Apple (NASDAQ: $AAPL) released their FY2017 Q1 earnings today, beating Wall Street consensus on early all metrics.
Here are your key takeaways:
- Revenue of $78.4B (vs. $75.9B in 2016)
- EPS of $3.36 (vs. $3.28 in 2016)
- 78.3M iPhone shipments – up 5% YoY
- Services revenues of $7.18B, up 18.3% YoY
- Apple has $246.09B in CASH (up $8.49B from the previous quarter)
- Q2 revenue guidance: between 51.5 billion and 53.5 billion
(Company Records are in bold)
Apple’s earnings can be summed up as nothing less than great. Apple ended it’s streak of declining quarterly revenue growth and beat most of Wall Street’s estimates. Analysts were expecting revenues of $77.38 billion from the tech giant in the holiday quarter. Apple announced a beat, bringing in $78.4 billion. Compared with the same quarter a year ago, that represents a 3.3% increase ($75.9 billion). Profit margins beat consensus at 38.5% vs 38.4%, but were ultimately down from 40.5% a year ago
Shares ended extended-hours trading up over 3.05% to $125.05.
Revenue Breakdown – iPhones, iPads, Macs
Revenues were primarily driven via strong iPhone 7 sales, despite a palpable lack of enthusiasm about the “headphone jack’less” smartphone. The 78.3M iPhone sales breaks the Cupertino, CA company’s previous record by just about 4M units. It also topped analyst consensus of 76.3M units.
Another strong driver of revenue came from traditional Mac sales, up 7% YoY, bringing in $7.24 billion. Early in the quarter, Apple released a new MacBook Pro, an update to their high-end option for laptops. Despite receiving negative feedback for removing many of the ports on the new laptop, Apple sold 5.4M units, also beating Wall Streets estimates of 5.2M.
Not all was good story for Apple’s core line of products. iPad sales came in at a measly 13.1M units, missing estimates of 14.7M and also signalling a sharp 18.6% decline YoY. Additionally, iPad Revenue also came in below expectations, experiencing a 22% decline YoY. On the earnings call, CEO Tim Cook suggested that changes in inventory levels and a single supplier’s component shortages were the main culprit for the decline. He expects the shortage to continue moving forward into Q2. “I still feel very optimistic about where we can take the product.” Cook said.
Strong Services Revenue
One of the major bright spots for Apple as of late has been their services business, which is made up of their app store, music, movies, gaming, insurance and iCloud. As noted by Ophir Gottleib at CMLVIZ Apple is quietly locking users into their ecosystem and creating content that will keep users engaging even if they stop purchasing the new device each year. Apple Music has offered users exclusives from artists such as Drake, Dr. Dre, Frank Ocean, and even Taylor Swift. In addition, Apple has also launched an exclusive gaming platform which offers games like Super Mario Run. The company noted that the game was downloaded around 80 million times, netting Apple close to $50 million in revenue from the single game via licensing fees from the game’s producer.
This quarter Apple’s services sales came in at $7.18 billion, an 18% increase YoY, easily beating Wall Street’s $6.91B estimate. On the conference call, CEO Tim Cook said “We feel great about this momentum, and our goal is to double the size of the services business in the next four years.”
China Remains a Headwind
China’s growth has been a concern for the company for the last year and a half now. Revenues in China declined by 12% YoY. On the conference call, Luca Maestri, the company’s Chief Financial Officer, noted that the strong dollar has put a lot of pressure on international demand. In some local currencies, the net price of an iPhone increased by as much as 40%.
Apple is Hoarding Cash
Apple ended the quarter with a record (and absurd) $246.09B. To put that hoard into perspective, if Apple were to spin off its cash reserves into a new public company, it would be the WORLD’S 13th LARGEST PUBLIC COMPANY. Another way to visualize the monstrous cash stash: Using today’s ending market cap, Apple’s cash could buy Netflix ($61B), Nvidia ($57.5B) Salesforce ($56B), Tesla ($41B), and still have over $30B in cash.
On the earnings call, Tim Cook addressed the cash on hand as it relates to mergers and acquisitions and President Trump’s tax policy (including repatriation).
“I am optimistic on what I’m hearing for some tax reform this year, it seems there are people in both parties that would favor repatriation as part of that. That would be good for the country and good for Apple. What we would do with it, let’s wait and see what it is. We are always looking at acquisitions, we acquired 15-20 companies per year for the last four years. We look for companies of all sizes. Not a size we would not do, based on the size of it. More about the strategic value of that. In terms of strategic content, we’ve put our toe in the water with Apple Music, rolling out through the year, we’re learning from that, and we’ll go from there.”
Apple’s Q2 Guidance
- revenue between $51.5 billion and $53.5 billion
- gross margin between 38 percent and 39 percent
- operating expenses between $6.5 billion and $6.6 billion
- other income/(expense) of $400 million
- tax rate of 26 percent
My Take on $AAPL
Apple seems to have fixed their slumping device sales despite innovation pressure. To put their services revenue ($7.18B) into perspective, the world’s 7th largest company by market cap, Facebook (NASDAQ: $FB) brought in a total of $7.01B in revenue last quarter (Note: $FB reports this quarter’s earnings after market close 2/1/17). If Tim Cook is serious about doubling services revenue (and there’s no reason you shouldn’t believe him), that growth alone is enough to justify going long shares of $AAPL. Yes, they’ve got headwinds to face in China & Asia, but their absolutely absurd hoard of cash makes Apple a safe bet. Finally, while it may not seem like Apple has innovated, they have not slowed in R&D spending, which is typically a great indicator of future innovation & growth.
While they haven’t acquired anyone recently, Tim Cook is always looking and they certainly have the cash to finance huge/material future growth. That, mixed with President Trump’s goal of repatriation, of which Apple stands to be the biggest winner, makes Apple an attractive play despite becoming “boring.”
Disclosure: As of this writing, I am LONG shares of $AAPL and I own it in my motif portfolio.
