Apple (AAPL) Shares Up On Q3 Earnings & Revenue Beat

Apple Inc. (NASDAQ:AAPL) posted better-than-expected results for both earnings and revenues in the third quarter of fiscal 2016. As a result, shares were up nearly 7% in the after-hours trading session yesterday.

Earnings of $1.42 per share surpassed the Zacks Consensus Estimate of $1.39, though it came 23% below the prior-year quarter figure.

Revenues of $42.4 billion were also above the Zacks Consensus Estimate of $41.8 billion but declined 14.6% from the year-ago quarter.

Product Details

Apple iPhone unit sales came in at about 40.4 million, down 15% year over year. Revenues from iPhone also fell 23% from the year-ago quarter to a little over $24 billion (57% of total revenue). Nonetheless, the number of units sold was greater than anticipated, which boosted investors’ confidence.

Nearly 9.95 million units of iPad were sold in the quarter, generating revenues of $4.9 billion. Revenues increased 7% year over year despite a 9% drop in unit sales.

Apple Mac unit sales declined 11% year over year to approximately 4.3 million, while revenues dropped 13% from the prior year quarter to $5.2 billion.

Services, which includes revenues from Internet Services, AppleCare, Apple Pay, licensing and other services, surged 19% year over year to nearly $6 billion.

Other products, which includes revenues from Apple TV, Apple Watch, Beats products, iPod and Apple-branded and third-party accessories, declined 16% year over year to over $2.2 billion.

Geographical Performance

Demand for Apple’s products remained soft across most of the geographical regions except Japan. As much as 63% of sales were from the International markets.

Americas (the biggest market for Apple) generated revenues of approximately $18 billion in the quarter, down 11% year over year.

Europe generated nearly $9.6 billion in revenues, down 7% on a year-over-year basis.

Owing to persistent macroeconomic weakness, Apple revenues declined around 33% year over year in the Greater China region to $8.8 billion.

Japan was the only market for Apple this quarter that registered year-over-year growth in sales. Revenues of $3.5 billion rose 23% over the prior-year quarter, though it came in 18% below the last quarter.

In the rest of Asia Pacific, the company reported revenues of $2.4 billion, down 24% year over year.

Margins

Gross margin was 38%, a decline of 170 basis points (bps) from the year-ago quarter. Lower average selling price of Apple devices (especially iPhone) was one of the key reasons for the reduced margins.

Operating expenses increased 7.2% year over year to $6 billion due to higher research & development expenses. As a result, operating margin plunged 930 bps from the year-ago quarter to 23.9%.

Balance Sheet and Cash Flow

Apple’s cash and cash equivalents (and short-term marketable securities) were $61.7 billion at the end of the quarter, compared with $41.6 billion as on Sep 26, 2015. Long-term debt was $68.9 billion compared with $53.5 billion at the end of fiscal 2015.

For the quarter, cash generated from operating activities was $10.6 billion.

Apple returned about $13 billion in capital returns this quarter though dividends and share repurchases (including the launch of an Accelerated Stock Repurchase program).

The company also declared its quarterly dividend of 57 cents per share payable on Aug 11 to shareholders of record as on Aug 8.

Guidance

For the fourth quarter of fiscal 2016, Apple forecasts revenues in the range of $45.5 billion to $47.5 billion.

Gross margin is expected within 37.5% to 38%, while operating expenses are projected within $6.05 billion to $6.15 billion. Other income/ (expense) is likely to be $350 million, while tax rate is expected to be 25.5%.

Our Take

Better-than-expected iPhone sales have definitely come as a respite. The company is also seeing strength in the number of switchers from Android and other operating systems to iOS.

But the macroeconomic headwinds remain for now, especially in China, one of the high-growth regions for Apple. Competition is also mounting in most of the markets in which Apple operates.

Nonetheless, Apple is optimistic about the long-term growth prospects in regions like China and India. The expected launch of newer devices in the current quarter will also open more avenues for the company’s growth.

Apple’s Services business is also expected to remain strong as it is mostly dependent on the already installed Apple devices. Also, in the long run, Apple is expected to benefit from its robust cash position, strength in technology and the ecosystem that it has built, given its loyal customer base. Further, its enterprise collaborations with the likes of IBM Corp. (NYSE:IBM) , Cisco (NASDAQ:CSCO) and SAP SE (TO:SAP) are expected to be important long-term growth drivers.

Currently, Apple has a Zacks Rank #4 (Sell), but it could change in the event of estimate revisions following its earnings announcement.