Notes of interest from Apple's Q4 2018 earnings report and conference call

AppleInsider · January 29, 2019 9:39PM

Following the publication of its first fiscal quarter of 2019 results, encompassing the holiday season, Apple provided additional detail surrounding the decline of sales in China, as well as more information about the Services business in an earnings conference call.

Apple CEO Tim Cook and CFO Luca Maestri

The numbers: Apple's revenue for the first quarter of the 2019 fiscal year hit $84.3 billion for the crucial holiday quarter, and Apple has for the first time broken out more details of the Services component.

Participating in Thursday's call were Apple Chief Executive Tim Cook and Chief Financial Officer Luca Maestri.

Highlights from the call

Apple posted quarterly revenue of $84.3 billion, a decline of 5 percent from the year-ago quarter, and quarterly earnings per diluted share of $4.18, up 7.5 percent.
International sales accounted for 62 percent of the quarter's revenue.
Services revenue reached an all-time high of $10.9 billion.
1.4 billion active devices.
Apple's board of directors has declared a cash dividend of $0.73 per share of the Company's common stock.
Revenue from iPhone declined 15 percent from the prior year, while total revenue from all other products and services grew 19 percent.
Revenue from Mac and Wearables, Home and Accessories also reached all-time highs, growing 9 percent and 33 percent, respectively.
Revenue from iPad grew 17 percent.
For FY2019 Q2, Apple is predicting revenue between $55 billion and $59 billion.
Observation: AAPL is up $5 on the news, nearly instantaneously
China dropped 26.7% YoY from last year. Europe down 3.3%, Japan down 4.5%, US up 5.0%

Apple's fiscal first quarter 2019 quarterly revenue and gross margin

Research and development is up $500 million from the year-ago quarter
Net income is $100 million less than the year-ago quarter, at $19.965 billion versus $20.065 billion
Apple CEO Tim Cook to CNBC on January so far: "As we got into January, things have improved...from where they ended in December and that gives us some optimism. Of course you don't know what will continue but I would also point out that seems to map to trade tension as well, that there is a bit more optimism in the air in January, or certainly I feel that anyways. I'm encouraged by the comments coming out of both countries."
Cook to Reuters on January so far: "When you look at foreign currencies and then particularly those markets that weakened over the last year those (iPhone price) increases were obviously more. And so as we've gotten into January and assessed the macroeconomic condition in some of those markets we've decided to go back to more commensurate with what our local prices were a year ago in hopes of helping the sales in those areas."

Quarterly iPhone revenue

Services revenue over time

Cook: More than 2/3 of customers in China with an iPad or Mac were buying for the first time.
Cook: Business in China on a year-over-year comparison is up.
Cook: Outside of iPhone, business grew by 19%.
Cook: Three factors to iPhone sales volume drops: Foreign exchange, subsidies less common internationally, battery replacement program.
1.3 billion active devices in beginning of January 2018 grew to 1.4 billion at end of December 2018.
Highest quarterly music revenue ever, with 50 million paid subscribers.
$322 million spent on App Store on New Years Day alone.
1.8 billion Apple Pay transactions in the holiday quarter.
Deutschebank reports more Apple Pay activations in Germany in a week, comparable to any Android service in a year.
33% in wearables, home, and accessories, with 50% growth in wearables alone.
Cook on keys to success: satisfied customers, growing and strong install base, culture of innovation.
Cook "Confident as ever in the fundamental strength of our business."
Apple Chief Financial Officer Luca Maestri: Products gross margin 33.4%, Services 62.8%
Maestri: 900 million iPhones active currently, growth of 75 million in last year alone, this data point will be updated periodically
Maestri: On track to double 2016 services revenue by 2020.
Maestri: Over 360 million paid subscriptions across App Store, increase of 120 million from year ago
Maestri: Largest of 30,000 subscription apps, largest is 0.3 percent of revenue from subscription apps (likely Netflix - MW)
Maestri: Half of both Mac, iPad purchasers in the holiday quarter were new to the hardware
Maestri: Wearables approaching Fortune 200 company status
Maestri: iPhone trade-ins doubled YoY
AppleInsider observation: AAPL is up almost $10 halfway through the conference call
Question and answer time!
Q: context for slight growth rate reduction in Services.
Maestri contextualizes, amortization of free services now under Services, and was previously under "Products." Reclassification reduces growth rate.
Reclassification is about 1/3 of the deceleration of growth. Without reclassification, growth rate is 24.3 percent, versus 19 percent reported
Holdup on review of games in China caused impact to Services as well
Q: How does economy, share price impact stock buyback?
Maestri: Buyback continues in a "rational" fashion. "Optimistic about out future, and think there is great value in our stock."
March earnings report will add more detail to stock buyback future
Q: What has Apple learned about iPhone price elasticity, based on complaints of high pricing
Cook: In essence, pricing is comparable to 2017 releases in the US. Foreign exchange is a problem.
Cook: In January, in some markets, part or all of foreign exchange absorbed by pricing changes
Cook: "Yes, price is a factor" and "In some markets ... the subsidy is the bigger of the issues in the developed markets"
Q: Request for more information on iPhone average selling price year-over-year was effectively denied.
iPhone XR most popular, followed by XS Max, then XS.

