Shares of Apple Inc. AAPL were up over 3% in aftermarket trading following better-than-expected first quarter of fiscal 2017 results.
Earnings of $3.36 per share and revenues of $78.4 billion easily topped the respective Zacks Consensus Estimate of $3.22 and $76.9 billion. On a year-over-year basis, both metrics registered growth of 2.4% and 3.3%.
Product Details
The good show was driven by impressive sales of Apple’s latest smartphone model iPhone 7 and 7 Plus. Performance of Apple’s Services business was also impressive.
Total iPhone unit sales came in at about 78.3 million, up 5% year over year. Revenues from iPhone also grew 5% from the year-ago quarter to $54.4 billion (69.4% of total revenue).
Services, which include revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, licensing and other services, surged 18% year over year (with extra one week in the quarter) to nearly $7.2 billion. App Store sales in December alone topped $3 billion. Apple said that it expects Services “revenues to be the size of a Fortune 100 company this year.”
Apple Inc. Price, Consensus and EPS Surprise
Apple Inc. Price, Consensus and EPS Surprise | Apple Inc. Quote
Management also noted that Apple Pay reported transaction volume growth of 500%, buoyed by expansion to markets like Spain, Japan, Russia and New Zealand. At present Apple Pay is available in 13 markets.
Apple Mac unit sales were up 1% year over year to approximately 5.4 million, while revenues grew 7% from the prior-year quarter to $7.2 billion.
Coming to iPad, Apple sold 13.1 million units in the quarter, down 19% year over year. Revenues of $5.5 billion were down 22% from the prior year quarter.
Other products, which include revenues from Apple TV, Apple Watch, Beats products, iPod and Apple-branded and third-party accessories, declined 8% year over year to over $4 billion. Again, there were no data available on Apple Watch sales or its latest product launch, AirPods.
Geographical Performance
Demand for Apple’s products improved across most of the geographical regions except greater China. As much as 64% of sales were from the International markets.
Americas (the biggest market for Apple) generated revenues of approximately $32 billion in the quarter, up 9% year over year.
Europe generated nearly $18.5 billion in revenues, up 3% on a year-over-year basis.
Revenues from Japan rose 20% year over year to $5.8 billion while the rest of Asia Pacific generated revenues of $5.8 billion, up 8% year over year.
Owing to persistent macroeconomic weakness, Apple revenues declined around 12% year over year in the Greater China region to $16.2 billion.
Margins
Gross margin was 38.5%, a decline of 160 basis points (bps) from the year-ago quarter.
Operating expenses increased 9% year over year to $6.8 billion due to higher research & development expenses as well as selling, general and administrative expenses. As a result, operating margin plunged 210 bps from the year-ago quarter to 29.8%.
Balance Sheet and Cash Flow
Apple’s cash and cash equivalents (and short-term marketable securities) were $60.5 billion at the end of the quarter, compared with $67.2 billion at fiscal 2016-end. Long-term debt was $73.6 billion compared with $75.4 billion at the end of fiscal 2016.
For the quarter, cash generated from operating activities was $27.1 billion.
Apple returned about $15 billion in capital returns this quarter through dividends and share repurchases. Apple also said that it has so far returned $201 billion out of the $250 billion capital returns program announced in April last year.
The company also declared its quarterly dividend of 57 cents per share payable on Feb 16 to shareholders of record as on Feb13.
Guidance
For the second quarter of fiscal 2017, Apple forecasts revenues in a range of $51.5 billion to $53.5 billion.
Gross margin is expected within 38% to 39%, while operating expenses are projected within $6.5 billion to $6.6 billion. Other income/ (expense) is likely to be $400 million, while tax rate is expected to be 26%.
Our Take
Better-than-expected iPhone sales have definitely come as a respite. But the macroeconomic headwinds remain for now, especially in China, one of the high-growth regions for Apple. Also, competition from local players has been hindering iPhone’s growth in China.
Nonetheless, Apple is optimistic about long-term growth prospects in regions like China and India. In the last few months, Apple has increased its focus on India, which is expected to become the second largest smartphone market in the world. In fiscal 2016, Apple sales in India grew approximately 50% over the prior fiscal.
Apple’s Services business is also expected to remain strong as it is mostly dependent on the already installed Apple devices. Also, in the long run, Apple is expected to benefit from its robust cash position, strength in technology and the ecosystem that it has built, given its loyal customer base. Further, its enterprise collaborations with the likes of Deloitte, IBM Corp. IBM, Cisco CSCO and SAP SE SAP are expected to be important long-term growth drivers.
Currently, Apple has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Apple’s shares have marginally outperformed the broader market over the past one year. Shares of Apple have registered growth of 28.56%, compared with the Zacks Computer Mini industry’s gain of 26.16%.
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