Apple (NASDAQ:AAPL) has been on a tear since reporting earnings earlier this month. In this episode of Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu take a dive into the earnings report.

Tune in to find out what had the market so excited. Learn how many of its own records Apple broke this quarter, what the big numbers looked like, what the fastest-growing segments are and how they're poised to keep growing, and how the Trump administration might affect Apple in the next few years, and much more.

A full transcript follows the video.

This podcast was recorded on Feb. 3, 2017.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, Feb. 3, and we're breaking down Apple's earnings release. I'm your host, Dylan Lewis, and I'm joined on Skype by Fool.com senior tech specialist Evan Niu. Evan, how are you doing?

Evan Niu: Pretty good, about to go on vacation.

Lewis: About to go on vacation. I doubt that you could possibly be doing as well as Apple is doing this week, though.

Niu: [laughs] That's true.

Lewis: It's not too often that you see the world's largest company spike 6% after earnings.

Niu: Yeah. The numbers they put up, I mean, I was pretty impressed. I wasn't really expecting them to blow it out like this, and beat their own guidance by $400 million.

Lewis: Yeah. We always do the Apple earnings show, it's one of my favorites to do. But after several in a row where we've been like, "Yeah, we know that growth is slow or even declining, but just be patient, we think it's going to be OK," it will be nice to do a show where we can talk about them and have a bit of a rosier outlook on things, and maybe reaffirm some of the confidence that the Street should have in the business. In a lot of ways, it's still a fantastic company. Why don't we start out with a big numbers here? Revenue came in at $78.3 billion, which beat estimates of $77.3 billion. Also beat the company's guidance, like you said, by a couple hundred million. Earnings per share came in at $3.36 for the quarter, which also beat estimates of $3.22. So, for the first time since fiscal Q1 of last year, the company posted year-over-year revenue growth.

Niu: Yeah. I think that's one of the big stories. 2016 was so tough on them in terms of storylines and sentiment, because, yeah, first year ever of showing negative growth, and everyone is kind of gloomy about it. Then, they come back and say, "We still have it in us, we can still set records, we can still push all these different parts of the business to these completely record levels," including the Mac, which is crazy, because the Mac has been around for 40 years, and they're still continuing to grow it and push up higher.

Lewis: And they've been working against so many headwinds for such a long time in that year. You look at the strong dollar having a pretty sizable impact on the money they make overseas, and also the selling price of devices overseas. You look at the elongating of the upgrade cycle, particularly with some of the wireless carriers moving away from a subsidy model, and getting people off of that two-year upgrade.

So, there are just a lot of things pushing against what would normally cause people to be buying phones, or would be allowing them to recognize more in revenue and earnings here in the U.S. So, it's nice to see them bring it back up this quarter. Why don't we hop right into the iPhone segment? This is really where they're making most of their money.

Niu: Yeah. They sold another record of 78.3 million. The last three consecutive quarters, they put up negative growth. So, they put an end to that trend. Of course, this creates another tough comparison for next year, raises the bar for a year from now. But, personally, I wasn't that impressed with the iPhone 7 as a product.

Lewis: Do you own it?

Niu: No. It's the first time in eight years that I haven't upgraded my phone. [laughs] 

Lewis: I don't own the iPhone 7 either, so don't feel bad. [laughs]

Niu: But, literally every year I've been upgrading, this is the first time I'm not, because I just didn't think it was that compelling. But, obviously the market really does. Part of it is that the 7 Plus is really the hot seller this quarter. Apple even acknowledged that they did a poor job predicting demand. They allocated less than they should have to the 7 Plus production. There's not really a killer feature in the iPhone this year. Arguably, the biggest thing is the dual camera system that is specifically for the 7 Plus. So, it seems like a lot of people are picking that bigger phone. I think it costs $120 extra now. You can see it in the numbers. They put up really strong results here.

