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Apple - Coronavirus means group will miss revenue target

Sophie Lund-Yates, Equity Analyst | 18 February 2020 | A A A
Apple - Coronavirus means group will miss revenue target

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Apple Inc Com Stk NPV

Sell: 318.07 | Buy: 318.12 | Change 1.38 (0.44%)
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A slower than anticipated return to "normal conditions" in China following the COVID-19 coronavirus outbreak means Apple expects to miss revenue targets next quarter.

Worldwide iPhone supply will be temporarily disrupted, and demand in China has been affected. That reflects store closures, very low customer traffic at stores that have remained open, and reduced operating hours. Customer demand outside China remains in line with expectations.

Apple will provide more information in its April results, and the shares were unmoved in after-hours trading.

View the latest Apple share price and how to deal

Our view

The differences between iPhones are more subtle these days, and the handsets last longer. Improvements in rival smartphones mean the market place is more crowded than ever too. These are both problems that have seen Apple struggle in recent years.

More recently these trends seem to have reversed. The latest iterations of the iPhone clearly resonated with consumers - which is a positive outcome as Apple is spending a fair amount more on R&D these days. Secondly, headwinds in the crucial Asian market have eased, with trade tensions between the US and China taken down a notch.

Investors will be keeping a close eye on the coronavirus too. In reality, this is a dynamic situation though and no one knows how things will play out in the longer term.

In the meantime Apple customers are incredibly loyal and Apple's looking to take advantage of that with its Services business - now comfortably the second largest division. It makes money from charging subscriptions for its music service and getting fees from app developers to use the App store, and has helped revenues grow rapidly. The recently launched TV+ is Apple's attempt to keep its loyal groupies out of Netflix's clutches and secure an even larger share of their wallets. Service margins are higher and revenues should be reliable - which all being well will take the pressure off the group to deliver constantly rising hardware sales.

Of course, Apple still needs to keep its core customers happy which means cooking up new "must have" hardware products. Recent performance shows progress in popular wearables and accessories (think AirPods and Apple Watch), and we'd like to see that continue.

Earnings per share have been protected by an extensive share buyback programme, and the group offers a 1% prospective dividend yield. That said, we think Apple could be doing more. A still sizeable cash pile means there's scope for more R&D spending.

All-in-all, Apple has a strong core. Future spoils will depend on its ability to keep growing higher-margin areas of the business, while also creating another generation of coveted products.

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First quarter trading details (29 January 2020)

Apple reported record revenue and earnings in the first quarter. Revenue of $91.8bn was up 9% compared to last year, well ahead of guidance and market expectations. Net-income reached $22.2bn which was another all-time high.

The results reflect strong demand for the latest iPhone 11 and 11 Pro, while Services and Wearables also hit new records.

A cash dividend of $0.77 has been declared.

iPhone sales reached $56bn which was a 7.6% rise compared to last year. In comparison, Mac sales dipped $256m to $7.2bn, while iPads saw an 11.2% decline to $6bn. However, this was offset by a $2.7bn improvement to sales in Wearables, Home and Accessories to $10bn.

The Services business also had a record quarter, reporting sales of $12.7bn, compared to $10.9bn last year.

Operating costs rose 11.1% in the period, reaching $9.6bn. Within that research and development accounted for 46.1%, which was a higher proportion than last year's 44.9%.

Earnings per share of $5.04 was over 19% higher than last year, helped by the $20bn of share buybacks in the quarter.

The number of active devices grew in every geographic region, with over 1.5bn active Apple products globally.

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