Apple reported record revenue and earnings, but iPhone unit sales and Q2 guidance were both below expectations. Revenues were better than expected at $88.3B, up 13%. EPS was $3.89, up 16% and also better than expected. iPhone units were weaker than expected at 77.3m units down -1% (and below expectations for 80m units), but iPhone revenues were up 13% driven by a record iPhone ASP of $796, up $100 from the prior year driven by iPhone X. Wearables were up 70% and were the second biggest growth driver after the iPhone. They also saw record app store sales. Heading into the iPhone launches in the fall, many analysts were predicting an iPhone “super cycle.” Sentiment has shifted dramatically given recent expectations for weaker iPhone unit sales, causing the pullback since mid-January when shares hit an all-time high of $179.
Current Price: $160 Position size: 3.8%
Price Target: Under review TTM Performance: 30%
Thesis is intact, key points:
- 1Q18 was a week shorter than 1Q17. Looking at growth metrics on a per week basis the results look a bit better.
- Average iPhone unit sales/week were up 6% in the quarter.
- Total sales/week were up 21%.
- Guidance was weak, but that was widely expected. There were numerous reports heading into the quarter suggesting iPhone unit sales have been below expectations.
- International sales accounted for 65% of the quarter’s revenue and they saw double digit growth across all geographies.
- Sales in China gained 11% to $18B.
- Cash is $285B, $269 of which is outside the US. Net cash is $163B. They have a provisional tax payable of $38B for planned cash repatriation.
iPhones
- iPhone revenue grew 13% to $61.56B; units declined 1%.
- On the call Tim Cook said “iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November.”
- With iPhone representing 62% of revenue, there are concerns that overall growth will slow. Unit growth is being impacted by a smartphone market that is maturing as penetration rises and the unbundling of phone and service contracts by carriers has led to a longer replacement cycle.
- There are also concerns that replacement batteries sales for older models could further extend the replacement cycle.
- While a lengthening replacement cycle may be a drag on unit sales, this will abate when the replacement cycle eventually stabilizes.
iPad
- iPad revenue grew 6% to $5.9b.
- Average sales/week were up 8%.
- They released new models mid-year.
- iPad now has 46% share of the US tablet market.
Mac
- Mac sales fell 5% to $6.9B, units declined 5%.
- Average sales/week were up 2%.
- 60% of worldwide Mac sales are to first-time buyers or switchers.
- Strong emerging markets performance with Mac sales up 13%.
Apple Watch
- Fourth consecutive quarter at over 50% growth.
- Total wearables were up 60%.
- The wearables business is now approaching a Fortune 300 company.
Services
- Services revenue was up 18% to $8.5 billion with record revenue on the App Store.
- They now have 1.3 billion active devices which is fueling this growth.
- ApplePay purchase volume tripled and is now accepted at more than half of all retail locations in the US.
- HomePod launch should help drive Apple Music revenue.
- Augmented Reality enabled apps (ARKit) gaining traction – they point to this as an important area going forward. “AR is going to revolutionize many of the experiences we have with mobile devices.”
By Geography:
- Americas: +10%
- Europe: +14%
- Greater China: +11%
- Japan: +26%
- Rest of Asia: +17%
2Q Outlook below expectations:
- Revenue between $60 billion and $62 billion (estimates were at $65B)
- Gross margin between 38% and 38.5% (estimates were 39%)
- Operating expenses between $7.6 billion and $7.7 billion other income/(expense) of $300 million
- Analysts are expecting 2Q iPhone units of 59.4 million
Valuation:
- Trading at over a 6% FCF yield the stock is inexpensive, especially for a company growing top line, with high FCF margins and high ROIC.
- The current price implies little to no growth and declining FCF margins.
- They regularly return close to 100% of FCF to shareholders.
- Gross cash is $285B, net cash is $163B, ~$32/share. They plan to reduce net cash to zero and will update their capital allocation plans next quarter. Given that they are suggesting reducing their cash by $163B there could be a transformative acquisition on the horizon.