A month has gone by since the last earnings report for Apple (AAPL - Free Report) . Shares have added about 10.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Apple due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Apple’s third-quarter fiscal 2018 results created new records in a seasonally slow period. Earnings of $2.34 per share not only crushed the Zacks Consensus Estimate by 17 cents but also surged 40.4% year over year.
Net sales increased 17.3% year over year to $53.27 billion, which surpassed the Zacks Consensus Estimate of $52.34 billion. Apple benefited from robust iPhone and Services segment revenue growth.
Total iPhone unit sales of 41.30 million beat the Zacks Consensus Estimate and inched up 1% year over year on the back of iPhone X, iPhone 8 and iPhone 8 Plus.
Double-digit growth in several markets, including the United States, Canada, Germany, Switzerland, Mexico, Hong Kong, Russia, the Middle East and Africa, was a tailwind. iPhone channel inventory declined by 3.5 million in the quarter.
Revenues from iPhone (56.1% of sales) grew 20% from the year-ago quarter to $29.91 billion. The upside can be attributed to higher iPhone average selling price (ASP), which increased to $724 from $606 a year ago.
Higher ASP and strong iPhone unit sales reflect increasing loyalty of the company’s consumers. Apple quoted a latest survey report from 451 Research, which stated that customer satisfaction was 96% for all iPhone models. Moreover, combining iPhone 8, 8 Plus and iPhone X, customer satisfaction was even higher at 98%.
Services Momentum Continues
Services — including revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services — surged 31% year over year.
Apple Services’ (17.9% of sales) revenues of $9.55 billion beat the consensus mark of $9.34 billion. Active installed base grew double digit.
Apple stated that paid subscriptions have surpassed $300 million, an increase of more than 60% in the past year alone. The number of apps offering subscriptions also continues to grow and there are almost 30,000 available in the App Store, currently.
Moreover, Apple Music grew more than 50% year over year. Management stated that AppleCare revenues grew at its highest rate in 18 quarters, driven by the company’s expanded distribution initiative.
Further, Cloud services revenues were up over 50% on a year-over-year basis. Communications services also experienced record usage.
Apple also stated that Siri requests have already exceeded 100 billion so far this fiscal year. Moreover, the number of articles read on Apple News has more than doubled year over year.
Apple Pay was used for more than 1 billion transactions, which is triple the amount of the year-ago tally. Apple Pay has completed more total transactions as compared with Square and more mobile transactions than PayPal.
Apple Pay is now live in 24 markets worldwide with over 4,900 bank partners. The company expects to enter Germany later this year. In the United States, eBay has allowed sellers on its platform to accept Apple Pay.
Moreover, CVS Pharmacy and 7-Eleven is set to roll out Apple Pay acceptance in locations nationwide, this fall. Apple Pay can now be used with iPhone and Apple Watch to ride public transport in 12 metropolitan areas.
Further, Apple’s peer-to-peer payment service, Apple Pay cash, is already being used by millions of customers across the United States within a short span of time since its launch.
iPad, Mac & Other Segment Details
Apple sold 11.55 million iPads in the quarter, down 5% year over year. Revenues (8.9% of sales) of $4.74 billion decreased 5% year over year.
The company reported double-digit iPad unit growth in both Greater China and rest of Asia-Pacific segments. Apple stated that iPad sales set a new third-quarter record in Mainland China.
Moreover, almost half of iPad purchases in the quarter were by customers who are new to iPad. Apple stated that active installed base of iPads reached a new all-time high in the quarter.
Apple Mac unit sales declined 13% year over year to 3.72 million. Globally, 60% of Mac sales were to first-time buyers and switchers.
Mac revenues (10%) of $5.33 billion declined 5% from the year-ago quarter. India, Turkey, Chile and Central & Eastern Europe showed impressive growth. Globally, active install base of Mac increased in double-digits on a year-over-year basis.
Wearables’ Robust Performance
Other products (7%) — including revenues from Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories — jumped 37% year over year to $3.74 billion.
Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased more than 60% year over year. Apple Watch grew in the mid 40% range.
Apple expanded distribution of HomePod to three additional markets. The company added new immersive listening features with support for HomePod stereo pairs and a new multi-room audio system.
Moreover, Apple announced that Charter Communications will begin offering Apple TV 4K to its customers in nearly 50 million U.S. households. The access to live channels and on-demand programs will be offered through the Spectrum TV app on Apple TV 4K, iPhone and iPad, later this year.
Demand for Apple’s products improved across most of the geographical regions, as revenues grew in each of its top 15 markets.
The Americas (46.1% of sales) generated revenues of $24.54 billion in the quarter, up 20.4% year over year.
Europe (22.8% of sales) generated $12.14 billion in revenues, up 13.7% on a year-over-year basis.
Greater China (17.9% of sales) surged 19.3% from the year-ago quarter to $9.55 billion. Business in China was backed by not just iPhone X but also Mac, Watch and Services.
Revenues from Japan (7.3% of sales) increased 6.7% year over year to $3.89 billion.
Rest of Asia-Pacific (5.9% of sales) generated revenues of $3.18 billion, up 16% year over year.
Gross margin contracted 20 basis points (bps) on a year-over-year basis to 38.3%, which was within management’s estimated range of 38-38.5%.
Operating expenses increased 16.2% year over year to $7.81 billion due to higher research & development (R&D) expenses and selling, general and administrative (SG&A) expenses, up 26% and 8.6%, respectively. The operating expense figure was slightly lower than management’s estimate of $7.6-$7.7 billion.
Operating margin remained flat on a year-over-year basis at 23.7%.
Balance Sheet & Cash Flow
As of Jun 30, 2018, cash & marketable securities were $243.7 billion compared with $267.2 billion as of Mar 31, 2018. Term-debt was $102.63 billion and commercial paper outstanding was $11.97 billion.
Cash flow from operations was $14.5 billion in the third quarter.
Apple returned about $25 billion in the reported quarter through dividends and share repurchases.
For fourth-quarter fiscal 2018, revenues are projected between $60 billion and $62 billion that imply year-over-year growth of 16-19%.
Gross margin is expected within 38-38.5%, while operating expenses are projected within $7.95-$8.05 billion range. 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 $300 million, while tax rate is expected to be 15%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.76% due to these changes.
At this time, Apple has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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 more suitable for growth investors than those looking for value and momentum.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Apple has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.