Research Blog – INTERNAL USE ONLY

As we discussed this morning during the RM/PM/Research meeting, here is a summary of the themes we have observed this earnings season:

 

1.       Some of the hardest hit industries:

o   SMB’s & highly levered, weaker balance sheet companies. Seeing a consolidation of strength w/ market leaders that could continue

o   Retail, restaurants, travel & entertainment. Companies are saying we may not see a return to pre-crisis levels until vaccine. (BKNG, DIS)

o   Auto – auctions are shut-down. Could see big fall in used car prices

o   Medtech with large portfolio of elective surgeries (such as knee replacement, etc.) as patients and doctors delay non-emergency surgeries

o   Airlines and aerospace: the lockdowns have destroyed demand for travelling by plane, and a return to pre-crisis could take  up to 2 years

 

2.       China:

o   ZTS: China seeing a rebound, and seeing an improvement in US and Europe clinic visits recently

o   XYL: China showing signs of early recovery

o   FTV: China recovering, plants operating at 80% capacity

o   SYK: expect recovery in China in Q2

o   ST: China pointing to recovery

o   Visa:  Hong Kong dropped in early February, along with the rest of China and appears to be recovering in April

o   DIS: Shanghai Disney opened yesterday @ 30% capacity

o   SHW: “We have started to see some recovery in China at a slower pace than anticipated.”

o   Uber said HK is now at 70% of pre-COVID levels

o   AAPL: Supply chain is back to a normal operation. Apple stores open

o   Moving supply chains? Apple defended current structure but wouldn’t rule it out

 

3.       Europe:

o   Europe worse than expected (XYL)

o   Region was already challenged before COVID-19 hit, not activity is worse (FTV)

o   SHW, BKNG talked about weakness. Visa saw the biggest negative impact in central and southern Europe with similar declines as the US

 

4.       How companies adjusting to current environment…

o   Pull forward of digital transformation (MSFT, ACN, ADBE, GOOGL, AAPL)

o   Improving bandwidth/connectivity (CCI, CSCO)

o   Conserving cash

o   Cost cutting

o   Sales team transitioned to virtual sales meeting with doctors and training, and think this could be the new normal (SYK, BKI)

 

5.       How consumers adjusting to current environment…

o   Use of telemedicine and home deliveries of prescriptions (CVS)

o   Could see people using more individual cars rather than public transportation due to COVID-19 change in habits (ST)

o   The management team believe this crisis will accelerate the need to monitor patients remotely (RMD)

o   Utility sector looking for remote sensing and automated operations (XYL)

o   People eating cheaper protein (chicken instead of beef) ZTS

o   WFH/distance learning – likely to continue after the pandemic. Positive implications for the technology that supports this and negative for real estate and travel. (GOOGL, MSFT, AAPL, CSCO)

o   E-commerce – Increase in online spending especially on essential items. Less so on discretionary items. Companies establishing an online presence that didn’t have one before leading to increased e-comm. competition. (V, HD, SHW, TJX, GOOGL, ADBE)

o   Entertainment – Increase in streaming & gaming. (AAPL, GOOGL, DIS)

o   Housing & home improvement – seeing underlying strength in housing, nesting benefiting home improvement. (SHW, HD, BKI)

 

6.       Be careful extrapolating current consumer behaviors into the future

o   Discretionary…trends exaggerated like streaming, gaming, e-comm

o   Staples… shouldn’t extrapolate that center of store food will make a comeback or that cleaning products will be a bigger part of people’s budget

 

Thanks,

Sarah & Julie

 

 

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

 

 

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

 

Key Takeaways:

·         Revenue was better than expected and EPS was worse, however throughout the quarter they saw a phased impact of COVID 19 in their results as it hit different geographies that I think made consensus numbers not that meaningful. In Q1, partial impact of the coronavirus led to significant decrease in bookings. Gross travel bookings decreased 50% and room nights decreased 43%, w/ ADRs down mid-teens. Given their Europe focus, they felt the impact sooner than the US. Newly booked room nights, which exclude the impact of cancellations were down over 60% YoY in March and down over 85% in April.

·         In response to the current environment they’ve halted stock buybacks, reduced costs including cutting marketing (their largest expense), had layoffs/furloughs and bolstered their liquidity position.

·         No guidance. They expect a significantly larger impact in Q2 relative to Q1.

