Apple beats earnings expectations by a mile, and its stock is soaring

Apple needed a breakout quarter after its last whiff, and boy did it get one.

The company reported revenue of $42.4 billion and earnings of $1.42 per share. Analysts were expecting earnings of $1.38 per share on revenue of $42.09 billion. As a result the company added tens of billions of value back to its share price, which rose more than 6% in extended trading. (6% might not feel like a lot, but for a company worth more than $500 billion, it’s a huge amount of value.)

That’s still a down quarter from last year. Apple then reported revenue of $49.6 billion on earnings of $1.85 per share. But that’s to be expected as the company’s core growth engine — the iPhone — has started to reach a saturation point and slow. Apple said it sold 40.4 million iPhones, compared to 51.2 million in the last quarter. But the last year has been largely iterative for the company.

This quarter largely shows an extension of that storyline. Revenue is no longer in growth mode, and iPhone sales are declining. But with industry watchers finally setting expectations that the company isn’t in full-on growth mode any more, it looks like positive news from the company is positive news for investors, who are still looking for new ways to value the company.

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We have another big story coming out of today’s earnings report as well: its cash pile actually decreased for the first time in recent memory. But the company has also been investing aggressively, recently writing a $1 billion check for Uber rival Didi Chuxing. Does this signal a new phase of Apple being more open to weaponizing its massive cash pile as it looks to find new avenues for growth? Hard to tell just yet — it’s only one quarter — but it might not be entirely surprising as the company looks to diversify its revenue streams.

Last quarter was a pivotal moment for Apple. The company showed its first revenue decline in 13 years, missing analyst expectations by a mile. iPhone sales, Apple’s main growth driver, were significantly down from the second quarter a year earlier. That sparked a lot of concern that Apple’s core engine may have — actually, most likely — has hit a saturation point.

As a result of that report, Apple’s stock promptly fell off a cliff. $40 billion in value for the company was wiped out in a single afternoon. Google has been nipping at Apple’s heeels, and at some moments seemed likely that it would permanently overtake the position of the most valuable company in the world (as it did at one point, momentarily). Apple’s stock has really yet to recover from that fall in the last quarter, but today was certainly a big help.

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This is also the first full quarter that the company’s revamp of the 4-inch iPhone, the cheaper iPhone SE, was for sale. That gave consumers an option to buy a less expensive phone from Apple, and upgrade from their iPhone 5 or 5S for those looking for a smaller phone. But having a cheaper phone has the potential to cut into Apple’s margins on its more expensive, more premium devices.

We may now be seeing signs of that. Apple’s gross margin — a key metric that industry watchers focus on — was down to 38% from 39.7%. Apple devices are largely considered premium devices, and as such having a high gross margin is key to the company’s success. Apple’s guidance showed an even further decline, aiming for between 37.5% and 38% for the fourth quarter this year (right before the next iPhone is expected to come out).

And so we turn to the company’s hopes and dreams. One particular note of interest was an interest in Apple’s iPad numbers this quarter. Last quarter, Apple CEO Tim Cook put out some tea leaves for investors to read that implied some optimism about the iPad. At the end of the March quarter, Apple sold around 10.9 million iPads. Here are his remarks from the last earnings report:

“We also unveiled the stunning 9.7-inch iPad Pro with cutting-edge performance and our most advanced display yet,” Cook said on the last earnings call. “The reviews of our new iPad Pros have been great, and we’re hearing from customers that the features and capabilities in the new Pros make them both the ultimate upgrade for iPad owners and a great PC replacement. In the June quarter, we expect to see our best iPad revenue compare in over 2 years.”

Analysts were expecting iPad sales of 9.1 million units. It turns out that it got more than what people were looking for — reporting that it sold 10 million iPads. But one interesting note is that the revenue it brought in from the iPad actually grew from $4.4 billion to $4.9 billion compared to the same quarter a year ago. As far as reading the tea leaves go, that looks like an interesting directionally positive data point.

[graphiq id=”ct34FpDiVGl” title=”Apple Inc. (AAPL) iPad Unit Sales” width=”600″ height=”463″ url=”” link=”” link_text=”Apple Inc. (AAPL) iPad Unit Sales | FindTheCompany”]

All eyes will, as such, be on Q4 and the unveiling of the iPhone 7. Apple’s last blowout performance came with the launch of the iPhone 6, which finally introduced a line of larger iPhones that proved to have extensive demand. It’s on Apple to find a way to re-ignite its core growth engine with the rest of its divisions being relatively ho-hum.

So, to recap, here’s the final scorecard:

  • Q4 guidance: revenue between $45.5 billion and $47.5 billion ($51.5 billion previous year)
  • Q3 revenue: $42.4 billion (Analyst expectations $42.09 billion, $49.6 billion previous year)
  • Q3 earnings: $1.42 per share (Analyst expectations $1.38 per share, $1.85 per share previous year)
  • Gross margin: 38% (down from 39.7% previous year)
  • Q4 gross margin guidance: 37.5% to 38%