Revenue from the Mac over time

Q: Will device longevity increase over time, given Apple's policies?
Cook: Hand-me-downs and trade-ins are a result of device longevity, "Making a great product that is high-quality is the best thing for the user"
Q: What's driving Services growth and gross margins?
Maestri: Services is a business that is growing nicely, good support from scale. Broad portfolio of services, with different margins inside
Q: What about video? Content plus iTunes on Samsung TV
Cook: "Huge changes in customer behavior taking place now, and we think it will accelerate as the year goes by" in regards to thin bundling
Cook: "We're going to participate in that in a variety of ways."
Cook cites Apple TV and AirPlay 2 to get into that kind of thing, plus third-party subscription revenue
Cook on original content: "We will participate in the original content world" -- but not extending that conversation today

Apple concluded the call at 5:58 P.M. Eastern Time. Coverage of the earnings results and conference call will continue on AppleInsider for the remainder of the week.

mdriftmeyer · January 29, 2019 9:58PM

Apple's board of directors has declared a cash dividend of $0.73 per share of the Company's common stock. Wake me when it goes up to where it should be, $2/share.

applejakes · January 29, 2019 10:08PM

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

jimh2 · January 29, 2019 10:12PM

iPad keeps jugging along too.

jhart376 · January 29, 2019 10:12PM

Someone had a good point about the buybacks. They noted that they likely had to stop buying for a period of time when they knew sales were off before and perhaps shortly after the announcement as that could have been a form of insider buying.

chasm · January 29, 2019 10:17PM

IOW, once the self-inflicted trade war is over Apple will go back to being the top dog in the tech world, and indeed weathered this crisis far better than its competitors (exhibit A, Samsung). Although investors should keep a close eye on (and pressure on their Congresspeople) the trade situation with China, in nearly every other possible area of the company, growth is still happening at an astonishing pace -- the increase in services alone almost made up for the drop in iPhone in China, though of course iPhones are more profitable than services in the short term.

applejakes · January 29, 2019 10:30PM

jhart376 said:

Someone had a good point about the buybacks. They noted that they likely had to stop buying for a period of time when they knew sales were off before and perhaps shortly after the announcement as that could have been a form of insider buying.

If that is the case hopefully they waited until after they lowered guidance where the average was $150ish as opposed to $180+.

focher · January 29, 2019 10:39PM

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

Apple has pretty much never used its cash for buybacks. It has issued low yield bonds to fund them.

eightzero · January 29, 2019 11:12PM

jhart376 said:

Someone had a good point about the buybacks. They noted that they likely had to stop buying for a period of time when they knew sales were off before and perhaps shortly after the announcement as that could have been a form of insider buying.

Pretty sure Apple has lawyers; and that the corporate decision makers listen to them carefully.

asdasd · January 29, 2019 11:16PM

jhart376 said:

Someone had a good point about the buybacks. They noted that they likely had to stop buying for a period of time when they knew sales were off before and perhaps shortly after the announcement as that could have been a form of insider buying.

After the announcement the information was public, before the announcement buying would have not been to their advantage given what they knew. I don’t think buybacks are subject to these rules anyway.

applejakes · January 29, 2019 11:29PM

focher said:

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

Apple has pretty much never used its cash for buybacks. It has issued low yield bonds to fund them.

They have been since the cash repatriation. All of last year. Their goal is to be net cash neutral. That is going to take a lot of buying back and div increases over the next 4-5 years.

6502 · January 29, 2019 11:29PM

focher said:

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

Apple has pretty much never used its cash for buybacks. It has issued low yield bonds to fund them.

That was only because a majority of its cash was not in the US and it was cheaper to issue bonds than pay taxes. Now that the tax rate was reduced, Apple has repatriated much of its foreign cash.

