By Emily Bary
Apple Inc. signaled that the worst is over for its China business, helping send shares higher in premarket trading Wednesday and putting the company on a path to regain its status as a trillion-dollar company.
The smartphone giant beat expectations with its latest results and gave an encouraging forecast for the current quarter, as Chief Executive Tim Cook discussed several factors that were helping improve performance in China, one of Apple’s most challenging regions.
Cook spoke positively of new iPhone trade-in programs, which were popular among consumers in China. Price cuts in emerging markets are also generating “positive customer response,” he said, while macroeconomic and geopolitical developments seem to be lifting consumer confidence.
The last weeks of the December quarter appear to be the “trough” in China, Cook said on Apple’s conference call.
“Apple’s strategy in China appears to be working,” wrote BTIG’s Walter Piecyk, who increased his price target to $234 from $220 after the report. “This will enable investors to embrace the revenue growth and margin contribution of the services business without such a big negative overhang from the declining iPhone business.”
Apple shares /zigman2/quotes/202934861/composite AAPL -1.44% were up 6% in premarket trading. They would need to close up 5.7% in Wednesday’s session for the company to once again record a closing market capitalization of $1 trillion, joining Microsoft Corp. /zigman2/quotes/207732364/composite MSFT -0.92% , which reached the milestone for the first time on Tuesday.
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Smartphone-buying patterns may have improved in China since the company’s dismal holiday quarter, but revenue for the region was still off substantially from a year earlier. Apple reported $10.2 billion in China revenue, down from $13 billion in the prior March quarter.
Overall, Apple managed to beat lowered expectations on the top line, delivering revenue of $58 billion, which was down from $61.1 billion a year earlier but ahead of the FactSet consensus estimate, which called for $57.5 billion. Apple’s current-quarter outlook of $52.5 billion to $54.5 billion also exceeded the FactSet consensus of $52.1 billion.
Apple has stopped reporting iPhone unit sales, but the company’s $31.1 billion revenue for the segment only matched analyst expectations. Prior to the report, rivals Alphabet Inc. /zigman2/quotes/202490156/composite GOOGL -2.18% /zigman2/quotes/205453964/composite GOOG -2.05% and Samsung Electronics Co. Ltd. /zigman2/quotes/209800866/delayed KR:005930 +0.43% warned of challenges in the premium-smartphone business. Market-research firm IDC said late Tuesday that smartphone shipments across the industry dropped 6.6% in the first quarter.
Apple did better with its other product lines, recording its highest revenue growth rate in six years for the iPad segment and showing continued expansion of its high-margin services business.
Apple once again signaled momentum in services without giving too many financial details about the various segment components. The latest period was the “best quarter ever” for Apple Music, the App Store, cloud services and search ads, as the company grew paid subscriptions to 390 million, up 30 million from the holiday period.
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Cook said that the services business was also starting to benefit as China eases its restrictions on new game approvals. He was tight-lipped when it came to discussing any new details of the services offerings that Apple teased at a March event focused on subscriptions.
Apple showed improvement in its services gross margin, which rose to 63.8% from 61.6% a year ago as the gross margin for Apple’s products businesses dropped to 31.2% from 33.8%. The company reported earnings per share of $2.46, down from $2.73 a year prior but ahead of the $2.36 that analysts were modeling.
The company announced that it would continue to return massive amounts of cash to shareholders as part of its efforts to reduce its $113 billion net-cash balance. Apple’s board of directors approved a new $75 billion buyback authorization and a 5% increase to the dividend, which will now stand at 77 cents.
Shares fell 1.9% in Tuesday’s regular session, though they’ve gained 27% so far this year. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.69% , of which Apple is a component, has risen 14% in that time.