Apple's third quarter results saw the group deliver revenue of $53.8bn, up 1%. While earnings per share fell 7% to $2.18, the decline wasn't as bad as had been expected. The group also confirmed it expects fourth quarter revenue to be better than many had been hoping for.
The shares rose 4.2% in after-market trading following the news.
Apple's success was built on a series of ground-breaking products, each more innovative than the last. Unfortunately it's been a while since we've seen anything truly revolutionary. That's creating headwinds for iPhone sales, but Apple's growth story is more software than hardware these days.
Let's start with the iPhone issues though. The lack of innovation, coupled with a longer lifespan for existing iPhones, means it's harder to justify regular upgrades. Especially since rivals are closing the technology gap at a fraction of the price.
External factors are hardly helping either. The economic backdrop remains uncertain and the battleground in the ongoing trade war between the US and China has turned to tech. That's squeezed sales trends in China, which had been a key growth market.
But it's not all doom and gloom. CEO Tim Cook has said pressures in the Far East are easing, and longer-term, investors should remember it's not all about price and technical spec. Apple has successfully positioned itself as an aspirational, yet accessible brand. That boosts loyalty.
If a 1bn+ customer/fan base is Apple's trump card, the mushrooming Services division is Apple's way of playing it. Charging subscriptions for its music service and getting fees from app developers to use the App store, have helped revenues grow rapidly. The soon to launch TV+ is Apples attempt to steal some of Netflix's ever expanding customer base.
Services is now comfortably Apple's second largest division. Margins are high and revenues should be reliable - which all being well will take the pressure off the group to deliver constantly rising hardware sales.
Of course, it won't be as simple as all that. Declining iPhone sales are hurting, and a legal dispute with chip supplier Qualcomm has seen the group shell out $4.5bn to part ways, with another $1bn spent on acquiring Intel's modem business as a long-term replacement. Intel's offer isn't as strong, but the good news is Apple has eight years to improve it before the split with Qualcomm becomes effective.
Over the years, Apple has generated shed-loads of cash and it's now finding its way back to shareholders through a share buyback program and dividend. The shares offer a prospective yield of 1.5%. That may not be large, but it's more than others in the US tech sector.
Third quarter results
While the group's largest division, iPhone, saw sales fall from $29.5bn to $26bn, growth across Mac (up 10.7% to $5.8bn), iPad (up 8.4% to $5bn) Wearables (up 48% to $5.5bn) and Services (up 12.6% to $11.5bn) was enough to move the top line forward.
Momentum was particularly strong in Japan and Asia Pacific, with trends in the Americas and Europe less pronounced, up 2.1% and down 1.8% respectively. Greater China again saw sales drop, falling 4.1% to $9.2bn.
Total costs rose 4% to $42.3bn, with R&D expenses increasing from $3.7bn last year to $4.3bn this. Therefore operating profits fell to $11.5bn.
The group has recorded a free cash inflow of $9.6n, and repurchased $17bn in stock and returned $3.6bn in dividends and equivalents
Looking ahead, Apple expects fourth quarter revenue of between $61bn and $64bn, with a gross margin of between 37.5% and 38.5% and operating expenses between $8.7bn and $8.8bn. That implies a Q4 operating profit of between $14.1 and $15.9bn
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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