Analysts review Apple Inc. (NASDAQ:AAPL)’s recent earnings report, and though iPhone sales disappointed, they look beyond them to see a healthy EPS, good margins, and strong cash flow.
Apple earnings ahead of estimates
Apple Inc. (NASDAQ:AAPL) reported fiscal 1Q14 EPS (December quarter) of $14.50, which was ahead of our estimate of $13.88, and consensus of $14.09, helped by higher-than- expected gross margins. Revenue of $57.6 billion beat our estimates by almost $800 million as iPhone ASPs were much higher than expected (iPhone revenue beat), and China significantly outperformed expectations ($2 billion beat vs. our estimates, growth rate of 29% y/y). iPhone shipments of 51 million were well below our estimate of 55 million and below consensus of 55 million – the clear negative from today’s report – and likely due to a very weak reception for the iPhone 5C. iPad shipments of 26 million were about 1 million units ahead of our expectations, helped by the new iPad Air and iPad mini with retina display (consensus was 25 million). Gross margin of 37.9% was better than our estimate of 37.2% and the consensus of 37.3% helped by the iPhone mix. Apple also generated very strong free cash flow of $20.7 billion or nearly $23/share and bought back over $5 billion in stock in the December quarter.
Apple Inc. (NASDAQ:AAPL) set expectations for the March quarter below Street expectations but basically in line with our preview (we note Apple is usually quite conservative). For fiscal 2Q14 (C1Q), Apple expects revenue of about $42 billion-$44 billion vs. current consensus of $46.0 billion – representing a sequential decrease of 25% likely given lower iPhone unit run rates. Apple guided for gross margin of 37%–38%, compared to consensus of 37.3%, operating expenses of $4.3 billion–$4.4 billion, other income of $200 million and a tax rate of 26.2%. At the midpoint, we believe this suggests an earnings-per-share outlook of around $9.80, compared to consensus of $10.93. At first blush, the guidance seems conservative given potentially better mix in the March quarter.
Apple still benefiting despite the negative reaction from iPhone sales
In short, we would have liked to have seen a better iPhone figure but believe investors are likely to appreciate the cash flow and new product potential long term. We need to know from management on the 5PM call how iPhone channel inventory is tracking and whether it faced iPhone production constraints in the quarter. While we expect a short-term negative reaction to the earnings given the iPhone unit figure, Apple Inc. (NASDAQ:AAPL) does still seem to be benefiting as a “premium” brand and is generating significant excess cash. We believe shares are likely to find support in the low $500s at this point, with the potential to move higher later in the year if Apple could add to its capital return pace and anticipation builds around new products in the fall that could include 2 new and larger iPhones along with a new and larger iPad. We also believe investors will eventually appreciate the growth rate in China – a key end market long term and note that Apple is one of the only companies we cover seeing upside at the moment in that region.