Lewis: Yeah. And I think you really see that when you look at average selling price. That grew to $695 in the most recent quarter, up from $619 in the previous quarter. And a lot of that is the 7 Plus model, and consumers clearly voting for the better camera, and being willing to pony up a little bit more dough for it.

Niu: And/or extra storage, because those things shoot 4K video, and you need a lot of storage to store all that.

Lewis: Yeah. absolutely. So, if you put those two numbers together, the units and average selling price, you get roughly $54.5 billion in revenue. So, right now, we're looking at the iPhone segment making up about 70% of revenue for Apple for this quarter. Higher than it's been in the past, but not necessarily surprising, because the iPhone segment was so massively popular and so successful this quarter. 

Niu: Yeah. They were so supply constrained the entire quarter. They acknowledged that they didn't meet supply demand balance until January. So, they were pretty short on inventory throughout the entire quarter. To still be able to hit these numbers even with constraints and, arguably, not a super strong feature set -- I was kind of blown away, honestly.

Lewis: I think we all were. One of the segments that is gaining more and more attention from analysts and the market in general is Apple's services segment. This is the iTunes Store, the App Store, Apple Pay, Apple Music, TV App Store, etc. Services, this time, came in at $7.2 billion, which is roughly 9% of revenue. But, perhaps more impressively, it was up 18% year over year. It seems like the company and the Street are both giving this a little bit more emphasis as time goes on.

Niu: Yeah. And that was a quarterly record, one of those records they set this quarter. If you look at it now on a trailing 12-month basis, Services has now crossed $25 billion, in terms of the size of the business. So this is a huge business already. Here's the crazy thing -- they're very ambitiously saying they're hoping to double the services business within four years. That's saying, "We think we can make a $50 billion business by 2020." Which is pretty ambitious. As far as how they'll get there, they highlighted a couple things. First of all, now, there are 150 million paid subscriptions that are being automatically billed, recurring subscriptions. That includes Apple's services as well as third-party services. But that's the total number that is being billed through iTunes and the App Store right now. That's a pretty big number. They do expect that to keep growing. That's a pretty big base of regular subscriptions of various types of services that they sell. Transaction volumes are going up, the installed base is growing. There's really all these different aspects of it. They even mentioned, this is kind of surprising, this iCloud storage business is growing quite a bit. I would never have thought it would be a growth driver. But, basically, all these different aspects are really putting up good growth, and combined, they're really bullish about this going forward. It's a pretty ambitious goal there.

Lewis: Yeah. Looking at the inputs of what makes up that services revenue, there's momentum on both sides. Not only is the installed base is getting larger -- so, the number of people that are actually somehow transacting with the services segment -- they indicated in the call that that's increasing in the strong double digits. Also, the ARPU (average revenue per user) for each paying customer is increasing in the double digits. So it's not that one side of that equation is really crushing it and the other one is stagnating. Both sides are performing well. And I think that's what you want to see. 

Niu: Yeah. And they also had mentioned the music business, which had been declining for quite some time, for many years. Before Apple got into the streaming side, when it was all the download business for music, as people shift toward streaming, that business was shrinking. Now, we're back to this inflection point where music is growing again. If you include both download and streaming -- so both iTunes plus Apple Music -- if you combine them, the music business as a whole is now growing again. That's always nice to see, particularly as the shift toward streaming continues, more and more people are willing to pay. The industry itself really likes the shift to paid streaming versus ad-supported streaming. And Apple is a big proponent in that transition. That's also another good sign. They are really helping the music industry grow as a whole, as well as their cut of the whole music business growing again.

Lewis: And you have to like that, considering that they are, what some people might argue, kind of a late entrant into streaming music. You already had Spotify with tens of millions of people using it, and you might have wondered what adoption might have looked like for Apple Music and the streaming service. But results seem to be pretty good so far. Another area that I think we should spend a little bit of time focusing on here is some of the international results, specifically China. I know that four out of Apple's five geographic operating segments set fresh highs -- all but Greater China. But, China is really seen as a huge market opportunity in addition to India, for Apple. Do you want to put a little color out as to what they said in the call?

