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Apple (AAPL) Up 11.1% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Apple Inc. (AAPL - Free Report) . Shares have added about 11.1% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is AAPL due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Recent Earnings

Apple reported second-quarter fiscal 2018 earnings of $2.73 per share, which beat the Zacks Consensus Estimate by 4 cents and increased almost 30% year over year.
    
Net sales increased 15.6% year over year to $61.14 billion, which surpassed the Zacks Consensus Estimate of $60.99 billion. Apple benefited from robust iPhone and Services segment revenue growth.

According to Apple, iPhone X has been its top-selling phone every week since launch in November 2017. Apple mentioned that the device was the most popular smartphone in China in the reported quarter. Another iPhone model was also among the top three in the country.

Apple Services (15% of sales) revenues of $9.19 billion beat the consensus estimate of $8.33 billion backed by record growth in App Store, Apple Music, iCloud and AppleCare revenues in the quarter. Management stated that active installed base for all devices grew in double digits on a year-over-year basis.

iPhone Details

Total iPhone unit sales of 52.2 million missed the Zacks Consensus Estimate of 52.9 million but increased 3% year over year on the back of iPhone X, iPhone 8 and iPhone 8 Plus.

Double-digit growth in several markets including Japan, Canada, Switzerland, Turkey, Central and Eastern Europe, Mexico and Vietnam was a tailwind. iPhone channel inventory declined by 1.8 million sequentially compared with 1.1 million decline in the year-ago period.

Revenues from iPhone (62.2% of sales) grew 14% from the year-ago quarter to $38.03 billion. The upside can be attributed to higher iPhone average selling price (ASP), which increased to $728 from $655 a year ago. However, ASP dropped 8.5% when compared sequentially.

Management mentioned that achieving $100 billion in revenues in the first half of the year, which increased by $12 billion from the year-ago period, is a new record for the company. Moreover, the growth rate in the first half was also the highest in three years.

Services Paid Subscribers Increase

Services— including revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services — increased 31% year over year and 8% sequentially.

The number of paid subscribers grew 30 million to 270 million sequentially and up 59% year over year.

Apple Pay active users more than doubled while transactions tripled year over year. The payment app is currently available in 21 markets. It garnered huge success in Tokyo. The company plans to launch it in Norway, Poland and Ukraine in the next several months. In March, the company launched Express Transit with Apple Pay in Beijing and Shanghai.

Apple Music surpassed 40 million paid subscribers in the March quarter. iCloud storage revenues increased more than 50% year over year. Moreover, revenues from AppleCare recorded highest growth rate in five quarters.

iPad, Mac & Other Segment Details

Apple sold 9.1 million iPads in the quarter, up 2% year over year. Revenues (6.7% of sales) of $4.11 billion increased 6% year over year.

Almost half of iPad sales were to first-time tablet buyers. Apple stated that strong growth in Japan, Latin America, Middle East and Africa and Central and Eastern Europe backed the year-over-year improvement.

Apple Mac unit sales declined 3% year over year to 4.08 million. Globally, 60% of Mac sales were to first time buyers and switchers.

Nevertheless, Mac revenues (9.6%) of $5.85 billion remained nearly flat from the year-ago quarter. Latin America, India, Middle East and Africa Central and Eastern Europe showed impressive growth. Globally, active install base of Macs increased in double-digits on a year-over-year basis.

Other products (6.5%) — including revenues from Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories — increased 38% year over year to $3.95 billion. Wearables and home products accounted for more than 90% of the total growth in the segment.

Wearables Robust Performance    

Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased almost 50% year over year. Unit sales of Watch and AirPods set a new high in the fiscal second quarter.

Apple Watch revenues showed double digit year-over-year growth. The company launched Apple Watch Series 3 with a cellular connection in Mainland China, Hong Kong and Thailand with many more markets under way. The availability of more features in Watch OS 4.2 makes the product more appealing.

The company added that AirPods are gaining popularity and it is striving hard to meet its robust demand. HomePods (launched in February), which are currently available in the United States, United Kingdom and Australia, will be introduced to more global markets shortly. The company is also adding new features to the smart speaker.

Geographical Performance

Demand for Apple’s products improved across most of the geographical regions.

The Americas (40.6% of sales) generated revenues of $24.84 billion in the quarter, up 17.4% year over year.

Europe (22.6% of sales) generated $13.85 billion in revenues, up 8.7% on a year-over-year basis.

Greater China (21.3% of sales) increased 21.4% (strongest in 10 quarters) from the year-ago quarter to $13.02 billion. Business in China was backed by not just iPhone X but also Mac, Watch and Services.
    
Revenues from Japan (8.9% of sales) surged 21.9% year over year to $5.47 billion.

Rest of Asia Pacific (6.5% of sales) generated revenues of $3.96 billion, up 4.3% year over year. Notably, Apple remains keen on India as the company believes that it has huge growth potential in the region.

Operating Details

Gross margin contracted 6 basis points (bps) on a year-over-year basis to 38.3%, which was within management’s estimate of 38-38.5%.

Operating expenses increased 15.9% year over year to $7.53 billion due to higher research & development (R&D) expenses and selling, general and administrative (SG&A) expenses, up 21.7% and 11.6%, respectively. The operating expense figure was slightly lower than management’s estimate of $7.6–$7.7 billion.

Operating margin declined 70 bps to 26%.

Balance Sheet & Cash Flow

As of Mar 31, 2018, cash & marketable securities were $267.2 billion, compared with $285.1 billion as of Dec 30, 2017.

As of Mar 31, 2018, term-debt was $110 billion and commercial paper outstanding was $12 billion.

Cash flow from operations was $43.42 billion in the second quarter.

Apple returned about $27 billion in the second quarter through dividends ($3.2 billion) and share repurchases ($23.5 billion). The company has now returned $275 billion to shareholders out of its $300 billion capital return program.

The company also announced that its board of directors’ approved a new $100 billion share repurchase authorization and a 16% rise in quarterly dividend, effective from the next dividend payable cycle.

Guidance

For third-quarter fiscal 2018, revenues are projected between $51.5 billion and $53.5 billion.

Gross margin is expected within 38-38.5%, while operating expenses are projected within $7.7-$7.8 billion. The company believes stabilization in NAND and DRAM pricing coupled with services mix to have a positive impact on gross margins.

Other income/(expense) is estimated to be $400 million, while tax rate is expected to be 14.5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to one lower.

Apple Inc. Price and Consensus

 

VGM Scores

At this time, AAPL has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was also allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, AAPL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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