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Why Is Apple (AAPL) Down 3.5% Since Last Earnings Report?
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A month has gone by since the last earnings report for Apple (AAPL - Free Report) . Shares have lost about 3.5% 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 its most recent earnings report in order to get a better handle on the important drivers.
Apple Q3 Earnings Beat, Services Aids Top-Line Growth
Apple reported third-quarter fiscal 2019 earnings of $2.18 per share that beat the Zacks Consensus Estimate by 8 cents but declined 6.8% year over year.
Net sales increased 1% year over year to $53.81 billion, which surpassed the Zacks Consensus Estimate of $53.31 billion. The figure was within management’s guided range of $52.5-$54.5 billion. Foreign exchange volatility negatively impacted sales by 300 basis points (bps) or $1.5 billion.
Product sales (78.7% of sales) decreased 1.7% to $42.35 billion. Services (21.3% of sales) revenues increased 12.6% from the year-ago quarter to $11.46 billion. Non-iPhone revenues increased 17% year over year.
Apple ended the quarter with 506 physical stores in 22 countries, apart from online store presence in 35 countries.
Recently, Apple announced that it is set to acquire Intel’s smartphone modem business. The deal will add 17,000 wireless technology patents to the iPhone maker’s portfolio.
Geographical Performance
Americas sales increased 2.1% year over year to almost $25.06 billion and accounted for 46.6% of total sales.
Europe generated $11.93 billion in sales, down 1.8% on a year-over-year basis. The region accounted for 22.2% of total sales.
Greater China sales decreased 4.1% from the year-ago quarter to $9.16 billion and accounted for 17% of total sales. However, on a constant-currency basis, revenues grew year over year in Greater China, driven by government stimulus, favorable consumer response to trade-in programs, financing offers, and other sales initiatives.
Apple stated that services grew at a double-digit rate in China, driven by strong App Store growth.
Japan sales climbed 5.6% year over year to $4.08 billion and accounted for 7.6% of total sales.
Rest of Asia-Pacific generated sales of $3.59 billion, up 13.3% year over year. The region accounted for 6.7% of total sales.
In BRIC countries, revenues grew 3% year over year. Sales increased at a double-digit rate in India and Brazil. The company set new third-quarter revenue records in Thailand, Vietnam and the Philippines.
Moreover, the company set June-quarter revenue records in several developed markets, including the United States, Canada, Germany, France, Japan, Australia and Korea.
iPhone Sales Details
iPhone sales declined 11.8% from the year-ago quarter to $25.99 billion and accounted for 48.3% of total sales.
Customer response toward iPhone has improved due to price reductions, and new trade-in and financing programs.
Retail and online stores grew year over year in June. Active installed base of iPhone reached an all-time high and increased year over year in each of Apple’s top 20 markets.
Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 99% for iPhone 10R, iPhone 10S and 10S Max combined.
Services Momentum Continues
Services — revenues from Internet Services, App Store, Apple Music, AppleCare, Apple Pay, and licensing and other services — continued its momentum in the reported quarter.
The company generated double-digit revenue growth across the App Store, Apple Music, cloud services and AppleCare, and triple-digit growth from Apple Pay and App Store search ad business.
Apple has now 420 million paid subscribers across its services portfolio, up 30 million sequentially. Third-party subscription revenues increased more than 40% year over year. Moreover, the largest of the paid third-party subscriptions accounted for only 0.25% of Apple’s total Services revenues.
Apple is expanding the distribution of AppleCare through partners like Best Buy. Almost 1000 Best Buy stores across the United States are now offering expert services and repairs for Apple products. Moreover, apart from Apple retail stores, the number of company-authorized third-party service providers in the United States has increased three times to 1800 over the past three years.
Meanwhile, Apple Pay transaction volumes more than doubled year over year (1 billion transactions per month). It is now available in 47 markets.
Per Apple, its third-quarter performance indicates Apple Pay’s addition of more users than PayPal and four times faster monthly transaction volumes growth.
Notably, the company will launch Apple Pay in Chicago later this year. It also plans to launch Apple Card in August.
Apple TV app was launched in more than 100 countries in May. The company stated that monthly viewers of the Apple TV app in the United States increased more than 40% on a year-over-year basis.
