Apple's Q1: Here's The Bottom Line
According to Maynard Um of Wells Fargo, Apple’s report contained a combination of good and bad, which prompted the analyst to maintain a Market Weight rating with a valuation range boosted to $110 to $125 from a previous $105 to $120.
- Apple’s 78.3 million iPhone units and average selling price of $695 were ahead of the analyst’s estimates of 78.0 million and $685, respectively.
- Apple’s fiscal second-quarter revenue and gross margin guidance is ahead of the current low investor expectations but below consensus estimates.
- Service revenue of $7.2 billion grew 18 percent year-over-year and exceeded the analyst’s estimate of $6.9 billion.
- Management reiterated its prior view that its Revenue segment will be the size of a Fortune 100 company which implies at least $28.0 billion in revenue.
- Mac revenue saw year-over-year growth for the first time since the last quarter of 2015.
- Apple saw record revenue in all major region except Greater China although mainland revenue in China was flat year-over-year and up 6 percent in a constant currency basis.
- Q1 EPS was partially offset by lower gross margins.
- Apple expects foreign exchange rates to impact Q2 revenue and gross margins.
- Management’s gross margin guidance range was widened to 100 basis points versus 50 basis points historically.
- iPad units of 13.1 million fell short of the analyst’s estimates of 15.7 million.
- Growth from China isn’t expected to be dramatically different year-over-year in Q2 versus Q1.
- Management’s guidance implies operating margins will be down on a year-over-year basis for the sixth straight quarter.
The Analyst’s Bottom Line
“We recognize that potential tax reform, incl. a cash repatriation holiday, could help AAPL’s capital allocation program in Apr. (though it’s unclear if repatriated cash will be allowed to be used for share repos, dividends, debt repayment, etc; it was not in 2004),” Um argued.
“This, as well as investors’ views for an iPhone 8 “super cycle”, regardless of our view that expectations are too high, is likely to limit downside risk near term. We raise our F17 EPS to $9.01 from $8.83 and adjust our valuation range to $110–$125 (13x C17) from $105–$120 but maintain our Market Perform rating as we see these as offset by uncertainties around off-cycle demand, June guide, and litigation.”
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