What iPhone slowdown? Apple's sales are better than feared

The company also boosts its dividend by 16 percent and says it'll buy back another $100 billion in stock.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
8 min read
Josh Miller/CNET

Apple CEO Tim Cook on Tuesday pulled a rabbit out of his hat.

Analysts and investors have worried that the iPhone's best days are behind it -- a problem, since the phone is Apple's biggest moneymaker -- and that the company would report weak results in the June quarter. But iPhone sales didn't fall off a cliff as feared, and Apple's projections for sales this quarter were in line with what Wall Street expected. The company also said it'll return a lot more cash to shareholders, giving its stock as much as a 4 percent boost in after-hours trading

Cook, during a call with analysts, recited a laundry list of accomplishments that makes him "very bullish on Apple's future" -- nearly $150 billion in revenue and $34 billion in earnings halfway through the fiscal year, double-digit sales growth in all geographies, dramatic growth in the services business, a "huge" installed base of active devices, and a strong cash flow. And "we have the best pipeline of products and services we've ever had," Cook said. 

Watch this: iPhone X sales defy rumors

"Since we split the line with the launch of iPhone 6 and 6 Plus back in 2014, this is the first cycle that we've ever had where the top of the line iPhone model has also been the most popular," Cook noted, firing back at Wall Street worries the iPhone X is too expensive to sell in high numbers. 

Apple sold 52.2 million iPhones in the three months ended March 31. Apple doesn't break out sales of individual models, but Cook noted that the iPhone X was the best-selling device every week of the quarter. 

It was the first full quarter of iPhone X sales, and market watchers have worried about a slowdown for the company's top-of-the-line device. As a result, analyst estimates for iPhone sales were all over the place. According to a poll by Bloomberg, analysts were predicting that Apple had sold 51.9 million iPhones in the second quarter, while Barrons said analysts overall expected Apple to sell 53 million iPhones. Many analysts had been lowering their estimates as recently as this week. 

The average selling price for iPhones rose to $728, but Wall Street expected an average selling price of $742, according to ReutersA year ago, Apple sold 50.8 million iPhones with an average selling price of $655.

Financial Chief Luca Maestri told Reuters that "clearing channel inventory of 1.8 million iPhones -- most of them iPhone X and iPhone 8 models -- accounted for some of the difference" in average selling price. 

Worries about a big drop in sales in the next quarter didn't materialize either. For the current quarter, which ends in June, Apple projected revenue of $51.5 billion to $53.5 billion, with the midpoint slightly higher than analysts were expecting. Wall Street expected Apple to report revenue of $52.04 billion in the fiscal third quarter, according to a poll by Yahoo Finance. 

"Cook delivers again despite rampant fears," GBH Insights analyst Daniel Ives noted. He added that Apple's forecast for the June quarter "was much better than feared" and will be a "major relief" for investors. 

Apple, the biggest public company in the world, has been facing worries about slowing iPhone sales growth. Millions of people buy its latest smartphones each quarter, but it's not the blockbuster demand Apple watchers have seen in the past. 

Overblown fears

Apple is facing the same problem as other phone vendors: It's getting harder to woo buyers with the latest and greatest smartphones. There were worries that even 2017's iPhone X, Apple's first major iPhone redesign in three years, hasn't gotten consumers excited about phones again. The phone -- which starts at $999, $300 more than the 4.7-inch iPhone 8 and $200 more than the 5.5-inch iPhone 8 Plus -- is the most expensive iPhone Apple has ever made, and people have been holding onto their "good enough" devices longer than before. 

"Apple and the smartphone industry face limited growth prospects," Barclays analyst Mark Moskowitz noted on Monday as he called the weakening iPhone business "a big problem."

In February, Apple reported its iPhone unit sales fell about 1 percent, a hit for the holiday quarter. Maestri at the time said that in the March quarter, Apple expected iPhone revenue to rise from the previous year in the double digits on a percentage basis. Cook also noted then that Apple had 1.3 billion active installed devices, up 30 percent over two years. 

Apple on Tuesday said iPhone revenue climbed 14 percent, to $38 billion. 

The iPhone X, released in November, ditched the traditional home button in favor of a new way to unlock the device, called Face ID. It also packed a sharper, bigger screen in a smaller package and gave users the ability to run augmented reality apps. Those changes haven't been enough to get consumers pumped, though, and worries remain that the mobile market will continue to fall after its first-ever year-over-year decline, in the fourth quarter of 2017. 

Over the past two weeks, component suppliers such as Samsung, Broadcom, TSMC and SK Hynix have all warned about lower demand -- presumably attributed to Apple -- and reports have said the California company has reduced production plans for its priciest iPhone. Many analysts in turn cut their expectations for iPhone sales in the March and June quarters. Before Tuesday, some even predicted iPhone sales could drop for the full year, a big turnaround from their optimism ahead of the iPhone X launch.

