The Key Trends From Apple’s Q3 Earnings

by Trefis Team
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Apple (NASDAQ:AAPL) published its Q3 FY’17 results on Tuesday, reporting its strongest levels of revenue growth (7.2% year-over-year) in about seven quarters, driven by a surging services business and growth across its key hardware product categories. In this note, we take a look at some of the significant trends from the earnings release.

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iPhone Sees Marginal Improvement 

Apple shipped 41 million iPhones over the quarter, marking a 1.5% increase year-over-year. Sell-through was stronger, as the company reduced iPhone channel inventory by 3.3 million units. ASPs stood at $606 during the quarter, up by about 2% over the year-ago period, amid a higher sales mix of iPhone 7 Plus devices. However, ASPs fell by about 7% sequentially, as Apple likely had to resort to some discounting to reduced inventory as it makes way for newer devices due this fall.

App Store, Paid Subscriptions Drive Services Business 

Apple’s services business grew by about 22% year-over-year to $7.3 billion, driven primarily by higher sales from the App store. In addition to taking a cut of sales of paid apps, Apple also generates revenue from paid subscriptions on its platform. The number of total paid subscriptions now exceeds 185 million, marking an increase of 20 million in the last three months. We expect services to become a larger component of Apple’s revenue mix, as it rolls out new tools such as the augmented reality (AR) focused ARKit, which could enable a richer service experience.

iPad And Mac See Growth On Product Refreshes

Apple’s iPad sales grew by a solid 15% over the last quarter, driven by a recent product refresh. The new $329 iPad appears to have been the biggest driver of sales, as average selling prices for iPads fell by about 11% year-over-year to $435. The Mac business also performed reasonably well, with unit shipments rising by about 1%, compared to the  broader PC market which contracted by 4%, per IDC. Revenue growth was still stronger at 7%, driven by sales of the premium products such as the MacBook Pro. Apple’s first wearable product, the Apple Watch also appears to be gaining traction, with sales growing by 50% year-over-year.

Gross Margins Expand

Apple’s gross margins stood at 38.5% in Q3, marking an increase of about 50 basis points year-over-year. While the improvement was likely driven by a larger mix of services revenue (16% of total revenue vs. 14% last year) and higher iPhone ASPs, manufacturing costs have also been rising amid tight supply of DRAM and NAND memory.

Q4 Guidance Indicates That iPhone 8 Launch May Be On Track

While there has been speculation that Apple could delay the launch of its newest iPhones on account of some manufacturing constraints, the company has guided for fiscal Q4 revenues between $49 billion and $52 billion, marking an increase of as much as 11% year-over-year. This could indicate that at least some new iPhones will go on sale in the mid-to-late September period like previous years. Moreover, Apple has indicated that gross margins could decline to between 37.5% and 38%, partly attributing this to “product transition costs”.

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