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Apple's iPhone X keeps selling as Q3 services revenue soars

The company also projected better-than-expected revenue in the fourth quarter, indicating good times ahead for its new iPhones.

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Apple generates most of its revenue from its iPhones. 

James Martin/CNET

People just kept scooping up Apple's iPhone X

The company said Tuesday it sold 41.3 million iPhones in its fiscal third quarter. That performance isn't bad for a gadget that's been on the market for roughly six months, though it missed the consensus estimate of 41.8 million units, according to Toni Sacconaghi, an analyst with Sanford C. Bernstein. By comparison, the company sold 41.03 million iPhones in the same quarter a year earlier. 

"We're thrilled to report Apple's best June quarter ever, and our fourth consecutive quarter of double-digit revenue growth," Apple CEO Tim Cook said in a press release. He noted that strong iPhone, services and wearables sales boosted results. 

"We are very excited about the products and services in our pipeline," Cook said. 

While iPhone unit sales weren't quite a blowout, Apple's forecast for fourth-quarter revenue topped analysts' expectations, as did its third-quarter sales and per-share earnings. A stronger-than expected fourth quarter indicates Apple has big ambitions for its next iPhones. And in a quarter that's usually pretty boring, Apple had plenty of highlights to share. 

Now playing: Watch this: Apple sells more iPhones and it ain't slowin' down
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"This was the most exciting quarter from Apple in quite some time," Michael Obuchowski, chief investment officer of Apple investor Merlin Asset Management. "The success of Apple's transition from a device to services company was undeniable."

Apple shares climbed 3.6 percent to $197.14 in after-hours trading. 

Cook sounded an optimistic tone during a call with analysts, pointing to everything from iPhone sales to AirPods. He noted that the third-quarter revenue rise was Apple's "seventh consecutive quarter of accelerating growth, our fourth consecutive quarter of double-digit growth and our strongest rate of growth in the past 11 quarters."

Cook has been pushing to expand Apple beyond the iPhone, but the company still gets most of its money from the popular smartphone. In the second quarter, it sold 52.2 million iPhones, which accounted for 62 percent of sales. (Services, Macs and iPads and "other products" like AirPods contributed to the rest of revenue). But Apple surprised almost everyone that quarter by reporting strong results despite fears that slowing demand for smartphone had finally caught up to the Cupertino, California, company.

When it comes to the fiscal third quarter, which covers the three months that ended June 30, Apple usually gets a pass. It's Apple's smallest in terms of contributing to annual sales, and by the time the period ends each June, Apple's newest iPhones are already nine months old. Case in point: the iPhone 8 and iPhone 8 Plus were introduced in September 2017.

This time around, things were a little different because Apple started selling its flashiest, highest-end device -- the iPhone X -- about six weeks after the 8 and 8 Plus hit the market. 

iPhone X demand

With the iPhone X, Apple redesigned its popular smartphone for the first time in three years, getting rid of the home button to expand the touchscreen and adding new Face ID technology. It touted the iPhone X as "the future" of mobile." Analysts predicted it would drive a "supercycle" that would reinvigorate excitement in the sluggish smartphone market, which has seen worldwide demand slip as people hold on to their devices longer. That didn't quite happen, but sales also haven't completely stalled, as some feared.

The iPhone X was Apple's best-selling device from the time it hit stores Nov. 3 through the end of the fiscal third quarter, even though it was the most expensive phone Apple's ever sold. The 5.8-inch device starts at $999, or $300 more than the 4.7-inch iPhone 8 and $200 more than the 5.5-inch iPhone 8 Plus.

"Based on the latest data from IDC, iPhone grew faster than the global smartphone market, gaining share in many markets including the US, Greater China, Canada, Germany, Australia, Russia, Mexico and the Middle East and Africa," Cook said Tuesday. 

The average selling price for the iPhone in the third quarter jumped to $724 from $606 a year ago. In the second quarter, the ASP was $728. 

Market watchers are now looking to the next iPhones. Apple is expected to introduce three new iPhones in September, including the possibility for a model considerably larger than the iPhone X and another that's significantly less expensive.

"This quarter takes a back seat to the 'main event' which is all about the FY19 underlying iPhone demand picture and ramping services business," GBH Insights analyst Daniel Ives noted. 

For the fourth quarter, Apple projected revenue of $60 billion to $62 billion, above the $59.6 billion expected by analysts, according to a Yahoo Finance poll. 

Everything else

In the third quarter, revenue climbed 17 percent to $53.3 billion. Analysts expected sales to total $52.3 billion, according to Yahoo Finance. 

Apple's net income increased to $11.5 billion, or $2.34 a share, from $8.7 billion, or $1.67 a share, a year ago. Wall Street anticipated earnings would rise to $2.18 per share.

Because so many people have iPhones, Apple's services business -- which includes the App Store, Apple Music and iCloud -- has been growing dramatically over the past several quarters. Revenue from services operations jumped 31 percent to $9.5 billion, the second quarter in row with a 31 percent rise. It was an all-time record, Cook noted, driven by double-digit growth in Apple's installed base. 

"We feel great about the momentum of our services business, and we're on target to reach our goal of doubling our fiscal 2016 services revenue by 2020," he said. Apple Music grew by over 50 percent from the previous year, while Siri requests have exceeded 100 billion so far this fiscal year, Cook said. The number of articles read on Apple News more than doubled from the previous year, and Cook hinted about big efforts to come in TV

Apple Pay, for its part, continues to grow. Apple processed well over 1 billion transactions in the third quarter, triple the amount from a year ago. That was higher than the total transactions of Square and the mobile transactions of PayPal, Cook said. Apple Pay works in 24 markets worldwide with over 4,900 bank partners, and Apple plans to add Germany later this year. It also said that in the US, eBay is beginning to enable its sellers to accept Apple Pay, and CVS Pharmacy and 7-Eleven will roll out Apple Pay nationwide this fall. 

Mac unit sales slipped 13 percent from the previous year to 3.7 million, while revenue declined 4.7 percent to $5.3 billion. Apple has been facing unhappiness over its computer line, particularly the keyboards. In June, the company said it would replace sticky keyboards on all of its newer MacBooks and MacBook Pros. Then earlier this month, it introduced new computers that slightly improved the keyboard but didn't redesign it.

iPad unit sales, meanwhile, edged up 1.1 percent to 11.6 million, though revenue slid 4.6 percent to $4.7 billion. Apple's tablets have struggled over the past few years before being revived with the introduction of the pricier, more fully featured iPad Pro. Apple in March introduced a new, cheaper version of the iPad aimed at schools, something that helped third-quarter units but hurt overall revenue (the new iPad starts at $329, while the iPad Pro begins at $649)

Apple Financial Chief Luca Maestri noted that iPad unit sales grew for the fifth consecutive quarter. Apple saw double-digit iPad unit growth in Greater China and the rest of Asia Pacific, and almost half of iPad purchases in the quarter were by consumers new to iPad. 

Apple doesn't break out results for its Apple Watch, AirPods or other gadgets but lumps them into "other." Revenue in that segment soared 37 percent from the previous year to $3.7 billion. Wearables alone jumped over 60 percent from the previous year, Cook said, with Apple Watch up "in the mid-40 percent range." 

Now playing: Watch this: Apple sells more iPhones and it ain't slowin' down
1:42

First published at 1:42 p.m PT
Update at 1:55 p.m. PT: Adds Mac, iPad and wearable sales
Update at 4:22 p.m. PT: Adds details from conference call
Update at 4:55 p.m. PT: Adds comment from investor
Correction, Aug. 1 at 3:20 p.m. PT: Fixes Mac sales 

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