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Apple (AAPL) Q1 Earnings Beat Estimates, Revenues Down Y/Y

AppleAAPL reported first-quarter fiscal 2019 earnings of $4.18 per share that beat the Zacks Consensus Estimate by a penny and increased 7.5% year over year.

Net sales decreased 4.5% year over year (3% when adjusted for foreign exchange) to $84.31 billion, which surpassed the Zacks Consensus Estimate of $84.07 billion.

Product sales (87.1% of sales) decreased 7.2% to $73.44 billion. Services (12.9% of sales) revenues increased 19.1% from the year-ago quarter to $10.88 billion.

Notably, total active installed base of devices grew from 1.3 billion at the end of January 2018 to 1.4 billion by the end of December, reaching a new all-time high for each of the main product categories. Moreover, non-iPhone business grew 19% year over year.

Geographical Performance

As anticipated earlier, Greater China (15.6% of sales) sales plunged 26.7% from the year-ago quarter to $13.17 billion. The decline was across the board, including iPhone, Mac and iPad.

On the positive side, Apple stated that services revenues in Greater China hit record level. The country currently has 2.5 million registered iOS developers. Wearables business revenues jumped more than 50%.

Apple Inc. Price, Consensus and EPS Surprise

Apple Inc. Price, Consensus and EPS Surprise | Apple Inc. Quote

Moreover, total active installed base grew on the addition of new customers. The company stated that more than two-thirds of all customers in China who bought a Mac or an iPad were first time purchasers of the products.

The Americas (43.8% of sales) generated revenues of $36.94 billion in the quarter, up 5% year over year.

Europe (24.2% of sales) generated $20.36 billion in revenues, down 3.3% on a year-over-year basis.

Revenues from Japan (8.2% of sales) fell 4.5% year over year to $6.91 billion.

Rest of Asia-Pacific (8.2% of sales) generated revenues of $6.93 billion, up 1.1% year over year.

Moreover, Apple report ed double-digit revenue growth in Germany, Spain, Poland, Mexico, Malaysia and Vietnam.

iPhone Details

iPhone sales declined 15% from the year-ago quarter to $51.98 billion and accounted for 61.7% of total sales. The sales figure lagged the consensus mark of $52.27 billion.

iPhone XR was the most popular model in the quarter, followed by iPhone XS Max and iPhone XS.

Top-line growth was negatively impacted by weakness in Greater China and emerging economies. Lower upgrades at developed nations also hurt revenues. Apple stated that a better battery condition due to its battery replacement program has enhanced the lifecycle of older models that negatively impacted upgrades. This along with lower carrier subsidies affected iPhone sales.

Global active installed base of iPhones surpassed 900 million. Apple quoted a latest survey report from 451 Research, which stated that customer satisfaction was 99% for iPhone XR, XS and XS Max combined. Per Kantar, "iPhone experienced a 90% customer loyalty rating for iPhone customers in the U.S. 23 points above the next highest brand measured."

Services Momentum Continues

Services - including revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services - increased 19.1% year over year to $10.88 billion and accounted for 12.9% of sales.

Apple has 360 million paid subscribers across its services portfolio. The company stated that more than 30,000 third-party subscription apps are available on the App Store. Moreover, the largest of them accounts for only 0.3% of Apple's total Services revenues.

Further, Apple Music has now more than 50 million paid subscribers.

Cloud services revenues surged more than 40%. Apple News now has more than 85 million monthly active users (MAUs) in the United States, the U.K. and Australia.

Per the latest data from Comscore cited by the company, Apple News has the largest audience of all news apps in the United States. Moreover, the first-ever bilingual launch of Apple News in Canada later this quarter is expected to boost international customers.

Apple Pay's transaction volume was 1.8 billion, more than twice the volume of the year-ago quarter. Rapid adoption is the major growth driver. Apple Pay is now accepted at nearly 3,000 Speedway locations. Moreover, Target, Taco Bell and Jack-in-the-Box stores will start accepting Apple Pay soon.

Apple Pay was launched in Germany, Belgium and Kazakhstan during the quarter and is now live in 27 markets around the world. Adoption in Germany was strong, with Deutsche Bank (DB) reporting more activation for Apple Pay in one week than for Android in an entire year.

Mac & iPad Details

Mac revenues of $7.42 billion increased 8.7% year over year and accounted for 8.8% of sales. Year-over-year growth was driven by robust sales of MacBook Air and Mac Mini launched in October.

Sales grew on a double-digit basis in a number of countries including the U.S., Western Europe, Central and Eastern Europe, Japan, Korea and South Asia.

iPad revenues of $6.73 billion jumped 16.9% from the year-ago quarter and accounted for 8% of sales. Year-over-year growth was driven by strong sales of the new iPad Pro in November.

Apple quoted a latest survey report from 451 Research, which stated that customer satisfaction was 94% for iPad overall, with iPad Pro models scoring as high as 100%.

Wearables, Home and Accessories' Robust Performance

Revenues from Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories jumped 33.3% year over year to $7.31 billion and accounted for 8.7% of sales.

Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased roughly 50% year over year.

Operating Details

Gross margin contracted 40 basis points (bps) on a year-over-year basis to 38%, which was within management's estimate of 38-38.5%. The decline was primarily due to unfavorable mix.

While product gross margin contracted 180 bps, services expanded 450 bps on a year-over-year basis.

Operating expenses increased 13.7% year over year to $8.69 billion on higher research & development (R&D), and selling, general and administrative (SG&A) expenses, which grew 14.5% and 13%, respectively. The operating expenses figure was almost in line with management's estimate of $8.7-$8.8 billion.

Operating margin contracted 210 bps on a year-over-year basis to 27.7%.

Balance Sheet & Cash Flow

As of Dec 29, 2018, cash & marketable securities were $245 billion compared with $237.1 billion as of Sep 29, 2018. Term debt was almost $102.8 billion and commercial paper outstanding was roughly $12 billion.

Cash flow from operations was $26.7 billion in the first quarter.

Apple returned about $13 billion in the reported quarter through dividends and share repurchases.

Guidance

For second-quarter fiscal 2019, revenues are projected between $55 billion and $59 billion. Apple expects $1.3 billion 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 $8.5-$8.6 billion.

Other income/(expense) is estimated to be $300 million, while tax rate is expected to be 17%.

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

Zacks Rank & Stocks to Consider

Apple currently carries a Zacks Rank #4 (Sell).

Twitter TWTR , ASGN Inc. ASGN and Wix.com WIX are better-ranked stocks in the broader computer and technology sector. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Twitter, ASGN and Wix.com are set to report quarterly results on Feb 7, 13 and 20, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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