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Apple's (AAPL) Q4 Earnings Beat, Services Drives Top Line

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Apple (AAPL - Free Report) reported fourth-quarter fiscal 2019 earnings of $3.03 per share that beat the Zacks Consensus Estimate by 19 cents and increased 4.1% year over year.

Net sales increased 1.8% year over year to $64.04 billion, which surpassed the Zacks Consensus Estimate of $62.45 billion. The figure also beat management’s guidance of $61-$64 billion. However, foreign exchange volatility negatively impacted sales by $1 billion.

Product sales (80.5% of sales) decreased 1.5% to $51.53 billion. Services (19.5% of sales) revenues increased 18% from the year-ago quarter to $12.51 billion. Non-iPhone revenues grew 17% year over year.

Geographical Performance

Americas sales rose 6.6% year over year to $29.32 billion and accounted for 45.8% of total sales.

Europe generated $14.95 billion in sales, down 2.8% on a year-over-year basis. The region accounted for 23.3% of total sales.
 

Apple Inc. Price, Consensus and EPS Surprise

Greater China sales decreased 2.4% from the year-ago quarter to $11.13 billion and accounted for 17.4% of total sales. Apple stated that the Services segment grew at a double-digit rate in China, driven by strong App Store growth.
    
Japan sales declined 3.5% year over year to $4.98 billion and accounted for 7.8% of total sales.

Rest of Asia-Pacific generated sales of $3.66 billion, up 6.6% year over year. The region accounted for 5.7% of total sales.

Apple established new fourth-quarter records in countries including the U.S., Canada, Germany, France, Korea, Singapore, Brazil, India, Thailand, Malaysia and Vietnam.

iPhone Sales Details

iPhone sales declined 9.2% from the year-ago quarter to $33.36 billion and accounted for 52.1% of total sales.

Customer response was good for new iPhone 11, 11 Pro and 11 Pro max, which were launched toward the later part of the quarter.

Active installed base of iPhone reached a new all-time high in each of the company’s geographic segments.

Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 99% for iPhone 10XR, iPhone 10XS and 10XS Max combined.

Services Momentum Continues

Services — revenues from Internet Services, App Store, Apple Music, AppleCare, Apple Pay, and licensing and other services — maintained momentum in the reported quarter.

Apple has now 450 million paid subscribers across its services portfolio, up 30 million sequentially. Third-party subscription revenues increased almost 40% year over year. Moreover, the largest of the paid third-party subscriptions accounted for only 0.25% of Apple’s total Services revenues.

Meanwhile, Apple Pay’s transaction volumes more than doubled year over year (3 billion in the reported quarter). It is now available in 49 markets and has more than 6,000 users.

Per the company, its fourth-quarter performance indicated that Apple Pay’s monthly transaction volume growth was four times faster than PayPal.

Notably, the company launched the Apple Card in August. It stated that major apps and retailers like Uber, Uber Eats, Walgreens, Duane Reade and T-Mobile have already joined to offer 3% daily cashback on Apple Card transactions.

Later this year, Apple will add a feature that will enable Apple Card holders to buy iPhones and pay over 24 months with zero interest.

In September, the company launched Apple Arcade, its game subscription service.

Moreover, Apple expanded the reach of Apple News+ to readers in Australia and the U.K. during the quarter. Popular publications including the Times of London, the Australian and Hello Magazine along with The Wall Street Journal, The LA Times, The New Yorker, People and GQ were made available on the platform.

iPad & Mac Details

iPad sales of $4.66 billion increased 16.9% year over year and accounted for 7.3% of total sales. The upside was driven by strong demand for iPad Pro.

In September, Apple introduced the seventh-generation iPad, offering more screen area and support for the full-sized Smart Keyboard. The company also released iPadOS in the reported quarter.

iPad sales grew across all geographic segments, with a fourth-quarter revenue record in Japan.

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

Apple quoted a recent survey report from 451 Research, which stated that overall consumer and business satisfaction was 95% and 97%, respectively, for iPad.

Mac sales of $6.99 billion decreased 4.8% from the year-ago quarter and accounted for 10.9% of total sales.

Globally, more than 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.

In October, Apple launched macOS Catalina, which also brought Apple Arcade to Mac. Apple stated that third-party developers like Twitter (TWTR - Free Report) and Post-it are bringing their iPad apps to the Mac App Store post the launch of Catalina.

Wearables’ Robust Performance

Wearables, Home and Accessories sales surged 54% year over year to $6.5 billion and accounted for 10.2% of total sales.

In September, the company launched Apple Watch Series 5 with the Always-On Retina display. The device powered by watchOS 6 comprises health and fitness features like Cycle Tracking, the Noise app and    Activity Trends. The ECG app is now available in 32 markets, including India.

Apple Gaining Traction Among Enterprises

Apple is gaining traction among enterprises, particularly end markets like financial services and banking.

The company stated that 80 of the largest 100 retailers, including brands like Burberry, Ralph Lauren, Sephora USA and Gap, are deploying Apple devices.

Moreover, the U.S. Census Bureau is set to use Apple devices for next year’s census.

Operating Details

Gross margin contracted 30 basis points (bps) on a year-over-year basis to 38%, which was within management’s guidance of 37.5-38.5%.

Operating expenses increased 9.1% year over year to $8.69 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses, which grew 9.6% and 8.6%, respectively. The operating expenses figure was close to the lower end of management’s guidance of $8.7-$8.8 billion.

Operating margin contracted 120 bps on a year-over-year basis to 24.4%.

Balance Sheet & Cash Flow

As of Sep 30, 2019, cash & marketable securities were $205.89 billion compared with $210.61 billion as of Jun 30, 2019.

Term debt as of Sep 30 was $102.07 billion, up from $98.47 billion as of Jun 30.

Cash flow from operations was $19.9 billion in the fourth quarter.

Apple returned more than $21 billion in the reported quarter through dividend payouts and share repurchases.

Moreover, the company declared a cash dividend of 77 cents per share to be payable on Nov 14, 2019, to shareholders of record as of the close of business on Nov 11.

Guidance

For first-quarter fiscal 2020, revenues are projected between $85.5 billion and $89.5 billion. Apple expects foreign exchange volatility to hurt the top line by $1 billion.

The Zacks Consensus Estimate for first-quarter sales is pegged at $86.18 billion.

Gross margin is expected to be 37.5-38.5%, while operating expenses are projected to be $9.6-$9.8 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.

Zacks Rank & Stocks to Consider

Apple currently carries a Zacks Rank #3 (Hold).

Digital Turbine (APPS - Free Report) and Dropbox (DBX - Free Report) are a couple of better-ranked stocks in the broader computer and technology sector. Both stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Digital Turbine and Dropbox are expected to report on Nov 4 and 7, respectively.

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