Apple beat on revenue and EPS and issued solid guidance. Midpoint of 3Q revenue guidance was better than street. Key positive is that the beat was driven by better than expected iPhone and services revenues. Better Q3 guidance suggests demand for iPhones has stabilized after a disappointing holiday period. Increasing their buyback program by $75B as they head to their goal of net cash neutral.
Key Takeaways:
· Q2 revenues of $58 billion, beating estimates of $57.5B.
· Q2 EPS of $2.46, beating expectations of $2.37.
· Q3 forecast of between $52.5B and $54.5B, beating estimates of $52.22B.
· Q2 iPhone revenues of $31B, beating estimates of $30.5B. iPhone revenue down YoY, but better than expectations and mgmt. said sales improved throughout the quarter.
· They saw strength across all segments except the Mac.
· Services revenue of $11.45B, +16%, an all-time record. Accounted for 20% of sales and 1/3 of gross profit.
· Wearables +50% on strong Apple watch results and huge demand for air pods.
· iPad up 22% – strongest iPad growth in 6 years due to their strategy shift: new Pro models last year and new cheaper, mid-range models (the iPad mini and iPad Air) this year.
· Europe, Greater China, and Rest of Asia Pacific segments were all down YoY, but the Americas and Japan were both up slightly. Greater China sales down 22% YoY.
The following excerpt from the call highlights Apple’s opportunity to grow services given their massive installed base of over 1.4 billion active devices:
“We believe we’re really just beginning to tap into what we can do to help our users actively manage their health and well-being. For example, last month Stanford Medicine reported results of the Apple Heart Study, the largest study ever of its kind, which enrolled over 400,000 participants from all 50 states in a span of only eight months. And hundreds of institutions are now supporting health records on iPhone with recent additions including Michigan Medicine and UT Health Austin.
In February, we announced that we are working with the U.S. Department of Veterans Affairs to make health records on iPhone available to veterans. This will be the first record sharing platform of its kind available to the VA, which is the largest medical system in the U.S. providing service to more than nine million veterans across more than 1,200 facilities.”
Valuation:
· Returned over $27B to shareholders through share repurchases and dividends. Board authorized an additional $75 billion for share repurchases.
· The stock is undervalued and substantial buyback from management’s goal of net cash neutral will support valuation.
· Trading at close to a 1.8% dividend yield, a ~6% FCF yield.
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,
- 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