With its stock up 27% since the start of the year, Apple (AAPL) - Get Reportdidn't have much margin for error with its fiscal second quarter (March quarter) earnings report. Unless the company cleanly beat estimates and issued third quarter sales guidance that was at least in-line with expectations, a selloff was likely. And it wasn't able to do that.
However, outside of the challenges Apple reported seeing in China, its numbers were pretty healthy, with iPhone demand looking healthy in many markets and some smaller businesses looking stronger than expected.
Apple reported March quarter revenue of $52.9 billion (up 5% annually) and EPS of $2.10 (up 10%). The latter beat a $2.02 consensus analyst estimate, but the former slightly missed a $53.04 billion consensus.
In addition, June quarter revenue guidance of $43.5 billion to $45.5 billion (implies 5% growth at the midpoint) fell short of a $45.63 billion consensus. CEO Tim Cook stated on the earnings call that Apple thinks "earlier and much more frequent reports about future iPhones" are weighing on sales. Considering how much has been reported about the iPhone 8 and the feature improvements it's set to deliver, the rumor mill could very well be having a larger-than-usual impact on iPhone sales this year.
Regardless, with a high bar having been set, shares fell 1.8% in after-hours trading to $144.80. Some iPhone/iPad suppliers are also lower. Audio codec chip supplier Cirrus Logic (CRUS) - Get Report, which reports on Wednesday and gets a solid majority of its revenue from Apple, fell 2.6%. RF chip suppliers Skyworks (SWKS) - Get Report and Qorvo (QRVO) - Get Report respectively fell 1.6% and 1.2%.
As has been its custom in recent years, Apple used its March quarter report to announce fresh capital returns: Its buyback authorization has been hiked by $35 billion to $210 billion, and the quarterly dividend has been hiked by $0.06 per share to $0.63 per share (1.7% forward yield). Overall, Apple expects to return $89 billion to shareholders over the next eight quarters.
Buybacks have long been boosting Apple's EPS by lowering its share count. Diluted shares outstanding were down about 5% annually in the March quarter to 5.26 billion. Capital raises used to pay for buybacks and dividends have also been inflating Apple's debt and commercial paper balance, which stood at $98.5 billion at quarter's end. Its cash balance stood at $256.8 billion, 93% of which is outside the U.S.
iPhone revenue rose 1% annually to $33.2 billion (63% of total revenue), with unit sales dropping 1% to 50.8 million. The latter figure fell short of a 52.3 million consensus. Depressed U.S. smartphone upgrade rates weighed on sales, as did a 1.2 million-unit iPhone channel inventory reduction (greater than last year's 400,000). And forex headwinds contributed to an iPhone average selling price (ASP) of $655, up by $13 annually thanks to strong iPhone 7-Plus demand but slightly below a $658 consensus and $40 below what was reported for the December quarter (a seasonally strong one for ASPs due to September iPhone launches).
But soft Chinese demand was easily the largest iPhone headwind: Apple's "Greater China" revenue fell 14% to $10.7 billion (20% of total revenue), even though the company reported 20% Mac growth and "extremely strong" services revenue growth in the region. While currency pressures -- responsible for a third of the Greater China sales decline seen over the last six months -- are a factor, it still looks as if (as indicated by prior estimates) the iPhone has been losing share to local Android OEMs Huawei, Oppo and Vivo. On the call, Cook admitted that while the iPhone 7-Plus did well in China, the same didn't hold for some "previous generation" iPhones.
In other regions, things look better. Apple's Americas, Europe, Japan and "Rest of Asia-Pacific" reporting segments respectively saw revenue grow by 11%, 10%, 5% and 20%. CFO Luca Maestri asserted "very solid" iPhone growth was seen in these segments, with double-digit growth posted in Western Europe, the Middle East and (with the help of Indian and Korean growth) Rest of Asia-Pac. It looks as if the iPhone gained share in those places, as well as the U.S., ahead of Samsung's April Galaxy S8 launch.
Also, while iPhone unit sell-through rose just 1%, Cook says Apple's active iPhone installed base grew by a double-digit clip. While the contrast between those numbers doesn't bode well for upgrade rates, it does for Apple's high-margin services businesses, as it shows that the number of consumers that can be monetized via services continues to steadily rise.
Services revenue rose 18% to $7 billion (13% of revenue). A 40% increase in App Store revenue helped -- Apple reports increases in both paying App Store users and per-user spending -- as did Apple Music and iCloud subscription growth.
Looking at Apple's non-iPhone hardware businesses, Macs were a standout. Revenue rose 14% to $5.8 billion, and units 4% to 4.2 million, as a stabilizing PC market and strong demand for MacBook Pros sporting OLED touch strips (launched last fall) remained tailwinds. ASP grew by $44 sequentially to $1,392 -- sky-high by PC standards.
By contrast, the iPad continues to be stung by weak tablet demand, in spite of Apple's best attempts to pitch the iPad Pro as a notebook replacement. Revenue fell 12% to $3.9 billion, and units 13% to 8.9 million. Nonetheless, Apple insists the business performed better than expected, and that it believes share was gained in the U.S. and Japan. A mix shift towards the iPad Pro led ASP to rise by $13 sequentially to $436.
Drawing attention: Apple's "Other Products" revenue, which covers the Apple Watch, headphones, Apple TV set-tops, iPods and accessories, grew 31% to $2.8 billion. That's quite the turnaround from the 8% decline recorded in the December quarter, and doubtlessly has much to do with a near-doubling of Apple Watch sales. Strong demand for AirPods (still supply-constrained) and Beats headphones also helped. While the Watch hasn't lived up to initial gaudy hopes, it can be seen as a successful, high-margin, iPhone accessory business, one that's clearly faring better than rival Android Wear smartwatch lines.
And with regards to Apple's bottom line, the company deserves some credit for turning in a 38.8% gross margin -- down 60 basis points annually, but towards the high end of a 38% to 39% guidance range -- in spite of soaring DRAM and NAND flash memory prices. As well as for guiding for a June quarter GM of 37.5% to 38.5%, flat at the midpoint with a year-ago GM of 38%. Maestri claims Apple's "very good cost performance on other commodities" helped offset higher memory prices last quarter, and that a greater services revenue mix is also boosting margins.
Thus, in a lot of respects, Apple performed better than expected last quarter, and gave plenty of reasons to think that the iPhone and various other businesses remain on solid footing ahead of the iPhone 8 launch. But it did fall short in one notable geographic region, and that's enough to spark some profit-taking at current levels.
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