Apple rises on services revenue

Gains in business area lead better-than-expected results in third quarter

CUPERTINO — Apple, looking for ways to counter continued declines in sales of the iPhone, is now saying that the company’s new growth engine rests on consumers continuing to buy apps, music and switch over to Apple Pay.

Apple delivered its fiscal third-quarter results Tuesday and the highlight was the ongoing rise of its so-called services business, which totaled $5.98 billion in revenue, a 19 percent increase from the same period a year ago. Services — which include sales related to the company’s App Store, Apple Pay, Apple Music and other items — are growing so much that Apple CEO Tim Cook said he expects the business area “to be the size of a Fortune 100 company next year.”

“We saw stronger (overall) demand than we anticipated three months ago,” Cook said on a conference call to discuss

the quarter’s results. “We saw tremendous performance from services. I think services will continue to grow very briskly.”

That performance helped Apple beat expectations and it was a new bright spot for the company, which saw its secondstraight quarter of yearover-year sales decline for its signature iPhone, a trend that has led to speculation about whether Apple’s years of rapid growth have come to an end.

Sales from iPhones totaled $24.05 billion, a decline of 23 percent from a year ago, as Apple sold 40.4 million devices, down 15 percent from last year.

But even with the decline in iPhone sales, the iconic smartphone is not ready for the ash heap. The Cupertino-based company managed to exceed the estimates of Wall Street analysts, who on average forecast Apple would sell about 40 million iPhones in the quarter. Cook said he is “very encouraged” about the growth prospects in China and India, where Apple is making more investments to gain a bigger piece of both countries’ huge consumer bases.

In the third quarter, Apple turned in a profit of $7.8 billion, or $1.42 a share, on revenue of $42.4 billion, compared to earnings of $10.7 billion, or $1.85 a share, on $49.6 billion in sales a year ago. However, Apple managed to beat the estimates of analysts surveyed by Thomson Reuters, who forecast the company to earn $1.39 a share on $42.1 billion in revenue.

Tim Bajarin, director of tech research firm Creative Strategies, said the impact of services on Apple’s performance can’t be overstated.

“Services revenues are exceptional,” Bajarin said. “This is becoming one of the most important and fastest growing areas for new revenue.”

Apple also forecast fourth-quarter revenue in a range of $45.5 billion to $47.5 billion, while Wall Street analysts had earlier estimated the company will bring in $46 billion in sales during the quarter that ends in September.

Gene Munster, who covers Apple for Piper Jaffray, said the company’s sales forecast “implies business is perhaps not as bad as expected,” and he estimates Apple could sell between 43 million and 45 million iPhones in the current quarter, which would give investors some more faith in Apple heading into the end of the year. Apple is expected to hold a company event in September where it will likely unveil the next iteration of the iPhone, which many have already dubbed the iPhone 7. The company has historically gotten a new iPhone onto retail shelves in early fall, and in time for the crucial holiday shopping season.

“Since investor expectations for the device (iPhone) are extremely low, any meaningful incremental update could be a positive catalyst for the stock,” Munster said.

Among Apple’s other main product lines, Mac computer sales slipped to $5.24 billion from $6 billion a year ago, a decline of 13 percent, while iPad revenue rose 7 percent, to $4.88 billion from last year’s sales of $4.54 billion. The revenue increase was mostly attributed to the sales of moreexpensive iPad Pro tablets, as total iPad units were actually down 9 percent from a year ago, to 9.95 million.

Following the release of its results, Apple shares rose almost 7 percent in after-hours trading to $103.29.

Contact Rex Crum at 408278-3415. Follow Rex at Twitter.com/rexcrum.