Apple Results: Equity Analyst View

Our big takeaway from Apple earnings is that consumers still want iPhones and the accessories and services that go with it

Brian Colello, CPA 4 May, 2018 | 7:49AM
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Brian Colello: Apple (AAPL) reported second quarter earnings and we had two big takeaways. The first is that there is no super cycle for the iPhone X this year, but we still see solid demand for those devices as pointed into the second quarter earnings and then also the third quarter forecast. The second one is at other products and services, which is the revenue that's attached to the iPhone, also did particularly well and beat our expectations.

So, we think sales of these other products, the wearables, the AirPods and then the services like App Store around the iPhone create switching costs for Apple. We think it will allow Apple to keep most of its customers over time that leads us to give Apple a Narrow Moat rating. Sales of those other products and services did quite well.

Apple had a good March quarter. It hit the middle of its forecasted revenue range. This really extends the iPhone X. They noted that the iPhone X was the highest selling model each week in the March quarter. So, more than the 8, more than the 8 plus, and then higher prices that really boosted revenue. iPhone unit sales were only up 3% year-over-year, but revenue was up 14%, again because of higher prices per phone.

Additional bright spots were other products and services; wearables were up 50% year-over-year. Apple Watch sales did extremely well. They have another hit with the AirPods. Those sold extremely well as part of that wearables segment. And then services, revenue was up 31% year-over-year. That's a higher growth rate than what apple saw a quarter ago and services was one area where they certainly beat expectations this quarter.

Looking ahead to the June quarter, Apple's guidance wasn't as bad as originally feared. There is an inventory buildup at Apple. You could see it on the balance sheet and we've heard that commentary from other chip makers. But it looks like demand for the iPhone X is still relatively strong. So it looks like Apple is going to be selling the iPhone Xs that they didn't sell as part of a super cycle in the December and March quarters. They are going to sell that inventory in the June quarter.

This led to fewer chip orders, so it's a problem down the supply chain for some of Apple suppliers, but on Apple's end in terms of its demand with its customers, it's still relatively strong better than feared, better than some of the commentary that we heard from some of Apple suppliers. So, we still think Apple is in a pretty good position in terms of iPhone demand heading into the fall in next year's product line.

The other aspect of Apple's earnings, which was expected was an update to their capital allocation policy. They are adding another $100 billion to its buyback program. They are going to complete the prior $210 billion. They are going to complete that in the June quarter, but they didn't put an end date on the $100 billion that they do have. But because of U.S. tax reform, they want to create that flexibility to spend efficiently and quickly. And so, they expected to buyback $100 billion of shares in the near future.


Apple also raised its dividend 16% to $0.73 per share per quarter. So these are nice capital allocation policies. It was expected that Apple would be a beneficiary of U.S. tax reform in bringing that offshore cash into the U.S. to payout in dividends and buybacks. And Apple is delivering on paying this cash back to shareholders.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Apple Inc169.80 USD-1.89Rating

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.