9 seeds of thought as Apple pockets profits on big iPhone sales

1 Aug 2018145 Views

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Apple iPhone X smartphone. Image: Hadrian/Shutterstock

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Expensive phones make Apple healthy, wealthy and wise, but looming trade wars are keeping CEO Tim Cook awake at night.

Apple continues to be in rude health, with third-quarter revenues of $53.3bn, up 17pc on last year. The company booked a profit of $11.5bn largely due to sales of high-end iPhone X devices.

As usual, CEO Tim Cook’s statement gave little away and he exclaimed how “excited” he is about new products.

“We’re thrilled to report Apple’s best June quarter ever, and our fourth consecutive quarter of double-digit revenue growth.

“Our Q3 results were driven by continued strong sales of iPhone, Services and Wearables, and we are very excited about the products and services in our pipeline.”

The third quarter, or the June quarter, is traditionally Apple’s quietest, representing the longest period since new iPhones were launched and just ahead of the traditional September fanfare of new devices.

Last September, the company launched two new generations, the iPhone 8 and the enigmatic iPhone X, to mark the 10th anniversary of the launch of the very first iPhone by Steve Jobs in 2007.

1. Expensive iPhones are selling like hotcakes

The iPhone contributed hugely to the third quarter with revenues of $29.9bn attributed to sales of 41,300 units. While this is fewer than the previous quarter, where more than 52,000 units were sold, it represented a 1pc increase in units year on year and a 20pc jump in revenues.

The average iPhone price hit $724, beating analyst expectations of $694.

In an earnings call, Apple CFO Luca Maestri said that customers were buying more expensive models, with the $999 iPhone X being the bestseller during the third quarter.

iPad sales were down 5pc in revenue terms but up 1pc in terms of units, most likely due to the onset of lower-cost iPads.

Mac sales were down 5pc in revenues and 13pc in units.

2. Cook has every reason to be excited about Q4

September is traditionally when Apple reveals new products such as iPhones and iPads and, if the earnings are to be divined correctly, Cook expects some serious revenues to come from the products.

The company is predicting Q4 revenues of between $60bn and $62bn, which indicates some serious iPhone sales.

3. Apple is edging closer to being a $1trn company

The stronger-than-usual June quarter earnings were well received by the stock markets, bumping Apple’s market cap up by 2.5pc to a valuation of around $935bn.

For Apple to reach the $1trn valuation mark, stocks just need a 7pc boost and it is likely that this could happen in September when the slew of new devices is revealed.

4. Other Products is the dark horse in Apple’s repertoire

Always watch the Other Products category in Apple’s financials. This segment includes devices such as the AirPods wireless headphones, the stylish Apple Watch and the new HomePod smart speaker.

In the third quarter, Apple reported $3.7bn in revenue from its Other Products portfolio, ahead of analyst expectations but down from the $3.95bn in the previous quarter.

Cook said that the company’s wearables division including Other Products experienced outstanding 60pc growth year on year.

“It reminds me of the early days of iPod, when I started noticing white earbuds everywhere I went,” Cook said, referring to sales of AirPods.

5. Services booming

Apple reported stellar growth in Services with sales up 37pc to $8.5bn during the third quarter.

Apple Music sales were up 50pc as were iCloud services revenues.

Apple is on target to double its Services revenues from 2016 by 2020.

6. Trade wars could bruise Apple

Trump’s ongoing trade wars are not good for businesses anywhere and Apple is no exception. Cook warned that tariffs on goods criss-crossing the world can lead to unintended consequences for consumers and the economy.

“Our view on tariffs is, they show up as a tax on the consumer and wind up resulting in lower economic growth, and sometimes can bring about significant risk of unintended consequences.”

The Apple Watch could be one of the first Apple devices hit by the latest round of US tariffs on $200bn worth of Chinese goods, potentially leading to a 10pc import tariff. “Like everyone else, we’re evaluating that one, and we’ll be sharing our views of it with the administration.”

Cook said he hopes that “calm heads prevail” in trade negotiations.

7. Apple’s share buyback is eye-watering

“Our strong business performance drove revenue growth in each of our geographic segments, net income of $11.5bn and operating cash flow of $14.5bn,” said Maestri. “We returned almost $25bn to investors through our capital return programme during the quarter, including $20bn in share repurchases.”

20bn greenbacks! Think about that for a second: that is a lot of dough and brings to $43bn the amount of share buybacks by Apple this year. It is no wonder investors are voting with their dollars and pushing the company towards a $1trn valuation.

The linchpin of this, of course, is Trump’s sweeping US corporate tax cuts last year.

Crucially, Apple’s share repurchases in the first half of 2018 alone exceed the stock market value of almost three-quarters of companies in the S&P 500, including Ford, Delta Airlines and Twitter.

8. Apple plans to be a big noise in TV

Cook said that Apple is focused on expanding Apple TV and content production. As well as hiring Hollywood business types, the company has also snagged a content deal with Oprah Winfrey.

“We hired two highly respected television executives last year, and they have been here now for several months and have been working on a project that we’re not really ready to share … details about,” Cook said. “But I couldn’t be more excited about what’s going on there.”

9. Apple’s war chest is bursting at the seams

Apple’s cash hoard is immense. The company now has $243.7bn in cash on hand. This is down from $267.2bn in March due to the start of a $100bn share buyback programme and a 16pc dividend increase.

While Apple is often quite frugal with its money and very strategic in its acquisitions, it has been committing to helping with economic growth in the US and is opening the purse strings on other endeavours, such as the aforementioned content deal with Winfrey.

Apple iPhone X smartphone. Image: Hadrian/Shutterstock

Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com