Apple TV’s growth can be attributed to a solid content portfolio (150 leading content providers in a single app), impressive user interface and continued transition from linear/cable television to over-the-top services. Moreover, the upcoming tvOS is expected to improve user experience in the long haul.
iPad & Mac Details
iPad sales of $5.02 billion increased 8.4% year over year and accounted for 9.3% of total sales. The upside was driven by strong demand for iPad Pro, iPad Mini and iPad Air.
iPad sales grew across all geographic segments, with a third-quarter revenue record in Mainland China and double-digit growth in emerging markets.
Additionally, more than half of the customers, who purchased iPads during the quarter, were new to the device. iPad active installed base also reached an all-time high.
Apple quoted a latest survey report from 451 Research, which stated that overall customer satisfaction was 94% for iPad.
The availability of iPadOS along with redesigned home screen, new multitasking tools and deeper integration with Apple Pencil is expected to drive demand for iPad in the near term.
Mac sales of $5.82 billion increased 10.7% from the year-ago quarter and accounted for 10.8% of total sales. Strong growth was driven by solid performance of MacBook Air and MacBook Pro.
Globally, almost half of the customers, who bought Macs during the quarter, were new to the device. Active installed base of Mac also reached an all-time high.
Mac ecosystem is set to expand with the launch of macOS Catalina and developer tool Mac Catalyst. Apple expects mac-dedicated apps to be available by this fall.
Wearables’ Robust Performance
Wearables, Home and Accessories sales surged 48% year over year and accounted for 10.3% of total sales.
Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased more than 50% year over year. AirPods benefited from solid demand.
Apple Watch generated record revenues. The company stated that 75% of customers buying the device were new users.
Apple expanded the availability of the ECG app and regular-rhythm notification features to five additional European countries during the reported quarter. Recently, Canada and Singapore were added to the list. The features are now available in 31 countries around the world. Management expects to launch these in more countries later this year.
Moreover, Apple continues to expand Apple Watch features. The device has become more useful, owing to the availability of an exclusive App Store, Siri enhancements, and music and audio features. The new watchOS 6 is expected to boost Apple Watch’s adoption.
Apple Gaining Traction Among Enterprises
Apple is gaining traction among enterprises, particularly end markets like financial services and banking.
The company stated that 90 of the largest 100 banks by assets size are deploying Apple devices. Moreover, 60% of the biggest banks are using iPads for wealth managers.
Additionally, two-thirds of the top banks are deploying iPad for branch transformation and modernization of legacy interfaces in retail banking.
Apple Watch is also gaining traction as a communication device among bank branch employees.
The company stated that American Express, Credit Suisse, Discover and T.D. Ameritrade have launched Apple Business Chat to improve customer experience. Moreover, T.D. Ameritrade has enabled immediate funding of accounts using Apple Pay.
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 11.2% year over year to $8.68 billion due to higher research & development (R&D), and selling, general and administrative (SG&A) expenses, up 15% and 7.7%, respectively. The operating expenses figure was lower than management’s estimate of $8.7-$8.8 billion.
Operating margin contracted 220 bps on a year-over-year basis to 21.5%.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash & marketable securities were $210.61 billion compared with $225.41 billion as of Mar 30, 2019.
Term debt was $98.47 billion at the end of third-quarter 2019, down from $100.7 billion at the end of second-quarter 2019.
Cash flow from operations was $11.6 billion in the third quarter.
Apple returned more than $21 billion in the reported quarter through dividends and share repurchases.
Moreover, the company declared a cash dividend of 77 cents per share to be payable on Aug 15, 2019, to shareholders of record as of the close of business on Aug 12.
Guidance
For fourth-quarter fiscal 2019, revenues are projected between $61 billion and $64 billion. Apple expects foreign exchange volatility to hurt top-line growth by $1 billion.
Gross margin is expected to be 37.5-38.5%, while operating expenses are projected to be $8.7-$8.8 billion. Unfavorable foreign exchange is expected to negatively impact gross margin by 100 bps.
Other income/(expense) is estimated to be $200 million, while the 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?
It turns out, estimates review have trended upward during the past month.
VGM Scores
Currently, Apple has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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.
