Apple iPhone sales miss, but profit breaks record anyway

The earnings report answers a lot but doesn't settle the question about how the iPhone X is selling.

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Roger Cheng (he/him/his) was the executive editor in charge of CNET News, managing everything from daily breaking news to in-depth investigative packages. Prior to this, he was on the telecommunications beat and wrote for Dow Jones Newswires and The Wall Street Journal for nearly a decade and got his start writing and laying out pages at a local paper in Southern California. He's a devoted Trojan alum and thinks sleep is the perfect -- if unattainable -- hobby for a parent.
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Roger Cheng
4 min read

The iPhone X and the iPhone 8 were the big drivers of Apple's holiday season. 

Óscar Gutiérrez/CNET

Just how well the iPhone X performed remains a mystery. Still, one thing's for sure: Apple sold boatloads of iPhones but not quite enough. 

The Cupertino, Calif., consumer electronics giant said Thursday that it sold 77.3 million iPhones, down 1 percent from a year ago. Bernstein analyst Toni Sacconaghi had pegged the company to sell around 79 million iPhones in the period. 

While  Apple  doesn't break out the sales figures for specific iPhone models (which include the iPhone 8 , 8 Plus and older units), the decrease should do little to quell the chatter about whether the iPhone X was a flop during the holiday season. The expectation was for the iPhone X to be a hard-to-find item after it launched in November, but many customers were able to easily get one after the first few weeks, suggesting demand wasn't as strong as expected. 

Watch this: Apple iPhone sales drop slightly

Then there's the talk that iPhone X sales have dropped even further in the new year, with several reports pointing to Apple halving the production run of the phone to 20 million units. On Monday, Sacconaghi cut his estimate for iPhone sales in the current quarter to 53 million from 66 million. 

The pricier iPhone lineup still drove the company to post all-time records in quarterly profit and revenue. And CEO Tim Cook says the iPhone X remains the top seller. And the average selling price was higher than expected at $796 -- suggesting a higher mix of iPhone X sales. 

"iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November," he said in a press release. 

A rough holiday

Apple ended 2017 in unusual fashion. 

There was, of course, the split timing of the release of its new iPhones, with the iPhone 8 and 8 Plus debuting on Sept. 22 and the iPhone X launching on Nov. 3. Apple also pushed the iPhone X's starting price to $999 -- unchartered territory for a super-premium phone. 

Watch this: Apple may have slashed iPhone X production in half

In December, Apple admitted it issued a software update that allowed the company to slow down older iPhones to better deal with aging batteries and cold conditions. That sparked a huge consumer backlash, causing Apple to cut the price of its battery replacement service by $50, to $29. The US Securities and Exchange Commission and Department of Justice are investigating how the company disclosed the information. Apple said it's responding to the government inquiries

The bad publicity and the fact that consumers could swap out the battery on their existing iPhone on the cheap may have had a negative effect on iPhone demand. 

Cook, however, said he didn't know what the impact of the lower battery replacement cost would be. 

"We did not consider in any shape or form what it would do to the upgrade rate," he said on a call with analysts. "We did it because we thought it was the right thing for the customer."

The unit sales decline suggests Apple could have potentially lost market share in phones in the period, according to Moor Insights analyst Patrick Moorhead. 

Bottom line

The move to the more expensive iPhone did help its revenue. The company's iPhone unit generated $61.58 billion in revenue, up 13 percent from a year ago. 

The company's iPad sales also saw continued improvement, with its 13.2 million units shipped up 1 percent amid a 6 percent increase in revenue. The company is seeing a flicker of life come back to the tablet business, largely for education and business use. While the iPad was wildly popular a few years ago, consumers feel less of a need to upgrade to a new version, preferring to spend their money on other gadgets -- like a new phone. 

Apple said there are 1.3 billion active installed devices out there, an increase of 30 percent in 2 years. 

Its second most important contributor to revenue was its services business, which includes Apple Music and its App Store. It generated $8.47 billion in revenue, up 18 percent from a year ago. 

Apple noted that the previous year's fiscal first quarter lasted 14 weeks, while this past fiscal first quarter was 13 weeks, affecting the comparison between periods. 

Apple's net income rose to $20.07 billion, or $3.89 a share, from $17.9 billion, or $3.36 a share, a year ago. 

Revenue rose to $88.29 billion from $78.35 billion.

Analysts had expected earnings of $3.86 a share and revenue of $87.28 billion, according to Yahoo Finance.

Looking ahead, Apple expects revenue to be between $60 billion and $62 billion in the fiscal second quarter, lower than the $65.7 billion analysts expected. 

Apple shares rose 3.3 percent to $173.35 in after-hours trading.

Originally published at 4:35 p.m. PT. 

Update, 2:55 p.m. PT: Includes executive and analyst comments and additional background.

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