6502 · January 29, 2019 11:30PM

chasm said:

IOW, once the self-inflicted trade war is over Apple will go back to being the top dog in the tech world, and indeed weathered this crisis far better than its competitors (exhibit A, Samsung). Although investors should keep a close eye on (and pressure on their Congresspeople) the trade situation with China, in nearly every other possible area of the company, growth is still happening at an astonishing pace -- the increase in services alone almost made up for the drop in iPhone in China, though of course iPhones are more profitable than services in the short term.

You honestly think China was treating us fairly (and legally)? We finally bloodied the nose of the bully.

ramanpfaff · January 30, 2019 12:01AM

mdriftmeyer said:

Apple's board of directors has declared a cash dividend of $0.73 per share of the Company's common stock. Wake me when it goes up to where it should be, $2/share.

That would be pretty big for a company that still has room for growth (IMO). If they up it $0.83 in March I'd be very happy. If it was up to $2 I'd retire. But I'm guessing $0.80 or $0.81. After the 16% jump last year, not sure if they want to go as high this year.

joebloggs · January 30, 2019 1:25AM

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

They were probably avoiding insider trading charges by avoiding buying when they had information not available to the general public.

mdriftmeyer · January 30, 2019 2:08AM

ramanpfaff said:

mdriftmeyer said:

Apple's board of directors has declared a cash dividend of $0.73 per share of the Company's common stock. Wake me when it goes up to where it should be, $2/share.

That would be pretty big for a company that still has room for growth (IMO). If they up it $0.83 in March I'd be very happy. If it was up to $2 I'd retire. But I'm guessing $0.80 or $0.81. After the 16% jump last year, not sure if they want to go as high this year.

Broadcom has $1.81/share. Apple has nothing but large growth ahead and stock piling the cash sure as shit doesn't benefit the shareholders like the repatriation rejects wanted. The Netflix division alone could be worth $100 billion in 3 years.

Folio · January 30, 2019 3:20AM

Strange call, started late and ended early. Not as wide variety of analysts. No Goldman, Merrill, etc. Pretty flat. But yes, I liked Cook’s emphasis on the long term, acknowledging some quarter calls may be like trips to the dentist. But hey, like the dentist, no bad news turns out to be a relief (and an after hours rally)

retrogusto · January 30, 2019 3:49AM

Folio said:

Strange call, started late and ended early. Not as wide variety of analysts. No Goldman, Merrill, etc. Pretty flat. But yes, I liked Cook’s emphasis on the long term, acknowledging some quarter calls may be like trips to the dentist. But hey, like the dentist, no bad news turns out to be a relief (and an after hours rally)

I think fewer analysts got to ask questions because Katy Huberty’s question at the beginning got the longest answer I think I’ve ever heard on one of these calls. And maybe they stopped a couple of minutes early because one more question would have put them past the 6pm ending time, unless it was a really simple one. But yes, the call was also a little “different” in general, probably because they felt they needed to do more than usual to set uneasy minds at rest.

And on a different note, I have to say that I’m really glad we have sites like AI, which can have a lot of typos but for the most part gets the important stuff right. It’s so annoying to look at all of the crappy financial reporting elsewhere, even sites like NY Times that have fact-checking departments but often get small facts and big conclusions wrong.

linkman · January 30, 2019 3:53AM

joebloggs said:

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

They were probably avoiding insider trading charges by avoiding buying when they had information not available to the general public.

Anyone at Apple that can authorize billions of dollars of buybacks will know information at all times that isn’t available to the general population. I’m fairly certain this is exempt from insider trading rules.

Latko · January 30, 2019 8:42AM

applejakes said:

focher said:

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

Apple has pretty much never used its cash for buybacks. It has issued low yield bonds to fund them.

They have been since the cash repatriation. All of last year. Their goal is to be net cash neutral. That is going to take a lot of buying back and div increases over the next 4-5 years.

Better use piles of unused cash for a replacement of a (carrier) subsidy plan - instead of only complaining about it

asdasd · January 30, 2019 1:10PM

joebloggs said:

applejakes said:

Apple only spent $8.2 billion this quarter on buy backs after spending an average of $21 billion the last 3 quarters. Could they be stockpiling money for a purchase? If not it was a gross misuse of cash to not throw a huge amount at buy backs this quarter. Something along the lines of $25+ billion.

They were probably avoiding insider trading charges by avoiding buying when they had information not available to the general public.

Does that make any sense? The information they had was such that stock prices would likely fall. So if any insider trading law applied to these buybacks then it would apply as they didn’t lose out in buying what they would have known (exclusively) before the announcement to be overvalued shares.

but of course insider trading can’t apply to buybacks as companies always have inside information about themselves and yet its legal.

Notes of interest from Apple's Q4 2018 earnings report and conference call

Highlights from the call

Comments