Apple Earnings Highlight Double-Digit Earnings Growth

In its just-posted quarterly results, Apple (AAPL 2.07%) flexed its profitability muscles. Even though revenue fell slightly during the period, earnings per share (EPS) jumped 13% year over year. This was fueled by the tech company‘s aggressive share repurchase program and product mix shift toward its lucrative services segment.

Here’s a closer look at some of the most important takeaways from the quarter.

A booming services business

Though shareholders would be happier if Apple’s total revenue for the fiscal fourth quarter didn’t fall 1% year over year, there were still some good reasons to be pleased with the quarter’s sales trends. Apple’s services revenue hit an all-time quarterly high during the period. It increased 16% year over year to $22.3 billion. Showing how significant the business is becoming to Apple, it accounted for a fourth of fiscal Q4’s total revenue.

It would be difficult to overstate how good a fast-growing services business is for Apple. The segment’s gross profit margin is 70.9%. This compares to a cumulative gross profit margin of 36.6% across all of Apple’s hardware segments. Services’ high gross profit margin, therefore, has an outsized effect on profitability. Specifically, Apple’s services segment represented 39.2% of the quarter’s total gross profit. This is one key reason why Apple was able to grow its EPS so significantly, even as its total revenue declined.

iPhone is doing well

Another Apple segment worth appreciating is iPhone. The important product category returned to growth during the period, aided slightly by the launch of the latest iPhone models with just over a week left in the quarter.

iPhone revenue for the period was $43.8 billion, up nearly 3% year over year and accounting for about 49% of the quarter’s revenue. This compares to the important segment’s 2% year-over-year decline in the fiscal third quarter.

Declining share count

Also playing a key role in Apple’s EPS growth is its share repurchase program. Over the trailing 12 months, Apple repurchased a staggering $77.5 billion of its stock. This reduced Apple’s total share count by nearly 3%. In other words, Apple’s share repurchases helped bolster EPS growth by almost three percentage points.

Looking ahead

Depending on how you look at Apple’s guidance, management expects further improvements in its business during the critical holiday quarter. Sure, management forecast a similar year-over-year growth rate for its total revenue during the holiday quarter as it saw in its just-reported quarter (a view that implies a 1% year-over-year decline). But management also reminded investors during its earnings call that the fiscal period has one fewer week.

“Revenue from the extra week last year added approximately seven percentage points to the quarter’s total revenue,” noted Apple’s CFO Luca Maestri during the conference call on Thursday afternoon.

So you could say that, when adjusted for the extra week in the year-ago period, Apple is guiding for a significant sequential acceleration in its business.

Helping the quarter is a loaded product line, featuring new smartphones, smart watches, laptops, desktop computers, and more.

All this indicates that Apple continues to easily justify its current valuation of about 30 times earnings. Recent business trends suggest that the company’s revenue could return to growth in fiscal 2024. The double-digit EPS growth it posted in fiscal Q4 could persist during the holiday quarter and into next year, thanks to Apple’s improving business composition as its fast-growing services business balloons as a percentage of total revenue.