Personal Finance

Apple Management Talks iPhone, iPad, Wearables, and Services

Apple's iPhones in a "mosaic" pattern.

On Tuesday, Apple (NASDAQ: AAPL) announced its earnings results for the third quarter of its fiscal year 2018, and the results were encouraging. Revenue was up 17% year over year, and earnings per share surged 40%.

Apple's also guiding for a strong finish to fiscal 2018, calling for revenue of $60 billion to $62 billion, up from $52.6 billion in the prior year. The midpoint of its revenue guidance implies approximately 16% year-over-year revenue growth, only slightly slower than what the company enjoyed last quarter.

Apple's iPhones in a "mosaic" pattern.

Image source: Apple.

During the conference call shortly after the earnings release, management provided a lot of insight that current and prospective investors should pay close attention to.

The iPhone performs well

Apple reported a 1% year-over-year increase in iPhone unit shipments during the quarter, with revenue up 20% year over year. That's the fastest quarterly year-over-year revenue growth that the iPhone business has seen during fiscal year 2018:

Metric Q3 2018 Q2 Q1
iPhone unit shipment growth (YOY) 1% 3% (1%)
iPhone revenue growth (YOY) 20% 14% 13%

Source: Apple quarterly releases. YOY = year over year.

CEO Tim Cook said that the iPhone X, the company's most sophisticated and priciest smartphone, "was the most popular iPhone in the quarter once again." That makes sense considering that Apple reported a year-over-year increase in iPhone average selling prices to $724 from $606, according to CFO Luca Maestri.

Maestri pointed out that iPhone business performance "from a consumer demand standpoint was stronger than our reported results, as we reduced iPhone channel inventory by 3.5 million units during the quarter."

Cook also said that Apple picked up global market share in the smartphone market last quarter.

The tricky iPad

The report showed that iPad unit shipments grew 1% year over year, but its revenue declined by 5%, suggesting a meaningful drop in average selling prices. In terms of unit shipment growth, this wasn't anything out of the ordinary (Apple saw a 1% increase in iPad unit shipments during the first quarter of the fiscal year). But this was the weakest iPad revenue performance so far over the course of fiscal year 2018.

Metric Q3 Q2 Q1
iPad unit shipment growth (YOY) 1% 2% 1%
iPad revenue growth (YOY) (5%) 6% 6%

Source: Apple quarterly releases. YOY = year over year.

According to Maestri, the company's "overall performance compared to last year was impacted by the introduction of new iPad Pro models in June of last year, which resulted in both a different mix with higher [average selling prices] and channel sales a year ago."

Apple is expected to refresh its high-end iPad Pro lineup later this year, which could help sell a richer mix of iPads, and ultimately boost average selling prices.

Maestri also highlighted the fact that the iPad saw its share of the United States' tablet market grow from 51% in the year-ago quarter to 60% last quarter.

Wearable computing serves Apple well

Cook said that the company saw outstanding results in its wearable-device business, which comprises Apple Watch, AirPods, and Beats.

According to Cook, revenue from these products was up, collectively, "over 60% year over year, with growth accelerating from the March quarter." Cook also said that the company's wearables revenue exceeded $10 billion over the last four quarters.

Apple Watch revenue, Cook said, grew in the mid 40% range. And according to Maestri, the company's AirPods wireless earbuds "continue to be a runaway success, and we've been selling them as fast as we can make them since their launch a year and a half ago."

The star services business

Although Apple generates most of its revenue from the sale of hardware, its services business has become its second-largest business unit, and was its second-fastest-growing business, behind the company's other products segment (which includes the wearables business and the benefit of growing off a much smaller revenue baseline).

Services revenue surged 31% year over year, although Maestri did point out that this growth was somewhat inflated thanks to a favorable $236 million one-time item in connection with the resolution of various lawsuits. "Excluding this amount, services revenue was still an all-time record, and the underlying growth rate of our services business was a terrific 28% over last year," Maestri said.

He went on to say that Apple generated double-digit services growth in all its geographic segments, adding that revenue from the App Store, AppleCare, Apple Music, cloud services, and Apple Pay "all set new June quarter records."

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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