Key Takeaways:
· Apple reported better than expected results with revenue of $58.3B (+1% YoY, +2% constant currency) vs consensus $54.8B and EPS of $2.55 vs. $2.26 consensus. They were on the path for a record second quarter before the virus hit.
· Broad beat – relative to lowered expectations, they saw better than expected revenues across all products, with a quarterly record for Services and for Wearables, Home & Accessories.
· Supply chain is back to a normal operation.
· They’ve seen improvements in the second half of April despite continued social distancing…improvements have been across geographies and products. The attribute this partly to the stimulus. China demand/foot traffic not back to pre-virus levels, but continues to improve.
· No specific guidance for Q3.
· Increased buyback & dividend – with huge cash balance and FCF generation they continue returning capital to shareholders – increased buyback authorization from $40B to $90B and raised the dividend by 6.5%
· Tim Cook said, “I think many people are finding that they can learn remotely and so I suspect that trend will accelerate some. I think that’s probably also true about working remotely.”
Additional Highlights:
· Installed base of active devices reached an all-time high and newly launched products iPad Pro, MacBook Air and iPhone SE have all received “outstanding customer response.”
· No specific guidance for Q3 – but they did say that they expect iPhone and Wearables to see worsening YoY trends in the June quarter versus March, and iPad and Mac to see better YoY trends (benefiting from WFH related purchases). They also expect a hit to Services revenue on lower Apple Care and Advertising.
· They continue to fully compensate retail employees despite store closures.
· Affordability – This is a growing focus right now as a way to grow their installed base. They just launched the iPhone SE @ $399. Compelling phone for the price – faster than all Androids on the market. They have payment plan iPhone when purchased on Apple Card. They plan to do that for other devices as well. Trade-in programs also focused on this.
· Supply chain – back to normal operations. When questioned about whether they would consider changes to their supply given disruptions from this pandemic, Tim Cook commented that how quickly the supply chain operations recovered provided defense for its current structure…it was a testament to its “resiliency and adaptability.” He also said that people tend to focus too much on where final assembly is (mostly China), but that for components the supply chain is truly global. He did slightly equivocate though by conceding that they’re always looking to tweak their supply chain structure and would make changes if they felt it was optimal, but he considers any changes to be competitive information that he wouldn’t share.
· Tim Cook said, “During uncertain times historically, we have continued to invest in the business and this remains our philosophy.” Specifically mentioned investing behind the baseband business they bought from Intel.
· iPhone ($29B, -7% YoY)
o iPhone supply and demand were affected by the impact of COVID-19
o Expect worse performance for iPhones in Q2
o active installed base of iPhones has reached an all-time high.
o exited the quarter in a good supply position for most of their product lines.
· Services ($13.3B, +17% YoY)
o Record Services performance. App store revenue grew by strong double digits as paid accounts grew to 515m, up 125m YoY.
o Expect to meet long-standing goal of doubling FY16 Services revenue in FY20.
o For the Services segment in Q2 they expect better performance with App Store, video music and cloud…but worse performance with Apple Care and advertising.
o App store paid accounts grew to 515m, up 125m YoY and 35m sequentially…the highest sequential growth they’ve seen. Goal is for 600m subs by year end.
o Third-party subscription increased >30% YoY. Apple Music and Apple Care hit record highs, up “strong double-digits.”
o Face Time and messages set new all-time records for daily volume
o Launching a joint effort with Google to enable to use Bluetooth technology for contact tracing.
o As stores shift to become fulfillment centers for online orders organizations are leveraging apps for remote shoppers and food delivery to reduce foot traffic.
· Wearables, Home and Accessories ($6.3B, +23%)
o Now the size of a Fortune 140 company
o >75% of Apple Watch purchasers were new to the product
o Expect worse performance in Wearables in Q2
· Mac ($5.4B) & iPad ($4.4B)
o Launched a brand new iPad Pro and a MacBook Air with significantly improved performance at a lower price.
o Expect better performance for iPads and Macs in Q2.
o Half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and I iPad reached a new all-time high.
o Deploying major orders of iPads to school systems working to support distance learning including tens of thousands in Ontario, Canada, Glasgow, Scotland and Puerto Rico. 100,000 to the City of Los Angeles and 350,000 to New York City, their largest educational iPad deployment ever.
· Valuation:
o Trading at a ~5% FCF yield. Higher than the S&P. Apple’s FCF generation is about the same as the other FAANGs combined.
o Ended the quarter with net cash of $83B ($193B in cash and debt of $110B) or about 6.5% of their market cap.
o Returned $22B to shareholders during the March quarter, including $18.5B of repurchases and $3.4B in dividends.
o Maintaining target of reaching a net cash neutral position over time.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$AAPL.US
[category earnings]
[tag AAPL]