Apple Slides After Iphone Sales Drop, Revenues Miss, China Sales Disappoint

With Apple trading at all time highs (and with a quarter trillion in cash on the books), the market was wondering if AAPL can once again surprise to the upside as well as guide what it plans to do with its cash hoard.It tried, but it couldn't quite get there.

Apple reported Q2 earnings which while beating on the bottom line, missed on revenue, and also missed on iPhone sales, as Apple sold 50.8 million iPhones, below the 51.4 million expected, and also down 0.8% from a year ago, and also missed on ASPs while Chinese revenues disappointed once again declining by 14% Y/Y. The company also forecast $43.5 billion to $45.5 billion in revenue for the current quarter, below analysts’ estimates of $45.7 billion.

Earnings of $2.10 were higher than the $2.01 expected, on revenue of $52.9 billion, which missed expectations of $53.4 BN expected, although still 4.9% higher than a year ago.

While sales grew across the globe as usual, revenue in China declined by 14% in the quarter, the 5th consecutive quarterly decline in a row.

The results in a nutshell:

Q1 EPS: $2.10 Exp. $2.02
Q1 Revenue: $52.9, Exp. $53.1Bn
Gross margin: 38.9%, just above the Exp. 38.3%
iPhone unit sales: 50.8 milion, Exp. 51.4 million. iPhone sales generated $33.2 billion in revenue, 63 % of total.
iPhone average selling price: $655 , Exp. $666

Putting Apple's numbers in context: in Q1 2017 iPhone sales generated 63% of the company's total revenue, down from 69% last quarter but well above the 2.5% in Q1 2008.

Apple also provided the following guidance for its fiscal 2017 second quarter:

revenue between $43.5 billion and $45.5 billion, below the exp. $45.7BN
gross margin between 37.5 percent and 38.5 percent, in line with the exp. 38.3%
operating expenses between $6.6 billion and $6.7 billion

Tim cook was predictably happy:

“We generated strong operating cash flow of $12.5 billion and returned over $10 billion to our investors in the March quarter,” said Luca Maestri, Apple’s CFO. “Given the strength of our business and our confidence in our future, we are happy to announce another $50 billion increase to our capital return program today.”

Some more silver lining: Tim Cook has sought to highlight Apple’s services business, the fastest growing part of the company last year. Sales of offerings like iCloud, the App Store and Apple Music grew 18% to $7.04 billion in the quarter (or about 13% of total revenue) however declined modestly from last quarter. Apple said earlier this year that it aims to double annual services revenue to more than $50 billion by fiscal 2021.

Shareholders, however, were more focused on the iPhone sales number and the stock slid afterhours.

Perhaps to assuage their pain, Apple also announced that its Board of Directors has authorized an increase of $50 billion to the Company’s program to return capital to shareholders and is extending the program timeframe by four quarters. Under the expanded program, Apple plans to spend a cumulative total of $300 billion by the end of March 2019.

The company also said that as part of the latest update to the program, the Board has increased its share repurchase authorization to $210 billion from the $175 billion level announced a year ago.

The result in chart format:

While Apple Net Income grew 4.9% Y/Y, a more troubling metric was the modest 0.8% decline in iPhone sales in Q2.

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Q2 Revenue of $52.9 billion missed expectations of $53.1 billion.

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Product sales: the biggest red flag, was the decline in iPhone sales.Apple also announces it sold 8.9 million iPads in Q217, a 13% drop from the 10.3 million units in the year-ago quarter.Apple also said it sold 4.2 million Macs in Q217, compared to 4.034 million units in the year ago quarter. This represents 4% year-over-year unit sales growth.

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Regional breakdown: sales grew in every region expect China where they declined by 14%

Finally, while the company's record cash hoard grew once more, rising to $256 billion total, the cash number net of debt actually declined modestly to $158 billion. As a reminder, most of this cash remains locked outside of the US.