luminaries and experts.

“TheCUBE is an important partner to the industry. You guys really are a part of our events and we really appreciate you coming and I know people appreciate the content you create as well” – Andy Jassy

THANK YOU