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Apple Guidance Good News for iPhone Launch

Upbeat guidance implies Apple is confident it can meet demand for its new phones.


Brian Colello: Apple reported fiscal third-quarter earnings tonight, and there was a lot to like in the earnings. The stock was up 6% after hours. Revenue, gross margins, and EPS all beat for the third quarter. 

Looking at product by product, the iPhone sales for the third quarter were solid, particularly with the 7 and the 7 Plus. Those were a little bit higher than the 6S and 6S Plus sales a year ago, so Apple got some nice comps there. 

IPad sales were actually really impressive, up 28% year over year. It looks like they might have hit a sweet spot with the $329 introductory iPad. They sold well into the education markets; they talked a lot about that on the earnings call. Seems like it sold well in China and Japan as well. They mentioned that half of all iPad sales in those regions were to first-time customers, which is nice. 

Services was the other bright spot in the third quarter, with sales ahead of expectations. We try not to get too carried away on services because it's still tied to iPhone sales; a lot of the services revenue comes from the App Store, comes from Apple Care, so it's still tied to the hardware sale rather than an independent company, but sales there were still quite strong. 

Apple's fourth-quarter revenue forecast was also ahead of expectations. If you look at the high end of guidance of $49 billion to $52 billion, that implies 11% year-over-year growth, so that's a good sign as well. All eyes at this point are on the new iPhones coming in the fall, particularly the iPhone--we'll call it 8, or iPhone X--which might be a $1,000 model with the bezel-less screen, the 3D sensing, and the facial recognition. That's certainly the hot topic. 

This is a slow point for Apple investors anyway, so maybe the good news out of the quarter is that the fourth-quarter forecast for September doesn't imply any sort of severe decline in iPhone sales at the tail end of September, which is when we expect the new Apple iPhones to be launched. 

The implication from this fourth-quarter forecast is that Apple will be able to meet demand at least somewhat. There are some concerns about delays for the high-end model. Maybe that's possible; it's hard to tease out from the forecast, but there's no severe shortage on the horizon. 

All in all, we think this is probably the most important iPhone launch for Apple in the past few years. Particularly with rumors that the high-end model might cost in the thousand-dollar range or possibly even higher, to the extent they could sell any of these phones at the high end and they have enough features to warrant that sort of pricing, it's likely a positive for revenue growth and gross margins, at least in the near term. 

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.