·         CEO Glen Fogel said… “we are seeing some stability in our newly booked room night growth trends. We hope that this is the beginning of the road back to recovery, but it’s certainly too early to say with certainty”…” we believe that domestic travel will rebound sooner than international travel as we expect travelers to look to their home country or region first for safe travel options.”

Highlights:

·         Total revenues were down 19% and adj. EPS was $3.77, down 66%.

·         Revenue was less negatively impacted than room nights and gross bookings due to the fact that many cancellations were received in Q1 with the check-ins expected to occur in later quarters.

·         Preliminary April results: newly booked room nights in April were down over 85% YoY. Reported room nights were negative in April (and March) as cancellations outpaced new bookings. For April, they saw a meaningfully higher domestic mix in their business. Historically, domestic accommodation bookings represent about ~45% of their total business and if Western Europe is considered as one market, the historic mix increases to about 55%. In April, their domestic share increased to ~70% and for Western Europe the domestic mix increased >75%. They also saw a shift to alternative accommodations associated with longer-term bookings. Towards the end of April, they saw some very early indications that domestic travel was starting to return in certain markets where shelter-in-place rules were relaxed, including Greater China, South Korea, Vietnam and Germany. In the US, newly booked room nights declined less than the global average in April and they saw an improvement in domestic travel during – and those trends cannot be tied to a relaxation in shelter-in-place rules as those have only happened in a few states and in recent days. They say it is too early to think we’re witnessing anything like a broad rebound in travel especially as they’ve seen some countries like Singapore, where travel demand was less impacted than other places initially, relapse. They are now seeing significant travel demand decreases associated with new outbreaks.

·         Management says their assumption are that it will be likely be years, not quarters, before we witness a full recovery of global travel demand and that they expect travel to fully recover later than many other industries.

·         They do benefit from having a highly variable cost structure which they can toggle in periods like this.

·         Balance sheet: Q1 ending cash and investment balance was ~$9B. They did spend $1.3B on buybacks early in the quarter, but then halted buybacks once they recognized the growing impact of the pandemic. Subsequent to the end of the quarter they had a debt offering. Including that and a refund of a sizable Dutch tax prepayment, their cash is now at >$14B.

·         Valuation: The stock has recovered from trough valuation in March, but still inexpensive relative to 2019 FCF, trading at close to an 8% FCF yield on 2019.  

Thesis:

1. Booking is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.

2. BKNG has several competitive advantages relative to Online Travel Agent (OTA) peers:

·         Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings

·         They operate largely on an agency basis which allows them to continue to grow their network and do so profitably

·         Strong position in China/South East Asia via Ctrip and Agoda

3. Booking’s addressable market is growing driven by:

1.) Alternative accommodations

2.) Increased penetration (growth of mobile/internet)

3.) Global growth of travel spend > GDP.

4. Their asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.

 

$BKNG.US

[tag BKNG]

[category earnings]

 

 

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

 

 

Key Takeaways:

 

·         COVID-19 is having a positive impact on CVS’s various businesses: greater use of 90-days prescriptions, more purchases made in front of store (in March), lower elective surgeries performed (April) benefitting Aetna’s costs

·         Telemedicine and home delivery saw a sharp increase

·         Liquidity is sufficient and the dividend is maintained

 

Continue reading “CVS 1Q20 earnings summary”

Key takeaways:  

·         Disney reported slightly better than expected revenue and missed on EPS. However, estimates have been wide ranging given the broad based nature of virus impact to their business.

·         Parks hit the worst: Biggest hit from Covid-19 was to Parks business. Parks were tracking well ahead of expectations before virus hit. Shanghai Disney is opening on May 11 w/ requirements for masks and temperature checks. Date of domestic parks opening is still undetermined.

·         Disney+ tracking ahead of expectations: 33.5m DTC subs at end of the quarter. As of May 4 they had 54.5m DTC subs. They’ve added ~26m subs in 3 months.

·         Cut July dividend and reduced capex to preserve liquidity. They will re-visit potential reinstatement of dividend in 6 months (their dividend is semi-annual, not quarterly).

·         No guidance.

·         CEO Bob Chapek said… “We are seeing encouraging signs of a gradual return to some semblance of normalcy in China.”

