zerohedge July 31, 2018

When we wrote our preview of AAPL earnings, we said they could be a trade-off between iPhone sales on one hand, and the company service revenues as well as broader revenue picture, and sure enough that’s precisely what happened.

In the third fiscal quarter, Apple sold 41.3MM iPhones, up from 41.0MM a year ago, but missing analyst estimates of 41.6MM, with disappointing unit sales for iPads and Macs as well, but because it beat on the bottom and top line, reporting Q3 EPS of $2.34, vs Exp. $2.18 on revenue of $53.3BN, also topping expectations of $52.4BN, while providing Q4 revenue guidance that was well above analyst estimates, the stock jumped over 2.7% after hours.

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

  • Q3 iPhone sales 41.3MM, vs Exp. 41.6MM
  • Q3 iPad sales 11.6MM, vs Exp. 11.7MM
  • Q3 Mac sales 3.7MM, vs Exp. 4.3MM, the lowest since Q3 2010

A clearer breakdown of iPhone sales in Q3, shows that after peaking in 2015, Apple may have hit a bit of a peak (via Jon Erlichman):

  • Q3 2018: 41.3 million
  • Q3 2017: 41.0 million
  • Q3 2016: 40.4 million
  • Q3 2015: 47.5 million
  • Q3 2014: 35.2 million
  • Q3 2013: 31.2 million
  • Q3 2012: 26.0 million
  • Q3 2011: 20.3 million
  • Q3 2010: 8.4 million
  • Q3 2009: 5.2 million
  • Q3 2008: 717 thousand

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:

  • Q3 2018: $53.3 billion
  • Q3 2017: $45.4 billion
  • Q3 2016: $42.4 billion
  • Q3 2015: $49.6 billion
  • Q3 2014: $37.4 billion
  • Q3 2013: $35.3 billion
  • Q3 2012: $35 billion
  • Q3 2011: $28.6 billion
  • Q3 2010: $15.7 billion
  • Q3 2009: $9.7 billion
  • Q3 2008: $7.6 billion

Indeed, despite softer iPhone sales, the company’s sold revenue beat suggests that the company is leveraging average selling prices and other revenue streams. And to be sure, Apple once again announced blockbuster service revenues of $9.5BN which includes the App Store and Apple Music, beating Wall Street expectations of $9.2BN. That is 31% growth from $7.3 billion in the year-ago quarter and 4% quarter over quarter growth. As RBC noted earlier, Apple is increasingly becoming a service company.

Further boosting the stock after hours, ASPs also came in above expectations, at $724 vs the $699 expected. Meanwhile, gross profit margin came in exactly as expected, at 53.3%

But even more important was Apple’s forecast for the next quarter, in which Apple sees revenue between $60 and $62Bn, above consensus estimates of $594BN, on margins of 38.0-38.5%, vs est of 38.2%.

The full forecast in a nutshell:

  • revenue between $60 billion and $62 billion
  • gross margin between 38 percent and 38.5 percent
  • operating expenses between $7.95 billion and $8.05 billion
  • other income/(expense) of $300 million
  • tax rate of approximately 15 percent before discrete items

Notable is that the company also returned almost $25 billion to investors through its capital return program during the quarter, including $20 billion in share repurchases, just shy of the Q2 record of $22.8 billion.

Commenting on the result, CEO Tim Cook said “we’re thrilled to report Apple’s best June quarter ever, and our fourth consecutive quarter of double-digit revenue growth. Our Q3 results were driven by continued strong sales of iPhone, Services and Wearables, and we are very excited about the products and services in our pipeline.”

CFO Luca Maestri also chimed in, saying that “our strong business performance drove revenue growth in each of our geographic segments, net income of $11.5 billion, and operating cash flow of $14.5 billion. We returned almost $25 billion to investors through our capital return program during the quarter, including $20 billion in share repurchases.”

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

Apple Net Income grew 32% Y/Y, EPS rose by 39.2% even as iPhone sales barely rose 0.7%

Product sales: The market was expecting a very modest increase in iPhone sales and yet the company failed to deliver, as iPhone sales came in at 41.3mm, below the 41.6mm expected, and just above the 41.0 mm sold last quarter. iPad sales were 11.6mm, also below the 11.7mm expected, while Apple sold 3.6 million Macs, far below the 4.3 million expected, adn the lowest since Q2 2010.

Service Revenue: a revenue category that is rapidly becoming as important as iPhone sales, soared 31% Y/Y to $9.55BN, the highest on record, and beating all Wall Street estimates.