Apple Jumps After Missing iPhone Sales But Launching New $100 Billion Buyback

As we wrote in our preview, AAPL earnings would be a trade-off between (disappointing) iPhone sales and the size of the company's buyback, and sure enough, that's exactly what happened.

In the second fiscal quarter, Apple sold 52.2MM iPhones, missing low-balled expectations of 52.3MM, but because it beat on the bottom and top line, reporting Q2 EPS of $2.73, vs Exp. $2.64 on revenue of $61.1BN, also topping expectations of $60.9BN, and mostly because Apple announced a new $100BN buyback and a 16% increase in the dividend, the stock has jumped 4% after hours.

As many had expected, Apple product sales missed on every metric:

  • Q2 iPhone sales 52.2MM, vs Exp. 52.3MM
  • Q2 iPad sales 9.1MM, vs Exp. 9.17MM
  • Q2 Mac sales 4.1MM, vs Exp. 4.14MM

A clearer breakdown of iPhone sales in Q2, shows that after peaking in 2015, Apple has had trouble breaking back over 50 million.

  • Q2 2018: 52.2 million
  • Q2 2017: 50.8 million
  • Q2 2016: 51.2 million
  • Q2 2015: 61.2 million
  • Q2 2014: 43.7 million
  • Q2 2013: 37.4 million
  • Q2 2012: 35.1 million
  • Q2 2011: 18.6 million
  • Q2 2010: 8.8 million
  • Q2 2009: 3.8 million
  • Q2 2008: 1.7 million

And yet, despite stagnant iPhone growth, the following breakdown of Q1 revenue shows that the company has been more than able to offset the topline growth:

  • Q2 2018: $61.1 billion
  • Q2 2017: $52.9 billion
  • Q2 2016: $50.6 billion
  • Q2 2015: $58.0 billion
  • Q2 2014: $45.7 billion
  • Q2 2013: $43.6 billion
  • Q2 2012: $39.2 billion
  • Q2 2011: $24.7 billion
  • Q2 2010: $13.5 billion
  • Q2 2009: $9.1 billion
  • Q2 2008: $7.5 billion

Another disappointment: ASPs also came in below expectations, at $728 vs the $740 expected, even though as Tim Cook said in the statement, "Customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter." This also meant that Q2 margins of 38.3% also missed expectations of 38.5%.

On the positive side, however, and as noted above Apple beat on the top and bottom line, with revenue rising to $61.1BN, while China revenue jumped a notable 21% Y/Y to $13 billion (see chart below). Just as notable, Q2 Service Revenue surged 31% to $9.19BN, smashing expectations of $8.26BN as the transition from iPhones to "Services" continues.

Speaking to Bloomberg, Maestri said that the App Store is the biggest driver of Apple's services business, which saw strong year over year growth. He also said that Apple has 270 million paid subscribers - across applications and its own services, which is up 100 million year over year, and 30 million quarter over quarter.

But even more important was Apple's forecast for the next quarter, in which Apple sees revenue of $51.5-$53.5Bn, above consensus estimates of $51.4BN, on margins of 38.0-38.5%, vs est of 38.3%.

The full forecast in a nutshell:

  • Revenue between $51.5 billion and $53.5 billion, Exp. $51.4BN
  • Gross margin between 38 percent and 38.5 percent, Exp. 38.3%
  • operating expenses between $7.7 billion and $7.8 billion
  • tax rate of approximately 14.5 percent

Curiously, as Bloomberg noted, Apple CFO Luca  Maestri rejected the idea that the iPhone X, at $999, is priced too high and said that the device is Apple's top seller. He also said it was the first time that the high-end iPhone was the top selling iPhone model. He also said the iPhone's marketshare grew in the December and March quarters.

But the most important aspect of Apple's resport was the following from Apple's CFO:  "Given our confidence in Apple’s future, we are very happy to announce that our Board has approved a new $100 billion share repurchase authorization and a 16 percent increase in our quarterly dividend."

While not as extreme as some of the most far-fetched expectations, the numbers were enough to soothe market worries, and certainly enough to push the stock 4% higher.

Commenting on the buyback, Shannon Cross, an analyst with Cross Research, said the buyback was largely in line:

"The capital return is in line with expectations, and it's also in-line with what a lot of investors were looking for. The guidance for third quarter alleviates investor concerns for iPhone shipments. The install base that Apple has developed is driving a nice recurring revenue stream. The "Other Products" they have out there are also providing upside. It was a solid quarter, cash flow was strong. The questions are how they're thinking about iPhone pricing and what they learned from the iPhone X pricing and the sustainability of services growth."

Last but not least, Apple repurchased $22.8 billion in common stock in the quarter; an all time high.

So with all that said, here are the results in chart format:

Apple Net Income grew 9% Y/Y, EPS rose by 25.3% while iPhone sales rose 2.8%

Product sales: The market was expecting a miss in iPhone sales and that's precisely what it got, as iPhone sales came in at 52.2mm, below the 52.3mm expected, while iPad sales were 9.1mm, also below the 9.17mm expected, while Apple sold 4.1 million Macs, also missing estimates of 4.14 million.

Service Revenue: a revenue category that is rapidly becoming as important as iPhone sales, soared 31% Y/Y to $9.19BN, the highest on record, and beating most Wall Street estimates.

Regional breakdown: The good news: sales grew Y/Y in every region around the globe. In better news, Greater China posted solid 21% Y/Y. U.S revenues increased year over year by 17.4%, while the rest of the Asia Pacific increased by 4.3% year over year, and Europe also saw a solid 8.7% increase.

Finally, as a result of tax reform, for the first time in nearly two years, Apple's cash hoard dropped, from $285BN to $267BN, as Apple used cash on hand to buyback stocks and fund dividends, instead of issuing more debt.

Net cash also declined, and was the lowest since Sept 2015  as it no longer has tax incentives to hoard cash offshore.

Still, here is Apple's cash over the decades:

  • 2018: $267.2 billion
  • 2008: $19.4 billion
  • 1998: $1.8 billion
  • 1988: $545 million

Putting it all together, shareholders have forgiven the miss in iphone sales, and are clearly enjoying the company's optimistic forecast, as well as the upcoming $100 billion stock buybacks, and sending the stock 4% higher, and once again approaching all time highs.