Continue reading “Disney 2Q20 Results”

Key Takeaways:

 

·         COVID-19 had a limited impact on their business in Q1, but impact should be greater in Q2 as US and Europe are in lockdown

·         China seeing a rebound, and seeing an improvement in US and Europe clinic visits recently

·         Expect Q3 and Q4 to be better, business back to normal

·         Guidance for the year reduced to reflect potential impact of a recession

·         Share repurchase put on hold temporarily to conserve cash

 

Continue reading “Zoetis (ZTS) 1Q20 earnings summary”

Key takeaways:

 

·         Weak organic sales due to COVID-19: few cancellations in projects but delay of orders

·         China showing signs of early recovery

·         Europe and US experiencing steeper declines than initially expected

·         Due to operational pressure, XYL is seeing new inquiries from the Utility sector about remote sensing and automated operations

 

 

Continue reading “Xylem (XYL) 1Q20 earnings summary”

Key takeaways:

 

·         Visa beat on revenue and earnings. No 2020 guidance. Cutting expenses. Share repurchase plans and dividend remain unchanged.

·         Dramatic fall in volumes but slight stabilization emerging: intra-quarter volume trends decelerated w/ early April volumes in the US and cross-border declining >20% and >40%, respectively. However, volumes stabilized/recovered somewhat in late April. More details below.

·         Food & Drug category spending saw only increase: >20% of U.S. spending on Visa’s network comes from food and drug stores and that was the only category to post an increase in April, up +20%. Among the hardest hit categories are travel, restaurants, entertainment and fuel.

·         Cross-border headwind until travel recovers: Visa warned “the road ahead will likely be challenging for a number of quarters,” though declines in spending on their network did begin to moderate in April. This is partly due to lower cross-border volumes which are more profitable for them. Cross-border volumes are basically a mix of travel and e-commerce. For the quarter, cross border was down 2%. However, 2Q will be worse. Exiting April, overall cross-border volumes were down 44%. Travel is 2/3 of volume and was down -80%. E-commerce is the other 1/3 and was up +25% in April.

·         Current environment could be secular growth catalyst: While cross-border will be headwind for the foreseeable future, current environment may be a catalyst to further displacement of cash aided by faster uptake of contactless and higher e-Commerce penetration.

·         CFO Vasant Prabhu said… “It is very likely that this crisis could accelerate trends that were already underway, like the shift to e-commerce and the shift to digital forms of payment… it is speeding up tap to pay adoption and driving growth of new flow use cases.”

 

Additional Highlights:

·         Revenue grew ~8% constant currency YoY and EPS was +9% YoY.

·         Key metrics: Payments volume was $2.1T, up 5% (credit +1% and debit +9%), cross-border was -2%. Total cards grew 4% to 3.5B cards (1.1B credit and 2.4B debit). Client incentive were up 15%, stepped up due to high renewal activity.

·         COVID-19 impact:

o   Discussed trends occurring after the quarter ended more than they normally would.

o   US payments volume:

§  strong growth in January and February payments, but by the last week of March payment vols were declining 28%.

§  Credit spending harder hit than debit.  

§  Through April 28, US payments volumes were down 19%, debit was down 6% and credit was down 31%.

§  Credit was down at least 25% every week in April, and debt was down mid-teens then spiked into positive territory in both week three and week four as the first wave of economic impact payments were distributed.

§  e-commerce volume excluding travel up 18% in April and card present volume down 45%.

§  20% of volumes = food and drug stores (along with Walmart, Costco and Target) and are the only categories still growing – up approximately 20% in April – essentially all this growth is coming from online spending up over 100% in the last two weeks.

§  33% of volumes = categories that are declining between 15% to 50% such as retail automotive, healthcare, education and government.

§  25% of volumes = the hardest hit categories – including travel, fuel, restaurants and entertainment all declining over 50% in April. The travel decline affects all sub-sectors and is the deepest at around 80%. Within restaurants quick service restaurants are holding up better.

§  Categories showing more resiliency include home improvement within retail and medical equipment within healthcare. Gaming is up over 200%. As economic impact payments have been distributed, they’ve seen significant increases in home improvement, automotive, healthcare and some retail goods and services categories.

o   International payments volume:

§  Major markets in Europe and Canada have trends similar to the US

§  India with a rigorous and sudden lock down has experienced one of the fastest and deepest declines.

§  Hong Kong dropped in early February, along with the rest of China and appears to be recovering in April.

o   Cross-border:

§  Volume declines exiting March of 44%.  Volume remains down 43% through April 28.

