Against the backdrop of an impending product upgrade cycle, Apple Inc. (NASDAQ:AAPL) reported financial results that surprised investors, and the stock hit record highs in after-hours trading. Many expected a lull in iPhone sales in anticipation of the upcoming release of the 10th anniversary edition of the iconic smartphone. It wasn't only the surprising performance of some key products, but the optimistic forecast the company provided that made headlines.

Revenue for the just completed quarter rose to $45.4 billion, an increase of 7% year over year, while net income of $8.7 billion increased by 12% over the prior-year quarter. Earnings per share jumped 17.6% year over year, as the shares outstanding declined by 4% as the result of buybacks. In addressing the results, Apple CEO Tim Cook said, "With revenue up 7 percent year over year, we're happy to report our third consecutive quarter of accelerating growth and an all-time quarterly record for services revenue."

iPad and iPhone featuring the upcoming iOS 11.

Even prior to a major product upgrade cycle, Apple can still produce impressive results. Image source: Apple.

Lots of small surprises

Sales of the flagship iPhone accounted for the vast majority of the company's business, increasing 3% to $24.8 billion. This represents a whopping 55% of total revenue, driven by the sale of 41 million iPhones. The average selling price increased to $606 in the current quarter, up from $595 in the prior-year quarter. This indicates that Apple has not been resorting to price cuts to clear out inventory in advance of the upcoming iPhone release, though the company did indicate reductions in current inventory levels.

The surprisingly good results held a number of smaller revelations, including the increasing relevance of services revenue, which hit an all-time record of $7.266 billion, up 22% year over year, and now accounts for 16% of Apple's overall revenue. Services includes iTunes, the App Store, Apple Music, AppleCare, iCloud, and Apple Pay. Apple CEO Tim Cook had announced earlier this year the company's intention to double the revenue of the services segment by the end of 2020, and since then that plan has been on track. 

Other products, which includes Apple TV, Apple Watch, Beats headphones, and Apple branded accessories, saw 23% year over year growth to $2.7 billion and 6% of the company's total sales. Sales of the Apple Watch grew 50% over the prior-year quarter, and it is now the number one selling smartwatch in the world. 

The company also saw a return to growth of its iPad, with revenue increasing 2% year over year and 28% sequentially. Units sold increased for the first time in 14 quarters, up 15% year over year, led by strong sales to US schools, where sales increased 32% year over year to over 1 million units.

Not to be left out, Macs contributed to the healthy results, with revenue of $5.59 billion, up 7% year over year, with higher-priced units accounting for the majority of the increase. Unit sales increased by 1%.

The company shared a few other tidbits on the call. Apple has sold 1.2 billion iPhones in the 10 years since its first launch. Apple ended the quarter with a jaw-dropping $261.5 billion in cash and marketable securities.

Things to come

The surprisingly robust guidance for the coming quarter was also a contributing factor. Apple expects revenue for the quarter in a range of $49 billion to $52 billion, while many investors were only expecting $49.2 billion, a 5% increase year over year. While rumors suggested production difficulties would delay the historic September release schedule, Apple's forecast suggests otherwise.

Many investors had questioned whether Apple could continue to grow in any segment not called iPhone. These results answered those questions with a resounding yes. While any substantial future growth will still be tied to the flagship device, this quarter showed that Apple can still produce growth in other areas as well.

 

Danny Vena owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.