Apple (AAPL) reported Q1 results on Wednesday that clearly disappointed investors and caused the stock to sell off over 10% following the release. Key highlights include record quarterly revenue of $54.5B (18% yoy growth), diluted EPS of $13.81 (no yoy growth), as well as gross margins of 38.6%, vs 44.7% a year ago.
Additional highlights include:
- iPhone sales: 47.8 million units (+29% y/y)
- iPad sales: 22.9 million units (+48% y/y)
- Mac sales: 4.1 million units (-22% y/y)
- iPod sales: 12.7 million units (-18% y/y)
- Q2 revenue guidance: $41-43B
- Q2 gross margin guidance: 37.5-38.5%
- Q2 operating expense guidance: $3.8-3.9B
- Q2 additional guidance: other income/(expense) of $350M and tax rate of 26%
- No EPS guidance provided
Adjustments & Reclassification
Both in the press release, and several times throughout the earnings call, the management team highlighted the fact that Q1 of the previous fiscal year contained 14-weeks, versus the typical 13-week quarter. In order to provide a more "apples-to-apples" comparison, the company provided weekly revenue for the current quarter ($4.2B) and the year-ago quarter ($3.3B). This represents a 27% increase in "weekly revenues", compared to the straight quarterly increase of 18%.
The management team also emphasized several additional changes it has made in the way it will report earnings going forward. First, the operating segments were expanded to include a "Greater China" specific line, separate from the Asia Pacific category that had previously included this information. In addition, the company updated the format used for presenting its summary data, with revenue categorized by product category.
Finally, perhaps the biggest change could be in the way the company provides guidance. It did not provide any diluted EPS guidance for next quarter. Furthermore, the CFO stated that in the past, Apple has provided a "single point estimate" that was conservative that management had reasonable confidence in achieving. Instead, the company is providing "a range" that its results are likely to fall within. Despite being repeatedly asked for further clarification on the specific difference, the team declined to elaborate other than to repeat similar statements.
Positive Takeaways: Strong Demand for iOS devices following multi-product refresh and global launches
Despite negative investor sentiment, Apple reported record sales on iPhones, and an impressive 50% growth in iPad units sold. Both of these product lines continue to bring consumers into the iOS ecosystem, which helps Apple strengthen its position in the mobile computing arena. Mobile is critical for all technology companies given the decline in the PC market and the size of the global smartphone market. On the call, Tim Cook highlighted that iPhone "weekly" sales were up 39% y/y, and iPad "weekly" sales were up 60% y/y. Furthermore, the team emphasized Apple's the global expansion of the iTunes store, which added 56 countries, bringing the total to 119 countries, as well as over 500 million app store account holders in 155 countries.
Along the lines of global expansion, the company continued to show strong growth in China, which is now the company's second largest market. For the quarter, revenues in "Greater China" grew 60% y/y, fueled predominantly by the iPhone, which more than doubled compared to the year-ago quarter. The team did note that iPads did not ship until late in the quarter. However, the number of Apple stores and official resellers in China both doubled. Cook stressed that he sees a lot of room for growth in this segment.
Negative Takeaways: Flat EPS, confusing guidance and lack of visibility concerning product innovation
Apple's EPS of $13.81 came in well ahead of guidance of $11.75 (+15%), but declined y/y for the first time in years. Similarly, revenue was below estimates and within 5% of the guidance of $52B provided last quarter, adding to the growing concerns that Apple's growth is not just slowing, but perhaps even stalling. Looking ahead to next quarter, management provided revenue guidance of $41-$43B, further raising red flags with investors concerned about growth. To make matters worse, Cook and Oppenheimer emphasized the shift in their approach to providing guidance that only seemed to only increase analysts' uncertainty.
Given that revenue and EPS was actually reasonably close (for Apple) to guidance previously provided, I believe analysts and investors are even more confused about how to interpret the low guidance that was provided, and how to use it when modeling their forecasts for the coming quarter. This uncertainty has undoubtedly added to the negative sentiment surrounding the stock, and likely contributed to the post-earnings sell off the stock experienced.
On top of growth concerns and uncertainty regarding management guidance, there is also a lack of visibility concerning innovation, which is at the heart of Apple's success as a company. Not surprisingly, Cook and his team declined to provide any information regarding a new apple tv product, or any other new products that are in the pipeline, although Cook did say the pipeline is "chocked full", with great stuff in store for customers.
Overall, Apple certainly proved that demand for their products are still high. Coming out of Q1, they continue to experience supply constraints for many products, especially the new iMac, iPad mini, and even in the older iPhone 4 - they simply couldn't make products fast enough to meet customer demand. However, margins are clearly declining as the product mix shifts to lower margin products and lower price points. This is particularly challenging with the iPad mini, which experienced a $100 decline in asp. On the call, Cook stated that he still believes the tablet market will be bigger than the PC market at some point, but conceded the mini may be cannibalizing sales of the iPad.
Moving forward, Apple will have to execute carefully and strike the right balance as they begin to sacrifice some of their margins in order to expand the iOS universe globally.
Disclosure: I am long AAPL.
Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth or outcomes as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.