As we discussed yesterday, Apple's iPhone X sales woes have been extensively documented in recent weeks (most recently in "Doubts Grow At Apple" That A $1,000 Smartphone May Not Have Been A Winning Idea") and with earnings by the world's most valuable company scheduled for 30 minutes after the close today, many analysts and investors have asked just how Apple will avoid having its stock punished for what has been a disappointing quarter (and likely lackluster guidance) with some speculating that Tim Cook could unveil a shareholder payout as large as $400 billion in the coming years to offset operational fears.
That, in a nutshell summarizes the cautious mindset of investors and Wall Street analysts (which GBH Insights analyst Dan Ives said has been in "full panic mode" about iPhone figures) ahead of today's earnings. And it has reflected in Apple shares, which have fallen 7% in the past nine trading days as repeatedly ominous signals from iPhone suppliers cast a shadow over the world’s most-valuable publicly traded company, and which prompted Wall Street analysts to further slash their iPhone sales estimates.
With that in mind, the biggest variables to keep an eye on at 4:30pm ET today will be the reported iPhone numbers, and the company's revenue forecast, but even more importantly this quarter will be any disclosure by Tim Cook on how much of Apple's massive and freshly repatriated cash hoard will be returned to shareholders, in addition to details on sales in China and growth in the company's rapidly growing services division.
Here, courtesy of Bloomberg is a breakdown:
The iPhone is Apple's flagship product, contributing two-thirds of revenue, so its performance will be closely scrutinized. The company is expected to report sales of 51.9 million iPhone units from the fiscal second quarter, along with an average selling price of $740, according to consensus estimates. For the projected fiscal third quarter, analysts are looking for unit sales of 39 million and an average selling price of $691. In February, CFO Luca Maestri gave rare additional guidance during the earnings call, telling analysts iPhone revenue would grow by at least 10% year-over-year in the current quarter. If that number disappoints, watch out below.
Shareholder Payout Plans
Here, it's all about Apple's quarter trillion in cash and cash equivalents: as we discussed yesterday, with iPhone X sales set to disappoint, investors have shifted focus to Apple’s swelling cash hoard and the potential for bigger capital returns, instead. And thanks to lower corporate taxes and Apple comments about holding an equal amount of cash and debt over time, Cook will probably not disappoint; the only question is whether the payout will be $200, $300 or $400 billion over the next 5 years. Morgan Stanley’s Katy Huberty predicted that Apple may total capital returns by $150 billion this year, including a dividend hike of as much as 50 percent. Others have been even more optimistic.
Putting Apple's buybacks and dividend in context, the company has given back more than $200 billion to shareholders since it started a cash-return program in 2012, mostly in the form of share repurchases. For the past two years, the company has announced an extra $50 billion for buybacks and dividends in conjunction with fiscal second-quarter earnings.
"The iPhone mega cycle didn’t happen, but many investors stuck around for the next big capital returns update," wrote Barclays analyst Mark Moskowitz. However, as Bloomberg notes, citing analysts, an increase in capital returns is widely anticipated and its effect on the stock could be limited.
While China has been a key focus for Tim Cook since he took over as chief executive officer in 2011, in recent years its influence has faded along with the companys' revenues in this key geography. While Apple now has more stores in China than any other region outside of the US, China revenue fell to $45 billion in the latest fiscal year, down from a record $59 billion in 2015 amid greater competition from local phone makers like Huawei Technologies Co. and Xiaomi.
Needless to China, with its estimated 100 million iPhone users, represents a “major swing factor” for Apple. About 60 million to 70 million Chinese consumers are due for an upgrade in the next 12 to 18 months, he estimated. Any indication that performance in China is improving will have big implications for sales of future iPhones. And vice versa.
With other growth ventures (iWatch most notably) disappointing, services revenue, which includes sales of apps and music, has become increasingly important for Apple as iPhone growth slows.
Services are now the second-biggest source of revenue for the company. Last quarter the CFO forecast strong performance from services and wearables in the fiscal second quarter. According to Gene Munster, "services should still be a bright spot in March,” and expects year-over-year growth of 18 percent to 20 percent. Here too there is room for disappointment.
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Finally, here are some additional observations from Macromon's Gary Evans:
Apple Getting Too Big
The company has almost become a utility due to its sheer size.
Apple’s relatively small recurring revenue stream (some argue iPhone upgrades are – Uncle Carl) forces Tim Cook to wake on the first day of every year and begin to generate annual revenues larger than the GDPs of 75 percent of the counties in the world (see table below).
God Bless Tim Cook, he is really trying to turn Apple into a services company, which really turned around Microsoft, when they moved their software to the cloud.
Nevertheless, imagine the pressure on senior management. Growing gadget sales and revenues every year to a level larger than the size of Peru or Greece’s GDP. That is one big nut, comrades.
Last Quarter’s Release
Clearly the release of the iPhone 10 was a flop, and we suspect due to its $1,000 price tag. That is a lot of scratch for a phone even for the 5 percenters. iPhone unit sales were down 1.2 percent y/y last quarter.
Monitor These Two Items
- Q2 iPhone unit sales to see if they can bounce back. The last two Q2s have seen negative y/y growth, however.
- Q2 China revenues, which may be more important. Lots of noise in last week about Apple losing market share to local firms. We also hear of boycotts of Apple products by the Chinese as they are upset at the U.S. bullying their country on the trade issue. Maybe that it why Tim Cook was in the Oval Office last week. Greater China revenues average around 20-25 percent of total revenues and have grown y/y for the past two quarters over 10 percent. It is critical that y/y growth quarterly remains above or around 10 percent.
Where Is The Stock Headed Tomorrow?
As they say at the tables, “Place your bets.”