Cramer's Investing Club: Apple shrugs off supply chain woes, blows out quarter

Published Thu, Jan 27 20229:14 PM ESTUpdated Fri, Jan 28 20227:36 AM EST

Charitable trust holding Apple (AAPL) reported record quarterly results after the bell Thursday, despite supply chain issues that continue to plague electronics and other products. Sales hit an all-time record of $123.9 billion (+11% YoY) surpassing the $118.788 billion consensus, while earnings of $2.10 per share (+25% YoY) were in line with expectations of $1.90 per share. "This quarter's record results were made possible by our most innovative lineup of products and services ever," CEO Tim Cook said. "We are gratified to see the response from customers around the world at a time when staying connected has never been more important." Improved margins Gross margins came in at 43.8%, well ahead of the 42% consensus, and are representative of a 399bps YoY improvement. These benefited from the growth in Services, which boast a higher-margin profile. Driving that result was a 72.37% Services gross margin (+397bps YoY) and a 38.42% Products gross margin (+336bps YoY). Once again, we can see why the growth in Services is so important in terms of overall profitability. While Services represented 15.75% of sales, it represented 26.04% of gross income. As we've noted previously, the combination of stronger profitability and the recurring nature of the Services results, investors are putting a higher value on the associated earnings stream. As the growth in services has expanded, so too has the company's valuation multiple. Breaking down the business segments Product sales hit $104.429 billion (+9% YoY), exceeding expectations of $99.483 billion. This comes despite CFO Luca Maestri calling out "significant supply constraints." Driving the segment's topline results: iPhone: $71.628 billion exceeded expectations of $68.06 billion iPad: $7.248 billion missed expectations of $8.182 billion Mac: $10.852 billion exceed expectations of $9.458 billion Wearables, Home and Accessories: $14.701 billion exceeded expectations of $14.2 billion On the earnings call, management said Apple realized all-time records in both developed and emerging markets and noted revenue growth across all product categories except for the iPad "where supply constraints were particularly pronounced." Management did call out constraints for the iPhone and Mac lines as well. Despite these supply constraints, Apple posted all-time sales records for the iPhone and Mac lines as well as new record installed base numbers in every geographic segment and major product category. Roughly half of iPad buyers in the quarter were new to the product, Apple said. What does a record installed base across all geographies and product categories amount to? About 1.8 billion devices — a whole lot of outlets globally for Apple to sell their services into. As long-term investors, we're always on the lookout for that installed base growth. We believe it's significantly more important than the number of iPhones sold in any given three month period because the installed base represents the gateway through which the company can sell its services. Apple's retail business topped its highest revenue in the company's history, and earned its best-ever customer satisfaction scores, said Cook. This is key because products sold through Apple's own retail business are more profitable since margins are not impacted by the need to compensate third-party sellers. The satisfaction scores are, of course, positive as it speaks to loyalty and a deeper entrenchment of the Apple ecosystem. On that note, Services sales reached an all-time record at $19.516 billion (+23.8% YoY), well ahead of the $18.77 billion the Street was looking for. Moreover, the segment also saw all-time records for cloud services, for music, video, advertising and payment services and a December quarter record for the App Store. Huge cash pile benefits shareholders Taking a look at some other financial metrics, Apple ended the quarter with a net cash position of $80 billion. Management once again reiterated the company's goal of being net cash neutral over time. Additionally, the company generated $46.966 billion in operating cash flow and roughly $44.163 billion in free cash flow (operating cash flow less payments for acquisition of property, plant and equipment). These strong numbers speak to the quality of Apple earnings; not only are these GAAP earnings, but by comparing them to net income in the quarter, they are more than backed by cash. Furthermore, this cash flow generating power, coupled with Apple's "net cash neutral over time" policy means that the company can and will continue to reward shareholders via buybacks (which serve to mechanically raise earnings per share as the dominator — earnings per share being net income divided by shares outstanding — is consistently getting smaller over time) and dividend payments. Case in point: Apple returned over $25 billion to shareholders, including $3.7 billion via dividends, $14.4 billion via open market repurchases and an additional $6 billion via an accelerated share repurchase program initiated in November. The open market repurchases led to the retirement of 93 million Apple shares while the accelerated repurchase program led to the retirement of another 30 million shares. In addition to good old fashion margin expansion that allows more sales dollars to fall to the bottom line, this retirement of shares provides for a one-two punch for consistent earnings growth over time. Looking ahead Apple once again refrained from providing quantitative forward guidance, instead opting to provide qualitative thoughts on the current quarter. Starting on the top line, management expects to achieve "solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints." Though supply is expected to improve versus the December quarter. That said, the growth rate is expected to decelerate versus the 11% rate we saw on this release. How does that compare to expectations? Coming into the print, consensus was for 0.9% YoY growth; so, while management may not have provided us with exact numbers, we believe this guidance — decelerating but "solid" — to more than likely be viewed as better than expected. For services specifically, management expects strong double-digit growth, though again, at a decelerated pace versus the December quarter. To us, that sounds like in line to better-than-expected than the 16.6% rate the Street was looking for coming into the print. In terms of profitability, management expects gross margin to be between 42.5% and 43.5%, which is better than the 42.7% expected at the midpoint. Operating expenses are expected to be between $12.5 billion and $12.7 billion. OI & E (other income and expense) is expected to be around negative $150 million, excluding any potential impact from the mark-to-market of minority investments. The tax rate is expected to be around 16%. Lastly, Ap