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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Why Is Apple (AAPL) Down 3.5% Since Last Earnings Report?
A month has gone by since the last earnings report for Apple (AAPL - Free Report) . Shares have lost about 3.5% 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 its most recent earnings report in order to get a better handle on the important drivers.
Apple Q3 Earnings Beat, Services Aids Top-Line Growth
Apple reported third-quarter fiscal 2019 earnings of $2.18 per share that beat the Zacks Consensus Estimate by 8 cents but declined 6.8% year over year.
Net sales increased 1% year over year to $53.81 billion, which surpassed the Zacks Consensus Estimate of $53.31 billion. The figure was within management’s guided range of $52.5-$54.5 billion. Foreign exchange volatility negatively impacted sales by 300 basis points (bps) or $1.5 billion.
Product sales (78.7% of sales) decreased 1.7% to $42.35 billion. Services (21.3% of sales) revenues increased 12.6% from the year-ago quarter to $11.46 billion. Non-iPhone revenues increased 17% year over year.
Apple ended the quarter with 506 physical stores in 22 countries, apart from online store presence in 35 countries.
Recently, Apple announced that it is set to acquire Intel’s smartphone modem business. The deal will add 17,000 wireless technology patents to the iPhone maker’s portfolio.
Geographical Performance
Americas sales increased 2.1% year over year to almost $25.06 billion and accounted for 46.6% of total sales.
Europe generated $11.93 billion in sales, down 1.8% on a year-over-year basis. The region accounted for 22.2% of total sales.
Greater China sales decreased 4.1% from the year-ago quarter to $9.16 billion and accounted for 17% of total sales. However, on a constant-currency basis, revenues grew year over year in Greater China, driven by government stimulus, favorable consumer response to trade-in programs, financing offers, and other sales initiatives.
Apple stated that services grew at a double-digit rate in China, driven by strong App Store growth.
Japan sales climbed 5.6% year over year to $4.08 billion and accounted for 7.6% of total sales.
Rest of Asia-Pacific generated sales of $3.59 billion, up 13.3% year over year. The region accounted for 6.7% of total sales.
In BRIC countries, revenues grew 3% year over year. Sales increased at a double-digit rate in India and Brazil. The company set new third-quarter revenue records in Thailand, Vietnam and the Philippines.
Moreover, the company set June-quarter revenue records in several developed markets, including the United States, Canada, Germany, France, Japan, Australia and Korea.
iPhone Sales Details
iPhone sales declined 11.8% from the year-ago quarter to $25.99 billion and accounted for 48.3% of total sales.
Customer response toward iPhone has improved due to price reductions, and new trade-in and financing programs.
Retail and online stores grew year over year in June. Active installed base of iPhone reached an all-time high and increased year over year in each of Apple’s top 20 markets.
Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 99% for iPhone 10R, iPhone 10S and 10S Max combined.
Services Momentum Continues
Services — revenues from Internet Services, App Store, Apple Music, AppleCare, Apple Pay, and licensing and other services — continued its momentum in the reported quarter.
The company generated double-digit revenue growth across the App Store, Apple Music, cloud services and AppleCare, and triple-digit growth from Apple Pay and App Store search ad business.
Apple has now 420 million paid subscribers across its services portfolio, up 30 million sequentially. Third-party subscription revenues increased more than 40% year over year. Moreover, the largest of the paid third-party subscriptions accounted for only 0.25% of Apple’s total Services revenues.
Apple is expanding the distribution of AppleCare through partners like Best Buy. Almost 1000 Best Buy stores across the United States are now offering expert services and repairs for Apple products. Moreover, apart from Apple retail stores, the number of company-authorized third-party service providers in the United States has increased three times to 1800 over the past three years.
Meanwhile, Apple Pay transaction volumes more than doubled year over year (1 billion transactions per month). It is now available in 47 markets.
Per Apple, its third-quarter performance indicates Apple Pay’s addition of more users than PayPal and four times faster monthly transaction volumes growth.
Notably, the company will launch Apple Pay in Chicago later this year. It also plans to launch Apple Card in August.
Apple TV app was launched in more than 100 countries in May. The company stated that monthly viewers of the Apple TV app in the United States increased more than 40% on a year-over-year basis.