§  The majority of the cross-border spend decline is travel related (2/3), and was down 80% in April. E-commerce is the rest of volume and is growing faster than pre-crisis levels.

·         Nothing has changed w/ their major growth initiatives: consumer payments, new flows and value-added services.

·         Contactless penetration: Seeing increasing penetration of tap to pay. This should help drive displacement of cash for lower ticket purchases.

·         Partnerships: Several announcements around new and renewed partnerships –Truist (6^th largest issuer in the US), Barclays (UK), Groupe BPCE (France), Comdirect (Germany). Entered into an agreement for B2B virtual cards with ICBC, the largest bank in China. Visa is the global co-brand leader, and extended that this quarter w/ Accor.

·         Digital wallets: As payment industry evolves, Visa continues to partner to stay at the center like with Tencent in China, Paytm in India, M-Pesa in sub-Saharan Africa and Lydia in France. They now have relationships with wallet providers that give them the potential to embed Visa credentials in 2 billion wallets.

·         Cost cutting: pulling back on discretionary spending, especially related to personnel, travel, professional services and marketing. Expectation for expenses to be flat in 2H. They’ve pledged to their 20k employees no Covid related layoffs in Calendar 2020.

·         Balance sheet:

o   Ended the quarter with $13 billion of cash.

o   At the end of March they raised $4B in fixed-rate senior notes with maturities ranging between 7 and 20 years, and interest rates from 1.9% to 2.7%. The weighted average interest rate was 2.16%. They have a $5 billion revolver, which remains undrawn.

·         Capital allocation: YTD FCF of $5B with $5.6B in share repurchase and $1.3B in dividends. Plan to buyback over $9B (so another $3.4B) in stock this fiscal year remains unchanged and their dividend policy remains unchanged.

·         Valuation: trading at a 4% FCF yield on 2021….reasonable for a company w/ high moat, powerful  brand, vast global acceptance network and LT secular growth – despite near term headwinds.

 

 

 

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

 

$V.US

[category earnings]

[tag V]

 

Key Takeaways:

·         Organic sales boosted by pantry loading in the US

o   EM sales +3%: negative impact from China and India lockdowns

o   Developed markets: +11.5%

o   Hill’s pet nutrition +21%

·         2020 guidance removed due to uncertainties on government measures to contain the pandemic

 

Continue reading “Colgate 1Q20 earnings summary”

Key Takeaways:

·         Better than expected results. Sales growth of 2.6% in line with guidance. Estimated impact from COVID-19 on sales during the quarter was approximately -1.5%.

·         They are seeing strong DIY sales (+double-digits) which aided same store sales (SSS) in their paint stores. DIY aided by stay-at-home orders. Should switch back to DIFM. In areas in the US that are less hit by Covid-19 they are already seeing a return of contractors getting estimates for projects. Positive comments on housing and new construction outlook.

·         Big GM expansion (270bps improvement), driven by strong volume, improved pricing, and lower raw material cost. Raw materials expected to be down low-single-digits for the year compared to prior estimate of flat.

·         Guidance: Unlike peers they gave full year guidance (more details below). For Q2 they expect sales down low to mid-teens percentage YoY. For their worst case scenario of full year guidance (which assumes economic conditions don’t improve until 1Q 2021) they could see 2020 sales down HSD. This would be partially offset by raw materials down low-single-digits.

·         Dividend increase: While others are cutting their dividend, SHW just approved a 19% dividend increase on April 22, underscoring the strength of their balance sheet and resiliency of their business right now.

·         DIY Business is strong: CEO John Morikis said, “Our DIY business is strong as consumers are nesting and using stay at home time to work on affordable home improvement projects such as painting.” And….”We believe we’re seeing a pause in demand in many of our end markets rather than destruction of demand. We believe the long-term fundamentals remain intact. We intend to continue strategic investments to support profitable growth.”

 

Additional Highlights:

·         Sales increase due to higher SSS in N. American paint stores and increased sales in the packaging and coil divisions w/in their Performance Coatings Group (across all regions). This was partially offset by impacts of COVID-19, continued demand softness in some end markets outside the US and unfavorable Fx translation.

·         Residential repaint customers are delaying interior work related to having painting contractors in their homes. They expect this demand to return gradually and they expect exterior repaint work to gain momentum near-term (already up double digits), which will help to offset some of the interior softness.

