Apple Tops Revenue Estimates but Services Miss Triggers Stock Drop

Revenue and Profit Top Forecasts

Apple just wrapped up its fiscal third quarter with numbers that most companies would kill for. Total revenue came in at $109.42 billion, up 16.4% from last year and above the $108.65 billion analysts were looking for.

Profit per share of stock, known as EPS, landed at $2.02. That includes 11 cents from U.S. tariff refunds. Strip those out, and Apple still hit $1.89 per share - above what Wall Street expected.

Its gross profit margin also looked healthy at 50.1%, or 48.1% without the refund boost. That beat the midpoint of Apple's own guidance.

The big story was iPhones. Apple sold $54.25 billion worth of them this quarter, the best third quarter ever for the product line. Macs were hot too, with $10.35 billion in sales, up 28.7% and well above the $8.74 billion analysts had predicted.

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So why did the stock drop? Because one key part of Apple's business came up short.

Services Growth Slows Despite Strong iPhone Sales

Apple's services division - the part that includes the App Store, iCloud, Apple Music, and other subscriptions - grew 12.1% to $30.74 billion. That sounds good until you realize analysts were expecting $31.22 billion.

Gil Luria, an analyst at D.A. Davidson, put it bluntly. "Investors are concerned that if Services are decelerating while iPhone is growing more than 20%, it may slow down even more as iPhone sales come back down to earth," he said.

The strong iPhone and Mac sales were driven partly by customers buying ahead of expected price increases. Apple raised prices on Macs and iPads because of a global memory chip shortage.

CEO Tim Cook explained that the supply chain for advanced chipmaking "just has fundamentally less flexibility in it to meet the high levels of demand." So a lot of people rushed to buy before prices went up.

Other areas also had mixed results. iPad sales fell 5.9% to $6.19 billion, below estimates of $6.92 billion. Sales of wearables, including the Apple Watch, rose 6.5% to $7.88 billion, marginally exceeding analyst forecasts. And revenue from Greater China hit $18.82 billion, up 22.4% but still missing the $19.67 billion six analysts had targeted.

Apple also signaled something unusual. It may end its policy of sending all its spare cash back to shareholders. That suggests the company wants to hold onto money for big investments down the road.

TECHnalysis Research chief analyst Bob O'Donnell captured the uncertainty, saying, "I do think it's possible people are going to continue to buy the existing phones, because of the price increases." He added, "The big question is, what's going to happen on Macs in this quarter, when the new prices are fully there?"

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