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China rebounds but Apple investors are waiting for the iPhone X effect

Apple shares leapt as the company reported far better quarterly results than Wall Street had expected, including an upbeat view of the performance of current iPhone models, amid the anticipation of the iPhone X.

The vendor reported $52.58bn in fourth quarter revenue, up 12% year-on-year and ahead of the consensus forecast of $50.7bn. Profits were up 19% to $10.7bn.

Apple said it sold 46.7m iPhones during the quarter, outdoing analyst expectations of 46m, which had been tempered by fears that the iPhone 8 and iPhone 8 Plus would be slow sellers. These models were launched at the same time as the iPhone X, but were made available earlier, leading to speculation that most people – especially at the high value end of the market – would wait for the bigger changes promised by the X.

But Apple CEO Tim Cook said the two new models “instantly” became the company’s top two selling devices, while CFO Luca Maestri said that the quarter’s iPhone shipment volumes were up 3% on the year-ago quarter. He said: “We are very pleased to see double-digit iPhone growth in many emerging markets including mainland China, the Middle East, Central and Eastern Europe, India and Mexico. We gained share not only in those markets but also in Canada, Germany, France, Italy, Spain, Sweden and Singapore, based on the latest estimates from IDC.”

However, a 3% growth is perilously close to flat – of course, in Apple terms, a single percentage means huge numbers of units, but there was still some concern that the wait for the X was hurting other models, and skewing Apple’s revenues even more than usual to the holiday quarter. The firm forecast sales in the current quarter of about $85.5bn.

“We’re firing on all cylinders. That gives us confidence we are headed into our best holiday season ever,” Cook said.

The iPhone X went on sale, with the eye-watering tag of $999, in many global markets last week. If it does well, analysts expect it to deliver a record in the next fiscal year in terms of both revenue and profit, though those goals could be missed if the company fails to ramp up supply sufficiently quickly.

Cook told analysts on the earnings call that the iPhone X ramp was “going well considering it’s the most advanced iPhone we’ve created and has lots of new technologies in it. We’re increasing output week by week, and we will get as many as possible to customers as soon as possible. But I can’t predict when the balance will happen.”

Apple sold more than 10.3m iPads in the quarter, up 11% in a rare growth quarter for the tablet, and more than 5.3m Macs, up 10% in a flat PC market.

Services including apps and music streaming saw the biggest growth again, up 34% to $8.5bn.

Regionally, investors heaved a sigh of relief that recent setbacks in China seemed to be over, for now at least – Greater China saw a 12% year-on-year revenue increase for the year after declining last year.

Gross margins declined by 40 basis points in the quarter and 110 basis points in the fiscal year due to increasing costs for DRAM and flash memory.

Apple should also benefit from the tax reforms proposed by the Republicans in US Congress, which would lower corporate taxation levels and make it easier to claim rebates on tax paid abroad.

Stephen Sohn, lead Apple analyst at Moody’s, commented: “The proposed tax reform will provide more clarity on Apple’s ability to access offshore cash and manage shareholder returns and debt levels.”

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