Apple reported good numbers for Q4, but disappointed on guidance and indicated they would stop reporting unit numbers. As consolation for the reduced disclosure, they are going to start reporting gross margins on Products and Services separately. They beat on top and bottom line and units were basically in-line with expectations. Revenues were $63B, up 20% and EPS was $2.91 (vs street $2.78), +41% YoY. All regions posted double digit growth.
Key Takeaways:
· The selloff today is because of guidance and the reduced/changed disclosure. Q1 (calendar Q4) is their seasonally biggest quarter and typically accounts for 35-36% of annual revenues.
o Weak guidance: Street is at the high end of 1Q19 revenue guidance. Guidance blamed on Fx ($2B headwind) and “macroeconomic uncertainty particularly in emerging markets.” Gross margin guidance was also weaker. The midpoint of rev and GM guidance would put 1Q19 gross profit about $1B shy of expectations.Weaker guidance may be conservative given growing mix of services and falling NAND (memory) prices.
o No more unit numbers: This is a little disappointing, especially given slowing global smartphone unit sales. Whenever a company reduces disclosures it’s viewed as a bad thing. Apple has historically reported units for iPhone, iPad and Mac. This also allows for ASP calculation. So going forward we’ll have neither of those.
o Gross Margin disclosure – this could be a silver lining to their disclosure changes if Services are more profitable than expected. This is especially true given Services are expected to be the new leg of growth.
· Weak iPad numbers, but they gained share. Also, not surprising given pending new product launches.
· Apple’s iPhone pricing power is strong with an average selling price (ASP) of $793 (much better than expected). That’s a 28% increase YoY and 10% increase sequentially. This is key as units were only up 0.5% for the year. So, iPhone revenues, which were up 18% for FY18, were basically driven entirely by higher ASPs. iPhones are about 63% of total revenues.
· Apple is taking share in smartphone units – 2018 should be the 2nd year in a row of global unit declines in smartphones. Calendar YTD Apple iPhone units are up 1.4%.
o In Q3 smartphone vendors shipped 355.2m smartphones, down 6% from the 377.8m units in Q3 2017.
o Apple gained 80bps of share, Samsung lost 180bps and Huawei gained 420bps.
o Huawei overtook Apple as #2 for Q3. However, Apple typically wins calendar Q4, while Samsung typically dominates the first three quarters of the year (but they’ve been ceding share to Huawei this year).
Valuation:
- Strong balance sheet and FCF generation continue. $123B in net cash. 2018 FCF was $64B.
- The stock is undervalued and the substantial buyback will support valuation. Trading at close to a 1.4% dividend yield, a 6.6% FCF yield and a 15.3x P/E.
- Returned almost $90 billion to investors during the year, including $73B in share repurchases and $14B in dividends.
The Thesis for Apple:
- One of the world’s strongest consumer brands and best innovators whose product demand
has proven recession resistant.
- Halo effect -> multiplication of revenue streams: AAPL products act as revenue drivers
throughout portfolio – iPhone, iPod, MacBooks, iPad > iTunes, Apps, Software, Accessories,
- Mac gaining share in PC market and iPhone robust global demand driven by China/EM.
- Strong Balance and cash flow generation.
- Increasing returns to shareholders via dividends and buybacks.
$AAPL.US
[tag AAPL]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
www.crestwoodadvisors.com