As of market close Monday, Apple shares had fallen 7 percent since April 18, the day before TSMC reported its quarterly results. Shares rebounded 2.3 percent on Tuesday to close at $169.10. They rose 3.8 percent, to $175.45, in after-hours trading. 

Cook on Tuesday, likely seeking to alleviate worries about the iPhone X, said the device was the best selling iPhone every week in the March quarter, just as in the December quarter following the device's launch. And he said the iPhone X is "priced for the value" Apple's delivering.

"iPhone X is the most innovative product in the market," Cook said. "And I've said a few times, we had sort of jam-packed [the device] with technologies that really set up the smartphone for the next decade. And so that's how we priced it."

Rewarding investors

A new tax policy passed in December allows Apple to pay a $38 billion tax bill to bring its overseas cash back to the US. As of the first quarter, which ended in December, Apple had a record $285.1 billion in cash, with most of that held overseas. Investors expected to benefit from that move. 

Apple started giving money back to shareholders in August 2012 in the form of dividends and stock buybacks. A year ago, it boosted the amount of money it's returning to investors through 2019 by $50 billion to $300 billion. Most of that -- $210 billion -- came from share repurchases. Apple at the time also increased its dividend by 10.5 percent, to 63 cents a share. 

On Tuesday, the company said it will finish distributing that $210 billion to shareholders in the fiscal third quarter. It will now give another $100 billion to shareholders -- double the amount of its normal yearly buyback boost -- and said it will pay a dividend of 73 cents a share, up 16 percent from its prior level. 

"While the new $100 billion stock buyback plan along with a 16 percent hike in the quarterly dividend will substantially weaken Apple's liquidity position, this plan is consistent with management's desire to become net cash neutral over time, with net cash currently standing at $145 billion," said Stephen Sohn, a technology analyst for Moody's. He expects Apple to generate more than $40 billion in cash this year. 

Everything else

Apple generates about two-thirds of its revenue from the iPhone, and it's believed the bulk of its profit also comes from the smartphone. If that market suffers, so do Apple's financial results. But when the iPhone does well, Apple's revenue soars. 

The company doesn't have any businesses that come close to the iPhone's size. But Apple is expanding into new areas like home audio with its HomePod and pushing its iPad in schools. And, as CNET reported last week, Apple has been working on a headset capable of running augmented and virtual reality, two technologies that some companies see as the future of computing. 

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Cook on Tuesday called AirPods, Apple's wireless earbuds, "a runaway hit" and said his company's "working hard to meet the incredible demand." He also noted that Apple is "looking forward to adding new features to HomePod and introducing it to more markets around the world soon." 

Apple also has been trying to position its services business as a big source of revenue growth in the future. In the second quarter, Apple's services revenue jumped 31 percent, to $9.19 billion. 

Maestri called the quarter "sensational" and noted that revenue is double what Apple reported in the second quarter four years ago. "Our services business is growing at a very fast pace all around the world, with revenue up more than 25 percent year-over-year in each of our five geographic segments," he said.

Apple set a revenue for record in the App Store and Apple Music, and iCloud storage revenue jumped more than 50 percent to a new record. Altogether, Apple's paid subscriptions surpassed 270 million in the quarter, up 100 million from a year ago and up 30 million in the last 90 days alone, Cook said. 

"I expect Apple Services to continue as the strongest part of Apple's business with consistent and accelerating growth well into the future," said Michael Obuchowski, chief investment officer for Boston-based Apple shareholder Merlin Asset Management. "Many analysts will continue to be obsessed with the number of iPhones sold in a quarter, but increasingly iPhones will become just part of a growing number of 'devices' designed specifically to access Apple Services."

Sales of the company's "other products," which include the Apple Watch, AirPods, Beats headphones, iPods and other accessories, soared 38 percent, to $3.95 billion. Maestri noted that AirPod and Apple Watch sales set a new high for the March quarter. 

"When we combine all our wearables and home products, they accounted for over 90 percent of the total growth in the other products category," he said.

Cook also said that Apple's wearable business, which includes Apple Watch, Beats headphones and AirPods, saw its revenue rise almost 50 percent from the previous year. "Looking at its revenue over the last 4 quarters, our wearables business is now the size of a Fortune 300 company," he said. 

Mac unit sales dropped 2.9 percent, to 4.08 million, though revenue was about flat. iPad unit sales increased 2.1 percent, to 9.1 million units, while revenue climbed 5.8 percent, to $4.1 billion.  

Apple's overall revenue climbed 16 percent, to $61.1 billion. Analysts expected Apple to report revenue of $60.98 billion, according to Yahoo Finance. Apple in February projected sales of $60 billion to $62 billion. 

Apple's net income rose to $13.8 billion, or $2.73 a share, from $11 billion, or $2.10 a share, a year earlier. Wall Street anticipated earnings of $2.69 a share. 

First published May 1, 2 p.m. PT.
Update, 3:35 p.m. PT: Adds comments from conference call and analysts. 

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