Apple Inc. AAPL reported strong second-quarter fiscal 2015 results. Earnings of $2.33 per share jumped 40.4% year over year on higher revenues from iPhoneand Mac sales, beating the Zacks Consensus Estimate by $2.19.
Quarter Details – Revenues
Revenues increased 27% year over year to $58 billion, higher than the forecasted range of $52 to $55 billion. Revenues also breezed past the Zacks Consensus Estimate of $56.3 billion. However, revenues declined 22% sequentially from $74.6 billion.
Demand for Apple’s products remained strong across all geographical regions. The company generated $16.8 billion in revenues from Greater China, soaring 71% year over year and 4% sequentially. In rest of Asia, the company reported revenues of $5.2 billion, up 48% year over year.
The Americas remained the biggest market for Apple, in terms of sales, generating revenues of $21.3 billion, up 19% year over year. Europe generated $12.2 billion revenues, up 12% year over year.
The growth was driven by increased sale of iPhone, which hit 61.2 million units, up 40% year over year. iPhone revenues surged 55% from the year-ago quarter to $40.3 billion.
Unit sales for Mac grew 10% year over year to 4.6 million, representing revenues of $5.6 billion, up 2% from the last year.
iPad recorded sales of 12.6 million units, which declined 23% year over year. Revenues were around $5.4 billion, down 29% year over year.
Services, which include revenues from the iTunes Store, App Store, Mac App Store, iBooks Store, AppleCare, Apple Pay, licensing and other services, increased 9% year over year to $5 billion.
Other products, which include revenues from iPod, Apple TV, Beats Electronics and Apple-branded and third-party accessories, declined 10% year over year to $1.7 billion In addition, App Store revenues shot up 29% driven by solid demand globally.
In the reported quarter, Apple opened six stores in Greater China, bringing the total to 21 across 11 cities. The company remains on track to open 40 stores in Greater China by the middle of next year.
Margins
Gross margin was 40.8%, above the company’s guidance range of 38.5% to 39.5%, and expanded 150 basis points (bps) from the year-ago quarter.
Operating expenses, increased 22.7% year over year to $5.4 billion due to higher research & development as well as selling, general & administrative expenses.
Operating margin expanded 170 bps from the year-ago quarter. Net income increased 32.7% year over year to $13.6 billion.
Balance Sheet and Cash Flow
Apple’s balance sheet remains strong with cash and cash equivalents of $14.5 billion at the end of the second quarter of fiscal 2015 compared with $13.8 billion at the end of fiscal 2014. At the end of second quarter, long-term debt was $40.1 billion compared with $29 billion at the end of fiscal 2014. Over the last six months, cash generated from operating activities was $52.8 billion, which compared favorably with $36.2 billion generated a year ago. In the reported quarter, the company generated cash flow of $19.1 billion from operating activities.
Guidance
For the third quarter of fiscal 2015, Apple forecasts revenues in the range of $46 to $48 billion. Gross margin is expected within 38.5% to 39.5%, while operating expenses are projected within $5.65 to $5.75 billion. Other income/ (expense) are likely to be $350 million, while tax rate is expected to be 26.3%.
Capital Program
Apple recently announced its decision to increased investors’ return by 50% and return nearly $200 billion of cash by the end of Mar 2017. Per the new program, the company increased its share repurchase authorization to $140 billion from $90 billion announced last year. In addition, Apple hiked its dividend return by 11% to 52 cents. The increased dividend will be paid on May 14 to shareholders of record as of May 11. As of Mar 2015, the company returned a total of $112 billion, including $80 billion through share repurchases since its inception.
Our Take
We believe that strong sales of the new iPhones (6 and 6 plus) will be Apple’s key growth catalyst in fiscal 2015. iPhone sales will continue to benefit from the Apple-China Mobile partnership in the Greater China region despite the pricing pressure, in our view. Moreover, expanding the carrier base in other countries will help the company to aggressively sell iPhones, going forward. In addition, the launch of Apple Watch is expected to fuel growth in the coming days and add to top-line growth.
Other Stocks to Consider
Currently, Apple has a Zacks Rank #2 (Buy). A couple of well-ranked stocks in the technology sector include Autobytel Inc: ABTL, InvenSense, Inc. INVN and Cirrus Logic Inc. CRUS. While Autobytel and InvenSense sports a Zacks Rank #1 (Strong Buy), Cirrus Logic has a Zacks Rank #2.
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