·         They expect DIY trend to fade as stay at home orders ease and that it will return to DIFM trend. “if you look at the underlying principles that have us believing that this gradually shifts back to the Do-It For Me as opposed to DIY primarily because we think those are still intact. Those are the aging demographics, the home appreciation, aging housing stock.”

·         Reassuring commentary on housing: Mgmt. gave a lot of positive commentary around the LT fundamentals of the housing market being intact. This is a positive read through for HD. “Activity should eventually improve as mortgage rates are low and the supply of homes is limited”…” in new residential, we feel there is a pause that there’s a fundamental need for housing in the country.” All top 10 of their builder customers have reached out to ensure SHW’s supply chain will be able to serve them.

·         Similar to other retailers, modifying their operations for the current environment is leading to permanent change as they plan continued investment behind omni-channel. In their stores SHW shifted to curb-side pickup and delivery.

·         Cost cutting: restricting travel, hiring freeze, some reductions in force, cutting some G&A expenses, cutting capex. They put a pause on spending related to their new headquarters and R&D facility projects.

·         America’s Group:

o   Same store sales grew 7.4% in 1Q, inclusive of a significant downturn in sales during the last two weeks of March due to COVID-19.

o   Higher paint sales volume led to 140bps segment op margin expansion.

o   Had a very small number of North American stores closed intermittently during the crisis related to varying government orders. The vast majority of stores remain open.

o   2Q guidance for down LDD to mid-teen. Seen improvement week-to-week. April toughest comp vs year ago.

·         Consumer Brands Group:

o   Decreased 4.9% due primarily to softer sales in Asia Pacific, partially due to impacts of COVID-19, and the planned exit of the ACE business, partially offset by higher volume sales through most of the Group’s retail customers in North America and Europe. 

o   Demand in North America continues to be strong. Stay at home mandates have increased home improvement demand. Sales to home centers and other retail channel partners continue to perform well – encouraged by growth prospects with multiple customers in this channel.

o   2Q guidance for sales up high-single-digits to low-double-digits.

·         The Performance Coatings Group:

o   Sales decreased -1.1%. The decrease was due to softer end market demand in some businesses in Asia Pacific and Europe, partially due to impacts of COVID-19, and unfavorable currency translation rate changes. This was partially offset by increased sales in the packaging and coil divisions.  

o   “We have started to see some recovery in China at a slower pace than anticipated.”

o   Lower miles driven and lower oil prices weakening some end markets.

o   Supporting industrial customers in mission critical areas, such as food and beverage packaging, health care equipment, food manufacturing, water treatment and energy infrastructure.

o   “During the crisis, we have delivered critical coatings product to producers of ventilators, oxygen tanks and hospital bed frame. At this time, all major architectural and industrial plants and distribution service centers are in operation.”

o   2Q guidance for sales down high-teens.

·         Guidance: Somewhat surprisingly and unlike peers they gave full year guidance. Competitor PPG withdrew its 2020 guidance last week, said it sees demand hurt by Covid-19 and guided aggregate sales volumes down 30% to 35% for 2Q.

·         For the full year SHW said, if economic conditions begin returning to normal in Q3 2020 and continue improving through Q4 2020, they anticipate full year sales to be flat to down a low-single-digit percentage. And if economic conditions do not materially improve until the first quarter 2021, they anticipate full year 2020 sales to decrease by a mid-to-high single digit percentage. This is compared to their previous full year 2020 sales guidance of an increase of 2% to 4%.

·         FY 2020 guided to a range of $19.00 to $21.00 (from prior guidance of $22.70 to$23.50, current consensus $20.26).

·         The revised FY guidance is premised on the following segment performance:

o   Americas Group: Flat to down mid-single-digits

o   Consumer Group: +/- low single digits

o   Performance Coatings: down high-single-digits to low-double-digits

o   Raw Materials: down low-single-digits

·         Well positioned from a balance sheet and liquidity perspective. They have $239 million in cash and $2.5B of unused capacity under their revolving credit facilities. No big near term maturities.

·         Capital allocation: increased dividend by 19%, share repurchases on hold, reduced capex.

·         Valuation: Stock is inexpensive, trading at >4% FCF yield.

 

 

 

 

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

 

$SHW.US

[category earnings]

[tag SHW]

 

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

www.crestwoodadvisors.com

 

$AAPL.US

[category earnings]

[tag AAPL]