Apple’s Financials: Is Less Really Less?

July 27th, 2016

Even though Apple’s long run of higher and higher sales every quarter has ended for a while, it does appear that Wall Street isn’t near as bearish about the company’s prospects as one might have expected. Now I don’t presume to understand how the market works, for I might well be a rich man today. Clearly there’s optimism about Apple’s long-term prospects, that the company isn’t on the ropes, and that there’s no prospect of red ink on the horizon.

That doesn’t mean expectations for the last quarter were high. They couldn’t be in light of Apple’s guidance. Indeed, the company’s financials for the June quarter actually exceeded most expectations. That alone was a decent achievement overall, even if some might have hoped for better sales numbers. Total revenue came in at $42.4 billion, with a quarterly net income of $7.8 billion. The Wall Street consensus pointed to revenues of $42.2 billion.

In all, a total of 40.4 million iPhones were sold. In the year-ago quarter, Apple sold 47.5 million iPhones with revenue coming in at $49.6 billion. So the decrease seems like an awful lot, but Apple is still moving more high-end smartphones than anyone else, and that includes Samsung. Unfortunately, the facts about Samsung are often obscured. They may sell more handsets overall, but most are in the lower price categories. To be sure, the flagship Galaxy S7 lineup had to be discounted when it first came out, which is hardly a show of confidence.

On the positive side of the ledger, maybe the iPad may be coming out of its slump, however. While sales of less than 10 million units were 7 percent lower than in the year-ago quarter, the results were still a million more units than Wall Street estimated. Total revenue increased 9 percent, which reflects the higher average sales price due to the success of the iPad Pro. This increase is the best in the last 10 quarters, so maybe there’s a reason for renewed optimism for the iPad’s success.

Unfortunately, it appears that the estimates of lower Mac sales from Gartner and IDC were pointed in the correct direction. Apple sold 4.3 million Macs, a decrease of 11% from the year-ago quarter. This continues a downward trend that is actually slightly worse than the rest of the PC industry. While you can speculate that sales might have been higher had Apple produced some compelling hardware refreshes this year, the problem may actually stem from the fact that older Macs still work quite well, that improvements have been very slight from year to year. Since macOS Sierra will support all Macs from 2010 onwards, and a couple of models from 2009, that leaves millions of Macs with a relatively long useful life.

On the positive side, the iPhone SE, the smallest iPhone, remains backordered as Apple continues to add production capacity. Apple’s growing services business grew 19% year-over-year, and App Store revenues reportedly hit a record. Apple continues to improve its ability to earn more money from existing customers, so even if hardware sales remain flat or lower for a while, other sources if income will help, in part, to compensate.

There’s not much to say about the Apple Watch. Again, actual sales are buried in an “Other Products” category, and can only be guessed at. It remains the most popular smartwatch, although independent estimates say that other companies are catching up.

In any case, Apple issued its usual conservative guidance for the current quarter, with revenue estimated at between $45.5 billion and $47.5 billion, with gross margins between 37.5% and 38%. These numbers are slightly above analyst projections that averaged $45.6 billion.

Clearly Wall Street noticed, as stock prices soared by some 6.5% in after-hours trading. After so many quarters where Apple’s share price routinely dropped after quarterly financials were announced, this demonstrates a surprising amount of optimism for Apple’s long-term prospects.

All-in-all, Apple finished the June quarter with $231.5 billion in cash. You can find more financials to consider at Apple’s site.

Despite the revenue headwinds, Apple remains in excellent shape with high sales and profits. They are thus the envy of the tech industry. No hardware maker comes close. Microsoft earns high profits from software sales and subscriptions, but, other than the Xbox and a small number of smartphones and tablets, is not strictly a hardware company in the way Apple is a hardware company. Indeed, Microsoft has written off billions of dollars to disengage itself from the wrongheaded decision to buy the handset division of Nokia.

Google’s efforts to make money from hardware have so far failed. Motorola Mobility, bought for $12.5 billion, was sold on a fire sale basis to Lenovo for $2.91 billion. The original move was the sort of slap-in-the-head decision that hardly made any sense.

In summary, it does seem that Wall Street has come to its senses about Apple, at least for now. While you can dismiss the supreme optimism of Tim Cook and other company executives as just corporate spin, it does appear that the company is in great shape financially. I’m also holding off any opinion about the next iPhone. The major reason is simple: It hasn’t been announced yet, so predictions that it’ll be a subpar upgrade are not worth anyone’s attention.

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2 Responses to “Apple’s Financials: Is Less Really Less?”

  1. dfs says:

    I hate to be so repetitive, but there’s also Car Play (the income from which, if I remember correctly, is buried in an omnium-gatherum category labeled Services). In the 2015 model year, Car Play was only available on certain Ferraris and a handful of aftermarket units offered by Alpine and Panasonic. This year it has exploded throughout the industry. Just last week, for example, Ford announced it is now provided on each and every model in its 2016 lineup. And its pretty ubiquitous in GM vehicles as well. Car Play is of course only a licensed technology, but these two companies alone add up to one hell of a lot of licenses, and plenty of others offer it too, including Honda, Mercedes Benz and Volkswagen. Yes, there is now an Android equivalent, but the interesting thing here is that regarding this kind of service Car Play and Android are not necessarily in competition, since some manufacture offer in-dash units which contain both. Over the course of a single year, this amounts to a huge explosion no doubt involving the sale of millions of units with Car Play aboard. If Apple provided a finer-grained accounting of its profits, I am sure it would emerge that Car Play is doing a lot to counterbalance softened sales of some Apple products

  2. DaveD says:

    Shocked! I tell you, I’m shocked. Yet, the sun rose out of the east today and Apple stock value had risen yesterday at the market close. Can’t remember when the last time, if ever, there were more buyers than sellers of shares of Apple after a quarterly earnings announcement. The value today has a strong upward push and value into double digits. Wow.

    My thoughts… No more stock buyback, increase the dividend, and jazz up the Mac line.

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