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Apple Q1 surges as iPhone 11, iPhone 11 Pro sales deliver, but coronavirus a wild card for Q2

The company's outlook is strong amid iPhone 11 demand. The company's device installed base is now 1.5 billion.
Written by Larry Dignan, Contributor

Apple's fiscal first quarter was fueled by strong iPhone revenue due to iPhone 11 and iPhone 11 Pro demand as well as the company's accessories unit, which includes Apple Watch and AirPods. Apple also detailed how the coronavirus outbreak in China is affecting operations. 

Apple reported first-quarter earnings of $4.99 a share on revenue of $91.8 billion, up 9% a year ago. Wall Street was expecting Apple to report fiscal first-quarter revenue of $88.5 billion with earnings of $4.55 a share.

CEO Tim Cook said that it saw a strong demand for iPhone 11 and iPhone 11 Pro as well as for wearable devices such as AirPods and Apple Watch. The company's active installed base of devices topped 1.5 billion. Apple CFO Luca Maestri said the company has more than 480 million paid subscriptions on its platform and expects to pass the 500 million mark in the March quarter. Maestri said that Apple is targeting more than 600 million paid subscriptions by the end of calendar 2020.

On a conference call with analysts, Cook broke down the iPhone demand picture. In a nutshell, the lower-priced iPhone 11 is selling well.

iPhone 11 was our top-selling model every week during the December quarter, and the 3 new models were our 3 most popular iPhones. We had double-digit growth in many developed markets, including the U.S., the U.K., France and Singapore and grew double digits in emerging markets, led by strong performances in Brazil, Mainland China, India, Thailand and Turkey.

Other items from Cook included:

  • Apple Pay has a run rate topping 15 billion transactions a year.
  • Apple Watch set an all-time revenue record in the quarter.
  • "We're closely following the development of the coronavirus.

The big question is whether the results are enough to justify Apple shares and their run in recent weeks.   

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Apple shares have been propelled by optimism about the company's Apple Watch sales, stronger-than-expected iPhone 11 cycle, and the success of services, which drives recurring revenue. There is also optimism about the upcoming iPhone upgrade cycle powered by 5G upgrades.

As for the outlook, Apple said it will deliver the second quarter between $63 billion and $67 billion with a gross margin between 38% and 39%. Wall Street analysts were modeling second-quarter earnings of $2.82 a share on revenue of $62.45 billion.

Key figures from the quarter include:

  • iPhone revenue was $55.96 billion, up from $51.98 billion a year ago.
  • Wearables, home and accessories revenue was $10.01 billion, up from $7.31 billion. That figure was in line with expectations. 
  • Services revenue was $12.71 billion, up from $10.87 billion. That figure was slightly below expectations. 

But Mac sales fell from a year ago as did iPad revenue. The long-term question is how Apple's China supply chain will be impacted by the coronavirus outbreak. Apple provided wide range with its second quarter outlook indicating some uncertainty about the coronavirus. 

Also: How to track the coronavirus: Dashboard delivers a real-time view of the deadly virus

Cook outlined the impact of the coronavirus on Apple's supply chain and retail operations. He said:

We do have some suppliers in the Wuhan area. All of these suppliers, there are alternate sources, and we're obviously working on mitigation plans to make up any expected production loss. We factored our best thinking in the guidance that we provided you.

With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10, depending upon the supplier location. And we've attempted to account for this delayed start-up through our larger range of outcomes.

With respect to customer demand and sales, we've currently closed 1 of our retail stores, and a number of channel partners have also closed their storefronts. Many of the stores that remain open have also reduced operating hours. We're taking additional precautions and frequently deep cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area across the country in the last few days.

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