Apple Earnings: A Low Bar, Easily Hopped Over

Apple Inc. (NASDAQ: AAPL) reported third fiscal quarter 2016 results after markets closed on Tuesday. The technology giant posted quarterly diluted earnings per share (EPS) of $1.42 on revenues of $42.4 billion. In the same period a year ago, the company reported EPS of $1.85 on revenues of $49.6 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.38 and $42.09 billion in revenues.

Analysts were not expecting much from Apple in the third quarter and Apple delivered just enough to make the analysts look like geniuses.

Gross margin in the quarter totaled 38%, down from 39.7% in the year-ago quarter, and international sales accounted for 63% of all sales.

Apple sold 40.4 million iPhones in the quarter, down from 47.5 million in the same period last year. Sequentially unit sales dropped by 21% and iPhone revenues dropped by 27%.

Revenues were down 16% sequentially and 15% year over year and fell by both measures in all geographical territories but one: U.S. revenues fell 11% year over year and revenues from Greater China were down 33%. Revenues rose 23% year over year in Japan, but fell by 18% sequentially.

CEO Tim Cook said:

We are pleased to report third quarter results that reflect stronger customer demand and business performance than we anticipated at the start of the quarter. We had a very successful launch of iPhone SE and we’re thrilled by customers’ and developers’ response to software and services we previewed at WWDC in June.

For the fourth quarter of 2016 Apple said it expects to post revenues in a range of $45.5 to $47.5 billion with a gross margin of between 37.5% and 38%. Operating expenses are pegged between $6.05 and $6.15 billion while other income is tabbed at $350 million.

Sales of “other products,” including Apple Watch, Beats products, Apple TV, and accessories totaled $2.22 billion up 1% sequentially and down 16% year over year. Services revenues were flat sequentially and up 19% year over year to $5.98 billion.

The top and bottom line beats appear to have forgiven a multitude of sins. Lower iPhone sales, though still above 40 million, and lower revenues from those sales could give some investors pause, but apparently not this time.

Apple’s slimmer margin is likely due to the popularity of the company’s iPhone SE, the cheapest iPhone available.

Apple shares closed at $96.63 on Tuesday, down about 0.7% for the day, and traded at around $101.55, up about 5%, in the after-hours session. The stock’s 52-week range is $89.47 to $123.91. Thomson Reuters had a consensus analyst price target of $122.37 before Tuesday’s report.

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