AAPL reported a very strong quarter beating across segments except a minor miss on services. They raised guidance for next quarter well above the street. iPhones sales were a big positive surprise at up 7.6% YoY vs expected down ~1%. Encouragingly Greater China returned to growth, which helped with the iPhone beat. The coronavirus will have an impact on supply given Apple’s manufacturing footprint in China and will also have an impact on sales within China given some store closures. All of this is factored into their above consensus guidance.
Key Takeaways:
· Revenue was up 9% YoY.
· iPhone 11 continues to be their best-selling iPhone.
· Mac and iPad sales were down 3% and 11% YoY, respectively. The comparison was tough due to new launches a year ago.
· Big beat on Wearables, Home & Accessories category – set all-time records for both Apple Watch and AirPods.. The strong wearables results were in spite of supply constraints for both the Apple Watch Series 3 and Airpods Pro.
· Active installed base of devices has now surpassed 1.5 billion.
· Services growth decelerated very slightly to ~17% – saw double-digit growth in all regions. The miss here will probably be a focus in the news given that the LT story on Apple rides on this category. However, they are still in the early stages of ramping their opportunity with services. Including several new services that aren’t making much of a contribution yet (Arcade, Apple News+, Apple TV+). A key advantage Apple has is its uniform operating system across devices. The smartphone market is dominated by two operating systems, Apple’s iOS and Android. Apple has mid-teens % of the global market and Android has almost all the rest. However, Android’s operating system is fragmented across multiple manufacturers which can make app development for Android more difficult than for iOS. Apple’s iOS ties in a growing ecosystem of devices including wearables and they have a wealthier installed base that is more likely to pay for Apps. I think this could become more important with 5G because taking advantage of 5G across devices requires app development. 5G’s faster speeds and lower latency will enable new Apps that let people do more with their wireless devices. For instance, Apps that take advantage of artificial intelligence, augmented reality and IoT (Internet of Things). 4G enabled things like Uber and a slew of food delivery apps and Netflix and Facebook on your phone.
· On a run rate basis with the results of the December quarter they’ve already reached their goal of doubling their fiscal year ’16 Services revenue during 2020.
· Tim Cook suggested the potential for them to do targeted video advertising in a way that would not infringe on privacy though he wouldn’t “speculate” as to whether they would actually take advantage of that opportunity. This probably depends on the success of Apple TV+ as a subscription service. It does suggest that if they don’t get a lot of subscribers they have an alternate video strategy.
· China – iPhone sales were up double-digits. Services and wearables were also up double-digits, Cook says iPhone 11 is doing particularly well there. Trade-in and finance programs were also well received
· Impact from Coronavirus – Apple does have some suppliers in the Wuhan area. There are alternatives and Apple is looking for increases from them. Factories are starting back up after the Lunar Holiday on Feb. 10 which is later than expected. All of that is factored into guidance and management pointed to that as the reason for a wider than usual top line guidance range. One of their retail stores has been closed, and some partners have closed stores or reduced operating hours. Sales within the Wuhan area are small, but retail traffic across China has been reduced. Again, Apple has accounted for this in its outlook.
· Apple Pay, revenue and transactions more than doubled year-over-year with a run-rate exceeding 15 billion transactions a year.
· They reiterated goal of being net cash neutral “over time.”
Valuation:
· Trading at about a 1% dividend yield, and ~4.7% FCF yield.
· They have about $99B in net cash on the balance sheet. That’s about 7% of their market cap.
· The stock is still reasonably valued and continued buyback from management’s goal of net cash neutral will support valuation.
· In addition to the $99B in net cash they already have, they produce >$65B in FCF annually (that’s more than all the other FAANGs combined). This suggests they could buyback over 20% of their current market cap over the next 3 years.
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
[category earnings]
[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