Apple made some risky choices over the holiday season, and Thursday it had to reckon with Wall Street.
Apple released three iPhones in the fall — one more than usual. And the flagship phone, the iPhone X, was not only a late add, it had a steep $999 price tag.
That was one factor Apple considered when preparing its guidance, Maestri said.
Its smart speaker, HomePod, missed the holiday season altogether. Then there was “battery gate” — a miscommunicated software updated that slowed some phones in favor of stable battery life. The outcry spurred a discounted battery replacement program and has drawn the scrutiny of regulators.
Cook said that Apple was simply trying to figure out the right thing to do for its customers.
“We did not consider in any way, shape or form what it would do to upgrade rates,” Cook said. “Sitting here today, I don’t know what effect it will have. Again, it was not in our thought process in deciding to do what we’ve done.”
On the bright side, Apple’s ecosystem is at an all-time high penetration, and the quarter was a record financially as well, CEO Tim Cook said. The company’s customer base is now 1.3 billion devices.
Apple said on Thursday it expects a tax rate of 15 percent in the coming quarter, down from last quarter’s projections of 25.5 percent. Apple’s cash pile hit $285.1 billion, a new record, and the company said it made 19 acquisitions last year.
“Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is 163 billion, and given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash netural over time. We will provide an update for our specific capital allocation plans when we report our second fiscal quarter. consistent with the timing of updates we have provided in the past,” Maestri said.
Apple’s service business, which includes businesses like the App Store, Apple Music, Apple Pay and Apple Care, fell short of its ambitious targets for the quarter, despite hitting fresh records in the App Store over the holidays.
Service revenues hit $8.5 billion, below the $8.67 billion projected by a StreetAccount estimate. Apple has invested in new Apple Music video content over the past year, added peer-to-peer Apple Pay options, and has revamped its stores to deliver better customer care. Apple Pay is now accepted at over half of all American retail locations, Cook said on Thursday, and purchase volume has tripled from a year ago.
Apple has also been investing in markets like China — a competitive market for local brands — and India, which has yet to build a big market for high-end handsets. Revenue in China was $17.96 billion over the quarter ending in December, up 11 percent from a year ago.
Other greenfield products, the Apple Watch and AirPods, have joined the Apple TV and Beats in Apple’s non-iPhone line-up. Revenue in that category grew 36 percent year-over-year, the most of any category.
“It was our best quarter ever for Apple Watch and when we add the results from Beats and AirPods, our total revenue from wearables was up almost 70 percent year-over-year,” Maestri said. “In fact, wearables were the second largest contributor to revenue growth after iPhone, which is impressive for a business that started only three years ago.”
Apple has made recent updates to its tried-and-true Mac and iPad lines. But despite the iMac Pro launch in December, Mac sales fell 5 percent from a year ago.
The quarter was one week shorter than a year ago.
“We think [Apple] executed well internationally, with Greater China rising 11 percent and Asia overall growing 15 percent (including Japan). While the Mar-Q revenue outlook of $60 billion to $62 billion was below our view, we think shares have largely discounted iPhone X softness. We view a 15 percent projected Mar-Q tax rate as a bright spot,” Angelo Zino, equity analyst at CFRA Research, said in a statement.
— CNBC’s Michelle Fox contributed to this report. Chart by John Schoen
Disclosure: Gerber, his firm and his clients own Apple shares
