Apple Surges After Smashing Expectations, Projecting Stellar Holiday Quarter Despite Another iPhone Sales Drop
Four quarters ago, Apple stunned investors when it said it would no longer disclose the number of iPhones it was selling – a clear signal that selling had slowed dramatically. investors sold off the stock… then bought the dip with gusto sending AAPL sharply higher with the narrative changing that Apple was pivoting from a product to a service company.
Three quarters ago, on January 3 2019, Apple once again shocked the market when it slashed its revenue guidance by 8% for only the first time since this century (naturally, blaming China). As AAPL stock tumbled, it reveberated across all capital markets, and even prompted a flash crash cascade in various currency pairs, especially the pound, lira and yen. However, just like a quarter earlier, Apple’s “shock” was quickly overcome, and the after hours plunge actually marked the max pain for longs, with the stock surging ever since. And to think all it had to do was slash revenue guidance..
Two quarter ago, as largely expected, Apple reported that iPhone sales had indeed slumped, but the reason why the market kept bidding up the stock, was the company’s effervescent outlook, which while declining on a year over year basis, was well above sellside consensus, dispelling fears of a growth slump and boosting hopes that Apple is successfully transitioning to a services company. Of course, Apple’s then brand new $75 billion stock buyback repurchase authorization did not hurt.
Finally, last quarter, Apple stock surged once again, when not even the company’s disappointing iPhone sales and service revenue miss was enough to impact its solid earnings and stellar guidance. As a result, heading into its fourth quarter, AAPL stock was trading at its all time high (even if its share count was sharply lower over the past 12 months), up an amazing 71% from its January 3 lows making it once again the world’s most valuable company with a $1.1 trillion market cap, amid expectations that not only service revenues (especially with the company’s $4.99 Apple TV launch on deck) continued to rise, but amid renewed optimism for higher unit sales after the iPhone 11’s launch in September, despite the phone’s not having major upgrades beyond an additional camera on the back.
So with US-China trade talks set to resume in a few days (assuming a replacement venue is found for the now-cancelled Chile summit), everyone’s attention was glued to the Apple earnings report at 430pm ET to see if all the optimism over the past 3 quarters would be justified. The answer appears to be yes, because moments ago, Apple reported that in fiscal Q4, it beat both revenue and EPS earnings:
Q4 EPS: $3.03, Exp. $2.91
Q4 Revenue: $64.04BN, Exp. $63.01N
Q4 Operating Income $15.625BN
Q4 Product revenue: $51.529BN, down from $52.301BN a year ago
But it was the company’s solid guidance for the holiday quarter (more below), that sparked a buying frenzy after the the company is guiding to Q1 revenue between $85.5-$89.5BN, the upper end well above the consensus estimate of 86.2BN.
Looking at the product breakdown, Apple confirmed that speculation for stronger iPhone 11 sales was accurate, with a solid beat to Wall Street expectations, if once again declining from sales a year ago:
iPhones: $33.362BN, which was down bigly from $36.755BN a year ago, but above the $32.25BN expected
Macs: $6.991BN, down from $7.340BN a year ago, and below the $7.46BN expected
iPads: $4.6562BN, up from $3.98BN a year ago
Wearables, Home and Accessories: $6.52BN, beating exp. of $5.7BN and up from $4.223BN a year ago
Putting these numbers in context, this is the fourth quarter in a row of declining iPhone sales:
Something else worth pointing out: after dipping below 50% last quarter, iPhone sales in Q4 rebounded back to 52%, or more than half of total sales, as iPhone sales appear to have regained their dominance.
On a geographic basis, Apple was down year-over-year in nearly all of its regions, including Greater China and Europe, but revenues held up overall thanks to strong growth in the Americas region, where revenues rose 6.6%. Apple grew nearly $2 billion in Americas, roughly the same amount it grew in total. Of note, China sales declined 2.4% from $11.4BN to $11.1BN, although this is certainly not the dire drop some had expected.
The full breakdown by geography is as follows:
Looking at the company’s increasingly important service revenue number, Apple reported $12.511BN, an all time record, up from $11.46BN last quarter, and up 25.3% from $10.6BN a year ago, and well above the $12.16BN expected by Wall Street consensus.
As Bloomberg notes, services were up significantly despite none of the company’s new services making an impact this quarter. “Apple Arcade launched during the quarter as a free trial, Apple News+ is one of Apple’s worst performing new services, and Apple TV+ doesn’t launch until Friday. The Apple Card doesn’t have a clear way yet to generate revenue. That means the App Store and Apple Music are the company’s big drivers.”
And an interesting observation: while AAPL’s gross cash (not net of debt) was $5BN lower sequentially to $206BN as long-term investments tumbled to just $105BN, net cash dropped again, and is now down to just $98BN, the first sub-$100BN print since the end of 2011.
And another interesting observation from Bloomberg: inventories were up from the same point a year ago, at $4.1 billion. “That’s either slightly bad or a sign that they’re building up ahead of an expected lift in demand.”
Looking ahead to the all-important holiday quarter, the company expects even more of the same, and is now forecasting stellar holiday quarter results, with the top-end of its revenue well above Wall Street’s estimates:
Q1 revenue between $85.5 and $89.5 billion, exp. $86.51BN
Q1 gross margin between 37.5% and 38.5%, Exp. 37.6%
Apple also announced that it had repurchased $18BN in stock in the quarter, and spent $3.5BN on dividends. After the buybacks, AAPL’s diluted shares declined from 4.847BN a year ago to 4.520BN currently.
Tim Cook was happy:
“We concluded a groundbreaking fiscal 2019 with our highest Q4 revenue ever, fueled by accelerating growth from Services, Wearables and iPad,” said Tim Cook, Apple’s CEO. “With customers and reviewers raving about the new generation of iPhones, today’s debut of new, noise-cancelling AirPods Pro, the hotly-anticipated arrival of Apple TV+ just two days away, and our best lineup of products and services ever, we’re very optimistic about what the holiday quarter has in store.”
Commenting on the results, Apple CFO Luca Maestri said:
“Our strong business performance drove record Q4 EPS of $3.03 and record Q4 operating cash flow of $19.9 billion. We also returned over $21 billion to shareholders, including almost $18 billion in share repurchases and $3.5 billion in dividends and equivalents, as we continue on our path to reaching a net cash neutral position over time.”
So the bottom line: a revenue and profit beat, coupled with strong iPhone sales despite a modest miss to service revenue, offset by even stronger guidance, which is enough to push AAPL stock 2.3%, rising briefly above $250, and a new all time high.