Apple's 2Q 2017: Declining Sales Vs. Operational EPS

Apple (AAPL) released 2Q FY2017 earnings that were a slight disappoint, despite the low bar of modest consensus expectations.

Revenue of $52.9b (+4.6% y/y) missed consensus by $190m, but was countered by better-than-expected EPS of $2.10.

Apple announced a $50b expansion of its buyback program (now $300b by March 2019), and raised its dividend from $0.57/share to $0.63/share.

Apple is now sitting on $256.8b in cash ($239.6b of which, or 93%, is stuck overseas).

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On 02 May 2017, Apple  released 2Q FY2017 earnings that were under top-line, but over bottom-line, consensus expectations. Quarterly revenue was $52.9b (+4/6% y/y, and in-line with Apple's own guidance), and EPS was $2.10 (+$0.08 vs. consensus). Apple's 2Q was pretty much as expected, with no big surprises and no big disappointments.

Earnings Breakdown

Apple's financials track closely to the retail cycle -- peaking around end-of-calendar-year holiday sales, and then dropping through spring into summer -- and this quarter was no exception. The 1Q to 2Q drop was anticipated, and while slightly below consensus, was still within the company's muted guidance. What stands out, however, is the why.

From a regional perspective, only China recorded a y/y decrease in revenue, dropping from $12.49b to $10.73b.

From a product perspective, only iPad sales (predictably) were down y/y. The higher-margin services category showed solid (and increasingly predictable) growth of +17.5% to $7b and represent a truly emerging bright spot. "Other products" (which includes Apple TVs, Apple Watches, Beats, and iPods) over-performed guidance by $400m to grow y/y from $2.18b to $2.87b (+31%), but is still only a little more than a rounding error for practical purposes.

From a unit/volume perspective, Apple continues to face declining sales on its mobile products -- the iPhone (unexpected) and iPad (expected) shipments were both below consensus expectations and are trending downward y/y.

Top Positives from the Results/Call

1. Earnings. Tim Cook knows how to drive EPS and shareholder value in the face of declining revenue, though there is a limit to his ability to continue doing so without reaccelerating revenue growth. While y/y revenue only increased slightly, from $50.56b to $52.90b (a 4.62% y/y increase, but below consensus estimates), Apple managed to drive EPS upward from $1.90 to $2.10 (a 10.5% increase y/y, and above consensus estimates). Apple continues to demonstrate operational efficiency.

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Disclosure: I am/we are short AAPL (with puts)

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