The ongoing struggle for Apple Inc. (NASDAQ:AAPL) has been how to turn AAPL from a company that relies on the iPhone for two-thirds of its revenue into a more diversified firm. While freeing up $200 billion in foreign-parked cash will help AAPL stock, the focus right now is on earnings.
Apple Earnings
The current source of concern for AAPL is iPhone X production. Rumors abound that AAPL had to cut its production run by 50%. The quarter, however, delivered a nice increase of 6.4% year-over-year to 77.3 million units, generating about $61.6 billion in revenue.
That’s accounting for 14 weeks last year vs. 13 weeks this year. On a sequential basis, iPhone sales rose 66% from 46.67 million units.
In short, the iPhone is still growing at a phenomenal rate.
That may be because AAPL is doing something I personally love — it kept around the iPhone 6 and 7 versions at discounted prices. I hate buying a $1000 phone, so by keeping these versions alive, I suspect Apple is grabbing some market share from competitors like Android. Users who have thought about trying the iPhone may be willing to buy a discounted model to test it out.
iPad sales were up 8.4% YOY to 13.1 million units, with desktop sales up 2.4% to 5.11 million units. The iPad had a big system update in September that I imagine drove some sales.
We also have the Apple Watch to deal with. I am frustrated that AAPL management will tell us everything about its other products but not about the watch.
Okay, other product revenues were up 36%, but that tells me that sales are disappointingly low. The watch along with Apple TV and accessories and the iPod generated “other revenue” of $5.49 billion, but when I don’t hear that watch number, I get antsy.
Everyone seemed worried about China, but the consensus was about $17.6 billion, up 9% YOY. China came in at $17.96 billion, up 11%.
Service revenue is the number I wanted to see the most, as AAPL stock needs to diversify its revenue stream. Getting to the guesstimated $8.7 billion meant a 21% increase, but revenue only came in at $8.47 billion, still up a very respectable 18%.
Overall, revenue rose 13% to $88.3 billion, and EPS was up 14% to $3.89 per share, beating expectations by three cents. The AAPL CEO guided Q2 revenue to $60-62 billion, and that’s down from the $65.73 billion that was estimated, which means fewer iPhones as mentioned.
How Will AAPL Use Cash From Tax Reform?
Finally, there is the question of all that repatriated cash. Apple needs different revenue streams, and the obvious move is a series of acquisitions — but of what?
I totally ignore suggestions regarding Tesla Inc (NASDAQ:TSLA) because it’s a con man’s money pit; Netflix, Inc. (NASDAQ:NFLX) because it is far too expensive, and Apple can build its content program from the ground up; and Walt Disney Co (NYSE:DIS) because it just makes no sense.
The company said:
“Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is 163 billion, and given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral over time. We will provide an update for our specific capital allocation plans when we report our second fiscal quarter, consistent with the timing of updates we have provided in the past.”
So we will find out soon enough how Apple management will use that mountain of cash.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
