Revenue in-line to slightly better than expected
Apple reported June quarter revenue of $42.4 billion, down 15% year over year, vs. the Street’s $42.1 billion projection and guidance of $41 to $43 billion. This was the first quarter in the past three where it exceeded the mid-point of its revenue guidance but the year over year percentage decline is still larger than the March quarter’s 13%. However when you take into account the $3.6 billion channel inventory reduction and about $500 million in last year’s June quarter the revenue decline would have been 8%. Still down but at least better optically.
Gross margin hit by stronger dollar
Gross margin of 38.0% was at the top end of Apple’s 37.5% to 38.0% guidance. This is positive but it is still down from the 39.7% a year ago and from the 39.4% in the March quarter. However there were some one-time impacts including the channel inventory reduction being largely higher margin iPhones. Also Luca Maestri, Apple’s CFO, commented that the stronger dollar negatively impacted gross margins by almost 300 basis points year over year. When you adjust for this the reported $1.42 of EPS would have been $1.66.
EPS helped by a lower share count
Apple reported $1.42 in EPS, down 23% year over year, which was above the Street’s $1.38 and coming very close to the high-end of an estimated guidance range of $1.31 to $1.43. It was the second quarter in a row of lower EPS year over year and was a steeper drop than the March quarter’s 18%. The share count decreasing by 5% helped EPS as operating income was down 28% year over year in the June quarter. As I mentioned above the stronger dollar impact on gross margins hurt EPS by $0.24. EPS would still be down 10% so not as bad but still lower.
iPhones did fine to very well, depending on how you look at the numbers
Apple “sold” 40.4 million iPhones in the quarter, which was down 15% year over year, the second quarter in a row of declining unit sales. However when adjusted for a 4.1 million unit channel inventory reduction the year over year decline would be 8% vs. last quarter’s 14%. Management expects the adjusted decline to be less in the September quarter but I don’t expect it to become positive unless the iPhone 7 does better than expected. Note that Tim Cook announced that the company has now sold over 1 billion since they were introduced in 2007.
Source: Apple
Analysts were expecting just under 40 million iPhones to have been sold per a compilation from Apple 3.0 so they did beat expectations by a little or a lot. A little would be when using the reported 40.4 million and a lot would be when the channel inventory change is included or 44.5 million units. I suspect most analysts were expecting channel inventory to decline some but by not nearly this much. Management said that channel inventory was at the low-end of the company’s 5 to 7 week guideline at the end of the quarter which is overall positive.
The iPhones’ ASP or average selling price fell below $600 to $595 for the first time since the June 2014 quarter and was down from $691 in the December 2015 quarter and $642 in the March quarter. The stronger dollar took $20 off the price of each iPhone or $800 million in revenue and $0.06 in EPS. With the bleed off of higher priced iPhones out of the channel inventory Apple expects the ASP to rebound in the September quarter.
iPads did much better than expected
Analysts were forecasting 8.9 million iPads to have been sold and the company moved almost 10 million, 9,95 million to be exact. Combined with an ASP of $490, up $60 from last quarter’s $430 the iPad’s revenue of almost $4.9 billion was over a billion dollars higher than what was projected. While units declined by 9% year over year this was better than the double digit unit declines of the past seven quarters. And revenue showed positive growth of 7% for the first time in 10 quarters.
Macs largely as expected
Mac units of 4.25 million were slightly below the Street’s estimate of 4.36 million and were down 11% year over year, the third quarter in a row of declining unit sales. Revenues of $5.2 billion were down 13% year over year and were slightly higher than the iPads revenue. When you add the iPad and Mac revenue they were almost 25% of the total company revenue.
Services providing a bit of stability and nice growth
Services continued its strong growth at 19% year over year to just under $6 billion for the quarter fueled by the App Store’s growth rate accelerating for four consecutive quarters to 37% year over year. For the first three quarters Services generated 11% of total revenue, up from 8% a year ago (but helped by declining total revenue) and its profitability is higher than the company average.
Watch is hanging in there
While there weren’t any details provided on Apple’s Watch there was one positive datapoint in that the category it is in (Other Products) had its revenue increase slightly to $2.22 billion from the last quarter’s $2.19 billion. The significance is that I would have expected Watch sales to decline sequentially and since they make up about 35% to 40% of the segments revenue a decline in Watch sales would show up in the categories total revenue.
Europe better than expected while Greater China fell off a cliff
Apple’s European revenue of $9.6 billion was down 7% year over year but was better than the company’s total revenue decline of 15%. However the US dollar was weaker during the quarter and when you remove Greater China’s revenue the rest of the company saw its revenue decline by 8%.
Greater China’s $8.8 billion in revenue declined 33% year over year which was an acceleration from 26% in the March quarter. However management said by far the largest portion of the channel inventory reduction was in this region. If you assume $2.5 billion of the $3.6 billion was from here the revenue decline would have been only 14%.
Guidance is a bit better than expected but not by much
Revenue guidance of $45.5 to $47.5 billion is up 9% at the mid-point quarter to quarter and the percentage increase is higher than the 0.5%, 2.9% and 0.8% increases seen the past three years, respectively. It is a bit higher than the Street’s $45.8 billion expectation. However when taking into account the $3.6 billion of reduced channel inventory the increase from June’s adjusted $46 billion in revenue would mean the September quarter’s revenue guidance mid-point would be slightly down quarter to quarter.
Gross margin guidance of 37.5% to 38.0% mirrors the June quarter’s and is slightly disappointing since not having the impact from a channel inventory correction should mean it would move higher. Note that September quarter’s gross margin guidance has a 50 basis point range which is the third quarter in a row of being this narrow. For the previous 12 quarters it had been a 100 basis point range. Either management is getting better at projecting what it will be, is pulling various levers during the quarter to hit it such as warrant accruals or wants to give better visibility so that analyst estimates are more accurate.
After making an assumption for September quarter’s share count (I’m using 5.41 billion down 60 million from the June quarter) you can estimate the quarter’s EPS. Using the revenue, gross margin, operating expenses, other income and tax rate guidance the range I come up with is $1.56 to $1.68 which nicely brackets the Street’s $1.61. Even if Apple hits the high-end it would still be lower than last September’s $1.85 in EPS.
