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Apple Slides After Missing Revenue, China, ASPs Despite Better iPhone Sales, Guidance

Tuesday, October 25, 2016 15:02
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After a torrid rally in Apple stock in the past three months that took its stock from under $100 some 20% higher, traders wondered how much more upside was left in the stocks, and if the surge could continue. And so, moments ago, Tim Cook tried hard to deliver, if not so much in the current quarter where revenue and ASPs missed, and EPS beat by just one penny, then certainly with his guidance for what the company expects in the year’s final quarter, however judging by the stock’s performance he failed. This was also the first time Apple posted an annual profit decline since 2001, as the two thirds of revenue it gets from the iPhone exposed it to waning smartphone demand.

For Q3, Apple reported Q4 revenue of $46.9 billion, which declined 9% Y/Y and which was also below the consensus estimate of $47 billion in the quarter in which the new iPhone was introduced, with the company selling 45.5 million iPhones in the quarter, down 5% Y/Y but above the 45 million expected. Earnings of $9 billion declined 19% Y/Y from the $11.1 billion reported a year ago.

Revenues from services increased 24% to $6.3bn in the fourth quarter, making it Apple’s second-largest source of income after the iPhone amid another sluggish performance by the Mac and iPad.  “Services were the highlight of the quarter,” Apple finance chief Luca Maestri told the FT in an interview. “Momentum is very good and even accelerating.”

And just like that AAPL is a services company.

Joking aside, looking at its products, Apple reported a gross margin of 38% which beat estimates of 37.9%; this however was offset by an average iPhone ASP of $618.72 which missed expectations of $625.

Additionally, which AAPL posted a sequential increase in virtually every region in which it operates, its China sales declined modestly by 1% to $8.785 sequentially, and down a whopping 30% Y/Y, missing estimates of $8.85 billion. Maestri defended Apple’s performance in China, where revenues fell by 30 per cent year on year in the quarter and 17 per cent for the full year. He said that the popularity of the iPhone 6 two years ago made for a “very difficult compare”.

In an attempt to offset the lackluster performance, AAPL guided substantially higher, and now expected $76-$78 billion in sales in fiscal Q1, above the expected $75.3 billion, however the company also forecast that gross profit in the same quarter would likely comes below expectations at 38-38.5%, below the 38.9% expected by the street.

Maestri said that customers’ initial response to the iPhone 7, which went on sale a month ago, “bodes well as we get into the December quarter”. Supplies of the shiny “Jet Black” model are still lagging behind demand, he said, with the larger iPhone 7 Plus proving particularly popular. He added that “we are confident that we can return to growth because we see that the response from customers to the 7 and 7 Plus is really positive.”

Chief Executive Officer Tim Cook said the company was “thrilled with the customer response” to the new iPhones. He also highlighted growth of Apple’s Services business.

The market, however, appears less thrilled judging by the stock reaction, which first jumped, then fizzled, the market does not appear convinced.

The result in a nutshell:

  • APPLE 4Q EPS $1.67, GAAP EST. $1.66; REV. MISSES EST.
  • APPLE SEES 1Q REVENUE $76B-$78B, EST. $75.4B
  • APPLE 4Q GROSS MARGIN 38%, EST. 37.9%
  • APPLE SOLD 4.89M MACS IN 4Q, EST. 5.1M
  • APPLE SEES 1Q GROSS MARGIN 38%-38.5%, EST. 38.9%
  • APPLE 4Q IPHONE ASP $618.72, EST. $625

Apple’s full guidance:

  • revenue between $76 billion and $78 billion, Exp. $75.4 billion
  • gross margin between 38 percent and 38.5 percent, exp. 38.9%
  • operating expenses between $6.9 billion and $7 billion
  • other income/(expense) of $400 million
  • tax rate of 26 percent

And the quarter in charts.


Sales breakdown by product:

Sales by Geography:

Gross cash:

And net cash:

Finally, while last quarter the market rejoiced at the company’s earnings, this time the kneejerk reaction was far less favorable, despite an initial spike which has since seen the stock decline by about 2% in the after hours.


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