Apple posts record quarterly revenue on stronger-than-expected iPhone sales

Analysts have talked for at least a year about the potential for Apple’s first 5G iPhone to drive a “supercycle” of device sales. On Wednesday, Apple’s earnings report for the three months ended December 26 — the first since the iPhone 12 went on sale — offered an initial look at how actual sales are stacking up against that projection.

Strong iPhone sales pushed the company’s total quarterly revenue to a record $111.4 billion — well above the $103.3 billion Wall Street analysts had predicted. Apple posted earnings of $16.8 per diluted share, up 35% from the same period in the prior year.

iPhone sales were also even better than expected: Growing more than 17% year-over-year to nearly $65.6 billion, compared with the $59.8 billion analysts had expected. Apple executives last quarter had said they expected single-digit percentage growth in iPhone sales during the December quarter.

“All signs point to a strong launch quarter for the iPhone 12,” Morgan Stanley analysts wrote in a note to investors ahead of the report. “In our view, the iPhone 12 has been Apple’s most successful product launch in the last five years.”

The company’s stock fell less than 1% in after-hours trading Wednesday.

The Wednesday earnings report comes as Apple’s stock has largely continued to soar in recent weeks. Its market cap this week reached an all-time record above $2.4 trillion.

“Our December quarter business performance was fueled by double-digit growth in each product category, which drove all-time revenue records in each of our geographic segments and an all-time high for our installed base of active devices,” Apple CFO Luca Maestri said in a statement.

Why so much pressure on the iPhone 12?

Hopes have been high for the iPhone 12 because it’s the first Apple device that can connect to 5G, the superfast wireless networks expected to create new capabilities for consumers and businesses.

The past several iPhone releases “haven’t really given users a reason to upgrade,” Tyler Ellegard, investment analyst at Gradient Investments, said in an interview ahead of the results. That led to disappointing iPhone sales numbers in recent years.

With the iPhone 12, experts predicted 5G connectivity could be a big enough change to encourage hundreds of millions of Apple users to upgrade. The fast download speeds and low lag time that 5G enables could make for a better experience using Apple services such as Apple Arcade.

However, there were also major questions surrounding the iPhone 12 launch: Will people really shell out for an upgrade during the economic recession caused by the pandemic? And with 5G networks still in their early days, would consumers experience enough of a difference to even want to?

D.A. Davidson Analyst Tom Forte said in a note last week that he believed Apple’s lineup of 5G smartphones was “better positioned than investors completely appreciate,” in part because of carrier promotions.

Some of the iPhone sales growth may not be because of 5G, but simply because consumers who hadn’t upgraded in a few years wanted other perks, such as the iPhone 12’s impressive array of camera features, Ellegard said.

What else will analysts be watching?

The iPhone wasn’t the only big Apple product to go on sale in recent months. The company also released the eighth-generation iPad and a redesigned iPad Air, the Apple Watch Series 6 with new watch faces and health monitoring features and a new Mac lineup powered by chips designed in-house.

Apple’s overall product sales during the quarter totaled nearly $95.7 billion.

But analysts will likely pay special attention to how Apple’s services segment performance — revenue from the business grew 24% to nearly $15.8 billion.

Although iPhones remain the company’s biggest revenue driver, it has been increasingly working to become more of a services business. Apple’s fitness subscription offering, Fitness+, launched during the quarter. And the ongoing pandemic and continued stay-at-home orders may have boosted subscription growth for Apple TV+.

The persistent growth of Apple’s stock likely has much to do with the services business, Gradient’s Ellegard said.

“People are changing how they value the company,” he said. “It’s easier to forecast future sales when you have the recurring subscriptions, and it’s also a higher margin business. It’s a better business model, to be honest.”

Apple executives could also provide insight into what they’re thinking about the new administration’s potential impact on their business during Wednesday’s earnings call. Although early Biden moves such as overturning Trump’s travel ban were likely welcomed by Silicon Valley, Big Tech continues to face major challenges in Washington DC.

“We see the potential of a return to a higher corporate tax rate as the biggest risk to Apple, from the changing of the guard to President Biden from President Trump,” D.A. Davidson’s Forte said in a note, adding that it could also hurt Apple if Biden continues Trump’s tariff war with China. “We look for comments from management on those risks.”