(Image Credit: www.theregister.co.uk)
Apple Inc (NASDAQ:AAPL) released its 2016 third quarter results Wednesday. The company recorded revenue of $42.4 billion for the quarter, down 15% from $49.6 billion for the previous corresponding period. Net income was also down 27% for the quarter to $7.8 billion from $10.7 billion for the previous corresponding period.
Clearly the news was better that expected with the company’s share price jumping 6.5% to $102.95. The company’s share price has continued to rise over the past month, up 11.85% from $93.59 on June 28 this year.
Let’s take a quick look through the company’s third quarter 10Q to find out more…
Net sales decreased 15% or $7.2 billion during the third quarter of 2016 compared to the same period in 2015, primarily driven by lower unit sales and a reduction in the average selling price (“ASP”) for iPhone.
What is most obvious is drop in net sales and unit sales for the iPhone and the Mac. Net sales have dropped 23% to $24 billion, down from $31.4 billion for the previous corresponding period, and Mac net sales have dropped 13% to $5.2 billion down from $6 billion for the previous corresponding period. The good news is that net sales for the period rose for the iPad and Services up 7% and 19% respectively.
(Source: Company Reports)
In terms of Services Timothy Cook – Chief Executive Officer & Director said, “We saw tremendous performance from our Services businesses, which grew 19% to a June quarter record of $6 billion. The growth was broad-based, with App Store revenue up 37% to a new all-time high, in addition to strong increases in Music, iCloud, and AppleCare.”
“In the last 12 months, our Services revenue is up almost $4 billion year on year to $23.1 billion, and we expect it to be the size of a Fortune 100 company next year. Most of our terrific Services performance during the quarter was fueled by our active installed base of devices, with installed base-related purchases of $10.3 billion accelerating to 29% growth year on year.”
iPhone net sales and unit sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015. The Company believes the unit sales decline is due primarily to the acceleration of iPhone upgrades in 2015 and challenging market conditions around the world. ASPs for iPhone were lower year-over-year during the third quarter and first nine months of 2016 due primarily to a shift in the mix of iPhones.
(Source: Company Reports)
iPad net sales increased in the third quarter of 2016 compared to the same period in 2015 primarily due to higher ASPs for iPad driven by the launch of the 9.7-inch iPad Pro. iPad net sales decreased during the first nine months of 2016 compared to the same period in 2015 primarily due to lower unit sales and the effect of weakness in most foreign currencies relative to the U.S. dollar, partially offset by higher ASPs for iPad.
The Company believes the year-over-year decline in unit sales during the third quarter and first nine months of 2016 is due in part to a longer repurchase cycle for iPads and some level of cannibalization from the Company’s other products.
Regarding iPad sales Timothy Cook said, “We had our best iPad compare in 10 quarters, with revenue growing 7% thanks to the roll-out of the 9.7-inch iPad Pro. We’re proud to have the most exciting lineup of tablets and accessories in the world and exceptionally high customer satisfaction and engagement.”
“Our surveys also show that about half of iPad Pro purchases are buying them for work. iPad Pro is the ultimate upgrade for existing iPad users and the ultimate replacement device for customers switching from PC notebooks.”
Mac net sales and unit sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015 similar to the overall market contraction.
What is also obvious is the significant reduction in sales to Greater China. Greater China net sales decreased 33% during the third quarter, and first nine months of 2016 compared to the same periods in 2015 due primarily to lower net sales of iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar, partially offset by an increase in Services.
(Source: Company Reports)
Reductions in Channel Inventory
Timothy Cook reporting significant reductions in channel inventory saying, “Revenue of $42.4 billion was near the high end of our guidance range and gross margin of 38% was at the top of our guidance range. We achieved these results while reducing channel inventory by about $3.6 billion, significantly more than the $2 billion inventory reduction we had expected. So our sell-through was markedly greater than our sell-in.”
“iPhone accounted for the vast majority of the channel inventory reduction. iPhone unit sell-through was down just 8% year on year, an even greater improvement over the March quarter than we predicted, and we expect the September quarter sell-through comparison to improve further. We feel good about our channel inventory levels and believe they position us well for the months ahead.”
Share Repurchase
The Company utilized $10 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $3.2 billion during the third quarter of 2016. Additionally, the Company issued $1.4 billion of U.S. dollar-denominated and A$1.4 billion of Australian dollar-denominated long-term debt.
What Does the Future Look Like
In terms of Apple’s future, Timothy Cook is very positive saying, “But I’m very optimistic about the future because I see so many signs that are positive. I see an installed base that has gotten incredibly large. I see a switcher rate that is the highest ever. I see the smartphone itself, led by iPhone, becoming even more instrumental and important to people’s lives. It’s becoming essential.”
“And all of the things that are coming [both] in the fall, the things that we’ve announced that you can see with iOS 10, hopefully you’re running by now with the beta, those and other things make it even more instrumental. And AI even makes it even more and more. As the phone becomes more and more your assistant, it’s one of those that you’re not going to leave without it. And so I see all of those things as vectors that are incredibly positive.”
“I also really like what I’ve seen with the iPhone SE and the fact that it’s opening the door to customers that we weren’t reaching before and likely convincing some people to upgrade that wanted a smaller form factor but wanted to stay with iPhone, and so they were waiting for the iPhone SE. And so I see lots of positive things, and so that’s how I look at it.”
Valuation
Apple is still in our Large Cap 1000 Screener here at The Acquirer’s Multiple. The company currently has a market cap of $564 billion. With debt exceeding cash by $24 billion, that means Apple has an Enterprise Value of $588 billion. With Operating Earnings of $66 billion, that gives the company an Acquirer’s Multiple of 8.88 which is why its just in the screen at #30.
With an Acquirer’s Multiple of 8.88, a FCF/EV yield of 7% and a P/E of 11, the stock currently represents good value.
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