Apple TV’s growth can be attributed to a solid content portfolio (150 leading content providers in a single app), impressive user interface and continued transition from linear/cable television to over-the-top services. Moreover, the upcoming tvOS is expected to improve user experience in the long haul.
iPad & Mac Details
iPad sales of $5.02 billion increased 8.4% year over year and accounted for 9.3% of total sales. The upside was driven by strong demand for iPad Pro, iPad Mini and iPad Air.
iPad sales grew across all geographic segments, with a third-quarter revenue record in Mainland China and double-digit growth in emerging markets.
Additionally, more than half of the customers, who purchased iPads during the quarter, were new to the device. iPad active installed base also reached an all-time high.
Apple quoted a latest survey report from 451 Research, which stated that overall customer satisfaction was 94% for iPad.
The availability of iPadOS along with redesigned home screen, new multitasking tools and deeper integration with Apple Pencil is expected to drive demand for iPad in the near term.
Mac sales of $5.82 billion increased 10.7% from the year-ago quarter and accounted for 10.8% of total sales. Strong growth was driven by solid performance of MacBook Air and MacBook Pro.
Globally, almost half of the customers, who bought Macs during the quarter, were new to the device. Active installed base of Mac also reached an all-time high.
Mac ecosystem is set to expand with the launch of macOS Catalina and developer tool Mac Catalyst. Apple expects mac-dedicated apps to be available by this fall.
Wearables’ Robust Performance
Wearables, Home and Accessories sales surged 48% year over year and accounted for 10.3% of total sales.
Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased more than 50% year over year. AirPods benefited from solid demand.
Apple Watch generated record revenues. The company stated that 75% of customers buying the device were new users.
Apple expanded the availability of the ECG app and regular-rhythm notification features to five additional European countries during the reported quarter. Recently, Canada and Singapore were added to the list. The features are now available in 31 countries around the world. Management expects to launch these in more countries later this year.
Moreover, Apple continues to expand Apple Watch features. The device has become more useful, owing to the availability of an exclusive App Store, Siri enhancements, and music and audio features. The new watchOS 6 is expected to boost Apple Watch’s adoption.
Apple Gaining Traction Among Enterprises
Apple is gaining traction among enterprises, particularly end markets like financial services and banking.
The company stated that 90 of the largest 100 banks by assets size are deploying Apple devices. Moreover, 60% of the biggest banks are using iPads for wealth managers.
Additionally, two-thirds of the top banks are deploying iPad for branch transformation and modernization of legacy interfaces in retail banking.
Apple Watch is also gaining traction as a communication device among bank branch employees.
The company stated that American Express, Credit Suisse, Discover and T.D. Ameritrade have launched Apple Business Chat to improve customer experience. Moreover, T.D. Ameritrade has enabled immediate funding of accounts using Apple Pay.
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 11.2% year over year to $8.68 billion due to higher research & development (R&D), and selling, general and administrative (SG&A) expenses, up 15% and 7.7%, respectively. The operating expenses figure was lower than management’s estimate of $8.7-$8.8 billion.
Operating margin contracted 220 bps on a year-over-year basis to 21.5%.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash & marketable securities were $210.61 billion compared with $225.41 billion as of Mar 30, 2019.
Term debt was $98.47 billion at the end of third-quarter 2019, down from $100.7 billion at the end of second-quarter 2019.
Cash flow from operations was $11.6 billion in the third quarter.
Apple returned more than $21 billion in the reported quarter through dividends and share repurchases.
Moreover, the company declared a cash dividend of 77 cents per share to be payable on Aug 15, 2019, to shareholders of record as of the close of business on Aug 12.
Guidance
For fourth-quarter fiscal 2019, revenues are projected between $61 billion and $64 billion. Apple expects foreign exchange volatility to hurt top-line growth by $1 billion.
Gross margin is expected to be 37.5-38.5%, while operating expenses are projected to be $8.7-$8.8 billion. Unfavorable foreign exchange is expected to negatively impact gross margin by 100 bps.
Other income/(expense) is estimated to be $200 million, while the 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?
It turns out, estimates review have trended upward during the past month.
VGM Scores
Currently, Apple has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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.
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.