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Apple Inc. (AAPL - Free Report) reported spectacular results for third-quarter fiscal 2017, driven by the impressive Service segment performance. iPhone sales were also steady in the quarter.

Moreover, the recovery witnessed in iPad business was a big win for Apple. An upbeat guidance for the quarter ending in September widely alleviated fears of a delay in the launch of the next edition iPhone, dubbed as iPhone 8. It has sent shares up over 6% in the aftermarket session.

Earnings of $1.67 per share and revenues of $45.4 billion surpassed the Zacks Consensus Estimate of $1.57 and $44.7 billion, respectively. On a year-over-year basis, earnings grew 17.6% and revenues increased 7.2%.

Apple Inc. Price, Consensus and EPS Surprise

Apple Inc. Price, Consensus and EPS Surprise | Apple Inc. Quote

Total iPhone unit sales came in at about 41 million, up 2% year over year. Revenues from iPhone grew 3% from the year-ago quarter to $24.8 billion (54.7% of total revenue).

Services – including revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services – surged 22% year over year to nearly $7.3 billion. App Store sales were a big contributor. For Services revenues, the company remarked that it is now the size of a Fortune 100 company, much earlier than the company expected.  Across the segment, the number of paid subscribers grew 20 million to a total of 185 million in the last three months.

Apple sold 11.4 million iPads in the quarter, up 15% year over year. Revenues of $5 billion were up 2% from the prior-year quarter.

Apple Mac unit sales were up 1% year over year to approximately 4.3 million, while revenues grew 7% from the prior-year quarter to $5.6 billion.

Other products – including revenues from Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories – increased 23% year over year to over $2.7 billion.

Geographical Performance

Demand for Apple’s products improved across most of the geographical regions except greater China. As much as 61% of sales were from the International markets.

The Americas (the biggest market for Apple) generated revenues of approximately $20.4 billion in the quarter, up 13% year over year.

Europe generated nearly $10.7 billion in revenues, up 11% on a year-over-year basis.

Revenues from Japan rose 3% year over year to $3.6 billion while the rest of Asia Pacific generated revenues of $2.7 billion, up 15% year over year. 

Owing to persistent macroeconomic weakness, Apple revenues declined around 10% year over year in the Greater China region to $8 billion.

Margins

Gross margin was 38.5%, an increase of 50 basis points (bps) from the year-ago quarter. 

Operating expenses increased 12% year over year to $6.7 billion due to higher  research & development, selling, general and administrative expenses. As a result, operating margin dropped 20 bps from the year-ago quarter to 23.7%.

Balance Sheet and Cash Flow

Apple’s cash and cash equivalents (and short-term marketable securities) were $76.8 billion at the end of the quarter and long-term debt was $89.9 billion.

For the nine months ended on Jul 1, 2017, cash generated from operating activities was $47.9 billion.

Apple returned about $11.7 billion this quarter through dividends and share repurchases. The company has returned $222.9 million to shareholders out of its $300 billion capital-return program.

Apple also declared quarterly dividend of 63 cents per share, payable on Aug 17, 2017 to shareholders of record as of Aug 14.

Guidance

For fourth-quarter fiscal 2017, the company forecasts revenues in a range of $49–$52 billion compared with $46.9 billion reported in the year-ago quarter when it released iPhone 7 and 7 Plus. The Zacks Consensus Estimate is pegged at $49.2 billon.

Gross margin is expected within 37.5–38%, while operating expenses are projected within $6.7–$6.8 billion. Other income/ (expense) are likely to be $500 million, while tax rate is expected to be 25.5%.

Our Take

With upbeat guidance for the current quarter, Apple investors can breathe easy. There had been news that the launch could be delayed, which could severely impact the company’s quarterly results. It is reportedly set to unveil three phones – iPhone 7S, iPhone 7S Plus and the rumoured iPhone 8 – this fall.

Usually, the company unveils its latest edition iPhones in September, making it an important quarter. This year, Apple is likely to unveil iPhone 8 to mark the decade of the first iPhone. Labeled a mega edition, with features including a glass body, a dual curved edge-to-edge OLED display with a built-in Touch ID sensor and wireless charging, iPhone 8  is already  termed a “super cycle.”

Moreover, the bounce-back witnessed in iPad business is a big win for Apple. The iPad business has long been in doldrums. However, increasing sales in the U.S, China and Japan, has helped to reverse second quarter’s 13% year over year drop in unit sales. Sales of iPad witnessed a 32% surge to 1 million units in the U.S education market. Going ahead, refreshing of the iPad lineup will help to sustain the momentum seen in the business.

Plus, Apple’s Services business is expected to remain strong as it is mostly dependent on the already installed Apple devices. Moreover, in the long run, the company is expected to benefit from its robust cash position as well as strength in technology and the ecosystem that it has built supported by its loyal customer base.

Furthermore, Apple is working on developing technologies such as artificial intelligence (AI) and augmented reality/virtual reality (AR/VR), which are fast emerging as lucrative business opportunities. The company’s interest in the autonomous car project is understandable as it is now being labeled a big business opportunity. Apple also remains focused on increasing its market share in India.

Apple is working to get into the Internet of Things (IoT) market. At its WWDC held this year, the company also announced the HomePod. With the device, Apple is preparing itself to take on Amazon’s (AMZN - Free Report) Echo and Alphabet’s (GOOGL - Free Report) Google Home. HomePod is a little speaker-like home automation device that can do everything from streaming music to dimming lights or adjusting the heat on the compatible thermostat. The company also announced the launch of iOS 11, MacOS, WatchOS and tvOS.

However, macroeconomic headwinds remain for now, especially in China – one of the high-growth regions for Apple. Moreover, competition from local players is hindering iPhone’s growth in China. 

Zacks Rank & Stock Price Movement

Currently, Apple carries a Zacks Rank #3 (Hold). The company’s shares marginally outperformed the broader market in the past one year. The stock registered growth of 43.6% compared with the industry’s gain of 42.6%.

Stock to Consider

A better-ranked stock in the broader tech space is Red Hat Inc (RHT - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Red Hat has delivered an average positive earnings surprise of 11.14% in the trailing four quarters.

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