Niu: Yeah. Like you mentioned, more quarterly records in terms of all the other geographical segments, which, again, it's all these little things that are contributing to this overall overperformance. For example, Japan grew 20%. Japan is not a huge market for them, but just the fact that they can still put out meaningful growth numbers ... Europe was pretty much flat. But, Greater China, it has bounced back quite a bit sequentially. In the third quarter, sales were something like $8.7 [billion] to $9 billion. So, to really bounce back to $16 billion, it's shy of their all-time record, which was set a year or two ago, around $18 billion, but it is bouncing back on a sequential basis. I think there are still lingering concerns about the smartphone market in China, because it's getting really competitive with all these low-cost Chinese vendors really proliferating and flooding the market with these cheap choices. You can see in their numbers that they've had trouble in the past year as competition intensifies on the ground. But I still think that China is a very big, promising business. It's probably going to be a tough place to compete. But it's a great market. They're still growing, they still have to expand the retail footprint. There's still room to run.

Lewis: Yeah. With lower-priced entrants coming into the market, Apple's brand cachet is only going to give it so much pricing power. But, you have to think there's still some room to run there. Speaking of their international segments, I think it might make sense to check in on their cash hoard a little bit. As of their recent report, Apple is sitting on $246 billion in cash. Because they do so much business outside of the U.S. and because of certain current tax regulations, $230 billion of that total, or roughly 94%, is held outside the U.S. Morgan Stanley analyst Katy Huberty asked [CEO] Tim Cook on the call about what the company might be thinking with the current administration, and the possibility of repatriating some of that cash. I think that was a question a lot of people wanted an answer to.

Niu: Yeah. That's one of the big things that the Trump administration is pushing, is this tax reform, including a potential repatriation holiday. If they could bring back a lot of that cash, there are certainly a couple things they could do with it. Cook didn't really give a lot of clear guidance on what he's thinking. But, you could buy some companies. He keep saying that Apple is open to really big acquisitions if they fit, if they make sense, all these things. But he's basically not concerned about pricing anymore. You could buy some companies, you could invest in the U.S., you could potentially bring production back. Obviously, that's another big thing that Trump is pushing.

Another thing I would actually like to see is strengthen the balance sheet. The whole reason they have the $70 billion-plus in debt is because it's always been a way to avoid the repatriation taxes. So, if they can repatriate at appealing rates, it might also make sense to pay down some of that debt, because that way, you can avoid some of the interest expense, and it strengthens your balance sheet a little. Not that the balance sheet is weak, by any stretch of the imagination. It all nets out in the end. But, logistically, it would be nice to bring that money back, pay down some debt. Because, if this is a one-time deal that they can bring back a ton of money, I would expect them to keep generating ridiculous amounts of cash overseas, and then they would want to raise more debt, again, to be able to tap that, in the same way they have been doing, but if they could pay down that debt, that basically gives them even more time to keep pursuing the same strategy. And if they're taking advantage of a one-time tax holiday, I think that would make sense, from a corporate finance standpoint.

Lewis: Yeah. Even with $70 billion in debt, where they had to repatriate a lot of that cash that's held overseas, they still have quite a bit to work with. I think on the call, Huberty specifically asked about what merger and acquisition activity to expect, or if they might continue to invest in original content and programming that would make the Apple ecosystem seem a little bit more appealing. I think because she led with that question and had some specific examples of where cash might go, Cook's response followed along with that. But, I was hoping we might get some color about an increase in the dividend, or an update on what the company was thinking with share repurchase where they'd have that extra capital on hand. But, nothing there at the moment. Cook was notoriously cagey, as always, in his response. 

