Five 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.
Then four 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 130% since then as its PE multiple rose from 13x to 23X. And to think all it had to do was slash guidance.
Three 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 only helped with the agressive multiple expansion
Then two quarters agi, 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, quickly regained its status as the world's most valuable company 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.
Finally, last quarter, the stock now on autopilot, accelerated higher as the company beat both top and bottom line expectations, and more importantly, indicated that it sees no adverse consequences from the ongoing trade war, projecting stellar holiday quarter revenues despite yet another decline in iPhone sales. The catalyst: continued growth to the company's service offering and rising expectations for an upcoming 5G supercycle.
So with AAPL having hit a record $1.4 trillion market cap just last week making it the most important stock for not only the S&P but virtually every ETF that holds the name, and US declaring a trade war truce with China, everyone's attention was glued to the Apple earnings report at 430pm ET to see if all the optimism over the past 5 quarters would be justified. The answer appears to be yes, because moments ago, Apple reported that in fiscal Q1, it smashed both revenue and EPS earnings
- Q1 EPS: $4.99, Exp. $4.56
- Q1 Revenue: $91.8BN, Exp. $88.38BN, and above the high end of the company's own $89.5BN forecast
- Q1 Operating Income $15.625BN
- Q1 Product revenue: $79.1BN, above the $75.21BN estimate
This was the highest revenue quarter in Apple history, boosted by the second highest quarterly iPhone revenue ever, with CFO Luca Maestri clearly pleased by the results:
“Our very strong business performance drove an all-time net income record of $22.2 billion and generated operating cash flow of $30.5 billion,” said Luca Maestri, Apple’s CFO. “We also returned nearly $25 billion to shareholders during the quarter, including $20 billion in share repurchases and $3.5 billion in dividends and equivalents, as we maintain our target of reaching a net cash neutral position over time.”
Looking at the product and geographic breakdown, Apple confirmed that speculation for stronger iPhone 11 sales were indeed accurate even if Service revenues missed modestly:
- Q1 iPhone revenue $55.96 billion, up 7.6% y/y from $52BN a year ago, and above the exp. $51.50 billion
- Q1 service revenue $12.72 billion, up 17% y/y, below the exp. $12.98 billion
- Q1 Greater China rev. $13.58 billion, up 3.1% y/y
Apple also reported a solid beat on accessories, including AirPods, Apple Watch and Apple TV.
But it was the company's renewed solid guidance for the coming quarter that has sparked a new buying frenzy after the the company guided Q2 revenue between $63.0-$67.0BN, well above Wall Street's estimate of $62.33BN. The company also guided to a Q2 gross margin between 38.0% and 39.0%, above the 38.1% estimate.
- Q2 revenue between $63.0 billion and $67.0 billion, with the $65BN midline some 4.3% above the est of $62.33BN
- Q2 gross margin between 38.0 percent and 39.0 percent
- Q2 operating expenses between $9.6 billion and $9.7 billion
- Q2 tax rate of approximately 16.5 percent
In what was an otherwise stellar report, the main blemish was ironically some weakness in the company's increasingly important Service revenue, which rose to $12.72BN, an all time record, up from $12.51BN last quarter, if below the $12.98BN expected by Wall Street consensus....
... and up 17% from $10.875BN a year ago.
Commenting on the service miss, Bloomberg's Mark Gurman said that "the services miss isn’t totally surprising. None of their services have made any visible headway. Apple TV+ has very few shows and it seems likely not many people using it are paying for it, Apple Arcade is still early, Apple News+ has been a clear laggard of the bunch, and the Apple Card’s APR and transaction cost splits with Apple are likely still very low."
Still, in the big picture, services continues to rise and in Q1 contributed 13.8% of total revenue, up from 12.9% a year ago.
Another blemish: despite reporting record wearables, home and accessories revenue of $10 billion up from $7.3 billion a year-ago, this category also posted a modest growth slowdown:
With focus purely on iPhones, sales of Macs predictably continued so slow: Apple said it sold $7.16 billion worth of Macs, compared with $7.4 billion last year, while iPads sales were only $5.98 billion down from $6.7 billion last year.
On a geographic basis, Apple got $13.58 billion of sales from its all important Greater China region, up 3.1% from a year ago. Americas, Europe, and rest of Asia Pacific were also up. Japan was down. The Americas is still by far its biggest region.
That said, with everyone looking for guidance on how the coronavirus may impact China sales, there was no mention of China other than in the regional breakdown. Investors will need to wait for the call to hear if they have anything to say about any impact from the coronavirus outbreak. The full breakdown by geography is as follows:
Commenting on the results, Tim Cook said that the company reported its "highest quarterly revenue ever, fueled by strong demand for our iPhone 11 and iPhone 11 Pro models, and all-time records for Services and Wearables,” adding that “during the holiday quarter our active installed base of devices grew in each of our geographic segments and has now reached over 1.5 billion. We see this as a powerful testament to the satisfaction, engagement and loyalty of our customers — and a great driver of our growth across the board.”
In response to what was solid Q1 earnings and even more solid Q2 guidance, the stock surged 3% to a new all time high, surpassing $1.4 trillion in market cap, but is limping lower as investors look in more detail at the Services miss.