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Apple (AAPL) Down 15.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Apple (AAPL - Free Report) . Shares have lost about 15.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Apple due for a breakout? 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 catalysts.

Apple Q2 Earnings Beat Estimates, Revenues Down Y/Y

Apple reported second-quarter fiscal 2019 earnings of $2.46 per share that beat the Zacks Consensus Estimate by 9 cents but declined 9.9% year over year.

Net sales decreased 5.1% year over year to $58.02 billion, which surpassed the Zacks Consensus Estimate of $57.55 billion. The figure was within management’s guided range of $55-$59 billion. Strong U.S. dollars negatively impacted sales by 200 basis points (bps).

Product sales (80.3% of sales) decreased 9.2% to $46.57 billion. Services (19.7% of sales) revenues increased 16.2% from the year-ago quarter to $11.45 billion.

Geographical Performance

Americas sales increased 3% year over year to almost $25.60 billion and accounted for 44.1% of sales.

Europe generated $13.05 billion in sales, down 5.7% on a year-over-year basis. The region accounted for 22.5% of sales.

Greater China sales decreased 21.5% from the year-ago quarter to $10.22 billion and accounted for 17.6% of total sales.
   
Japan sales climbed 1.2% year over year to $5.53 billion and accounted for 9.5% of sales.
 
Rest of Asia-Pacific generated sales of $3.62 billion, down 8.7% year over year. The region accounted for 6.2% of sales.

Apple rolled out new trade-in and financing programs in the United States, China, the U.K., Spain, Italy and Australia during the quarter.

iPhone Sales Details

iPhone sales declined 17.3% from the year-ago quarter to $31.05 billion and accounted for 53.5% of sales.

Customer response in Greater China and certain emerging markets has improved due to price reductions, and the new trade-in and financing programs. CEO Tim Cook stated that March was the strongest month in the second quarter on a year-over-year basis due to these initiatives.

China sales also benefited from the government’s stimulus program and lower VAT from 16% to 13%.

Apple quoted a latest survey report from 451 Research, which stated that customer satisfaction was 99% for iPhone XR, XS and XS Max combined.

Services Momentum Continues

Services — including revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services — continued to show great momentum in the reported quarter.

The company generated double-digit revenue growth across the App Store, Apple Music, cloud services, AppleCare, Apple Pay and App Store search ad business.

Apple has now 390 million paid subscribers across its services portfolio, up 30 million sequentially. Number of paid third-party subscriptions increased more than 40% year over year in each of the geographic segments. Moreover, the largest of the paid third-party subscriptions accounted for only 0.3% of Apple’s total Services revenues.

Moreover, Apple Pay transaction volumes more than doubled year over year and are on track to reach 10 billion transactions in calendar year 2019. Apple Pay is now available in 30 markets. Apple expects the service to be live in 40 markets by the end of the year.

iPad & Mac Details

iPad sales of $4.87 billion increased 21.6% year over year and accounted for 8.4% of sales. Sales benefited from strong demand for iPad Pro.

iPad sales grew in all the geographic segments. All geographic segments, except Greater China, reported strong double-digit growth. This was the best quarter ever for iPad in Japan. Performance in Korea, Thailand and Mexico was impressive, as sales more than doubled on a year-over-year basis.

Additionally, more than half of the customers purchasing iPads during the quarter were new to the device. iPad active installed base also reached a new all-time high.

Apple quoted a latest survey report from 451 Research, which stated that customer satisfaction was 93% for iPad overall.

Mac sales of $5.51 billion decreased 4.6% from the year-ago quarter and accounted for 9.5% of sales. Apple stated that processor constraint in the quarter negatively impacted sales.

Nevertheless, the company generated double-digit Mac revenue growth in Japan and Korea.

Across the globe, almost half of the customers, who bought Macs during the quarter, were new to the device. Active installed base of Mac also reached a new all-time high.

Wearables’ Robust Performance

Wearables, Home and Accessories sales rallied 30% year over year and accounted for 8.8% of sales. Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased roughly 50% year over year.

Apple Gaining Traction Among Enterprises

Apple is gaining traction among enterprises, particularly end-markets like aviation. The company stated that pilots across 450 airlines prefer iPad for their electronic flight bag. More than half of top 50 airlines are using iOS to provide better customer service. Use case is also expanding thought mobile point-of-sale service.

Moreover, growing adoption of Apple Pay for food and beverage purchases, and in-flight access to Apple Music bode well for the company.

The company’s iOS SDKs are gaining traction among enterprise platforms like SAP and salesforce. Moreover, in February, the Apple at Work initiative was launched with AT&T, an extension of the ongoing collaboration between the two companies. This initiative will help enterprise customers choose the best Apple products for their business needs.

Operating Details

Gross margin contracted 70 basis points (bps) on a year-over-year basis to 37.6%, which was within management’s estimate of 37-38%.

Operating expenses increased 11.7% year over year to $8.41 billion due to higher research & development (R&D), and selling, general and administrative (SG&A) expenses, up 16.9% and 7.4%, respectively. The operating expenses figure was lower than management’s estimate of $8.5-$8.6 billion.

Operating margin contracted 290 bps on a year-over-year basis to 23.1%.

Balance Sheet & Cash Flow

As of Mar 30, 2019, cash & marketable securities were $225.41 billion compared with $245 billion as of Dec 29, 2018. Term debt was $100.7 billion at the end of second-quarter 2019, down from $102.8 billion at the end of first-quarter 2019. Cash flow from operations was $11.2 billion in the second quarter.

Apple returned more than $27 billion in the reported quarter through dividends and share repurchases.

The company’s board of directors has authorized an additional $75 billion for share repurchases. Moreover, the company declared a cash dividend of 77 cents per share, an increase of 5%. The dividend is payable on May 16, 2019, to shareholders of record as of the close of business on May 13, 2019.

Guidance

For third-quarter fiscal 2019, revenues are projected between $52.5 billion and $54.5 billion. Apple expects 300 bps of foreign exchange headwinds to negatively impact top-line growth.

Gross margin is expected to be 37-38%, while operating expenses are projected to be $8.7-$8.8 billion. Other income/(expense) is estimated to be $250 million, while tax rate is expected to be 16.5%.

Apple expects the number of paid subscribers to surpass 0.5 billion in 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Apple has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 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.

Outlook

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


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