Niu: Yeah. He didn't really give a lot away there. They usually update their capital return program every April. So, next quarter, we will get some insight. They did buy back $11 billion in shares this quarter. Which partially helps juice the earnings-per-share number, which is another record, because they are able to retire so many shares. They retired something like 62 million shares last quarter. That's really highly accretive to that earnings-per-share figure, even though net income was actually down slightly relative to a year ago, in part because of foreign exchange headwinds and things of that nature. So, right now, they are up to about $144 billion in cumulative repurchases, and the current authorization is $175 billion. So they still have plenty of room. They only have one more quarter before they update it again. But I would expect them to give another update and increase it again in a couple months, because this business creates so much cash that they literally have no idea what to do with it. [laughs] I mean, think about how much money they have given back, and the fact that they still have more money now than they've ever had before. So, it's like, they're trying to give this cash back at this ridiculous rate, but they generate so much of it that it still adds on a net basis to their total cash position, even after giving back so much over the years. It's mind-boggling.

Lewis: And that's with them continuing to invest in the future, as well. You hear about some of the different projects that they may or may not be funding, and some of the initiatives they might be pushing. It's not like they're sitting on their heels here. They're certainly throwing money into seeing where tech might be going. It's just that, with this type of money available to them, you can only do so much of it with reinvesting in the business and with R&D. I mean, that's the beauty of having a cash cow business like that.

Niu: It's just insane how much they make.

Lewis: One of the things that I was happiest about, and I think maybe this is one of the things that also pushed the stock up as much as it did after the report, was, looking forward, management guided that revenue should come in somewhere between $51.5 billion and $53.5 billion for the next quarter. And this would be a 1.7% to 5.7% increase over where they were a year ago. I think the reason you have to be really psyched about this as an investor is, they're showing growth year over year in a quarter that isn't fiscal Q1, where they are typically doing blockbuster sales because of the holidays. So, it seems like we are not only back to growth this quarter, but going to at least continue moderate growth for the next couple quarters, if all things hold.

Niu: Yeah. And another thing that's pretty impressive about the guidance for this coming quarter, the current quarter, is they're also leaving some room for some gross margin upside, in terms of the guidance. The last quarter, there was 38.5 [percent], and their current guidance is 38-39 [percent]. What's most impressive about that is, most of the time, when you're coming off the big fourth-quarter holiday season, you lose some operating leverage, so you're margins usually come down slightly because of the seasonality. For revenue to be coming down from seasonal factors to this 51.5-53.5 level and still being able to potentially put up a sequential increase in gross margin, that's pretty strong. I think the biggest factor that's contributing to volatility is all the currency stuff. But, if they could increase gross margin on a sequential basis after losing leverage, it's pretty good. That's impressive.

Lewis: Yeah. Strong business, firing on all cylinders. Nice to see them back in a growth phase. Anything else that really came out to you in the report, Evan?

Niu: No. It was just really broad-based. They just hit these numbers, small little records, but all across the business. As an investor myself, it's pretty encouraging. There is this perception that Apple is at the end of the road, they're running out of ideas, they're peaking. And they're just like, "Hey, no, we can still squeeze out these gains if we really push and hit on all these sides of the business."

Lewis: And that's working with a top-of-the-line smartphone that really isn't all that different than the previous versions. I mean, this wasn't a crazy update to form factor, aside from, maybe, getting rid of the headphone jack and updating the camera. The phone still resembles what people expect of the iPhone. So, you think about what that might mean, were they to make some really serious updates in functionality, or do something radical with future versions of the phone. I think you have to like what that would do for the business.

Niu: Yeah. I thought it was the least impressive update in years. But, here we go. [laughs] 

Lewis: Clearly 70 billion people disagree with you. [laughs]

Well, listeners, that does it for this episode of Industry Focus. If you have any questions, or just want to reach out and say "Hey," shoot us an email at industryfocus@fool.com, or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff, subscribe on iTunes, or check out The Fool's family of shows at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Evan Niu, I'm Dylan Lewis, thanks for listening and Fool on!

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.