Apple's quarter eases concerns about mobile device demand, with a China sales beat to boot

Published Thu, May 4 20237:39 PM EDT

Apple (AAPL) posted a better-than-expected March quarter after the bell Thursday, despite ongoing macroeconomic uncertainty — helping the market clear another one of the big four hurdles we laid out earlier this week. Shares gained more than 2% in after-hours trading. Revenue in Apple's fiscal second quarter of $94.84 billion dropped 3% year-over-year but beat expectations of $92.96 billion. Foreign exchange fluctuations were a headwind of over 500 basis points or more than 5 percentage points. Earnings per share (EPS) of $1.52 were flat compared to a year ago, exceeding the consensus estimate of $1.43. Gross margin was 44.3%, expanding from a year ago and edging the 44.1% consensus estimate. Bottom line Apple bounced back nicely from the supply-constrained December quarter to deliver record March quarter results across a few key categories and metrics. The installed base of active devices continued to expand to more than 2 billion. New services and features are constantly being added — including a recent buy now, pay later option and high-yield savings accounts — providing fuel to an incredible ecosystem that garners unmatched loyalty and satisfaction from its customers. Wednesday evening's disappointing outlook on handset chipsets from Qualcomm (QCOM) sparked fears that global demand for mobile devices had been slipping even further. However, the Q2 results and outlook commentary a day later from Apple should ease some of those concerns, at least for now. ( We exited the Club's remaining small position in Qualcomm Thursday morning.) It's hard to tell if Apple's results were enough to send shares in the near term back to all-time highs of about $176 each, set back in August. But for now, we do know that two of the four market events we were concerned about have passed — the Fed's latest interest rate hike and Apple's earnings. We reiterate that Apple should be owned, and not traded. The next question market for the market is Friday's employment report, followed by the June deadline on the debt ceiling. Cash flow Apple updated its generous shareholder return program Thursday evening. The board, as expected, authorized an additional program to repurchase up to $90 billion worth of stock and raised the quarterly dividend by a penny to 24 cents per share, marking the eleventh straight year of increases. Apple has a policy of being so-called net cash neutral over time, meaning that if the cash isn't used for acquisitions or organic growth investments, it's returned to shareholders through buybacks and dividends. In its March quarter, Apple returned $23 billion via the repurchase of 129 million shares valued at $19.1 billion and $3.7 billion in dividends. Quarterly commentary It was another quarter of records for Apple. Sales of iPhones and Services as well as the installed base of active devices for all major product categories and geographic segments all grew to all-time highs. Driving the new March quarter iPhone record were sales of the iPhone 14 and 14 Plus, which people love for the long battery life and advanced camera. The Pro was called out as well. Mac results, though down 31% year over year, were in line with management expectations as the business faces difficult compares after last year's M1 chip rollout. But really, this is no different than what we are seeing in the personal computer industry. The iPad's revenue decline of nearly 13% was also in line with expectations. Wearables, Home, and Accessories revenue was flat but posted a solid beat. Services, a high-margin business for Apple, reached a new all-time revenue record in March with records across the App Stores, Apple Music, iCloud, and payment services units. Services rose 5.5% from last year but just missed estimates. Apple now has more than 975 million paid subscriptions, up 150 million in the last 12 months, underscoring what Apple does best in terms of selling a quality smartphone or computing and attaching so many different valuable subscription services. By geography, a few things stick out to us. Americas was a surprise miss, with revenues falling 7.6% from last year. We can trace back one reason for the annual decline to the United States, where last year many U.S. carriers were aggressive with their promotional activity. As for the big beat and 2.8% gain in Europe, keep in mind that Apple lumps in sales from India into this bucket. Sales in India grew double digits year over year to a new quarterly record. Apple opened up two new stores there just a few weeks ago, and they're off to a great start, according to the company. India represents one of Apple's next big growth markets. But the company is also doing quite well with record quarterly results in many other emerging markets. Finally, it was notable to see Greater China post such a solid beat given some of the recent uncertainty surrounding consumer buying patterns following the reopening. One reason that might explain Apple's strength is market share gains, which CEO Tim Cook believed the iPhone achieved in the quarter. China sales, despite the beat, fell nearly 3% year over year. Guidance As has been the case since the start of the Covid pandemic, Apple refrained from providing specific revenue guidance. Instead, what management offers is more directional commentary. For the current June quarter, Apple expects year-over-year revenue performance to be similar to the March quarter result, assuming no worsening macro outlook. Foreign exchange will still be a headwind but improving sequentially, with the team estimating a negative year-over-year impact of nearly 4 percentage points. Services revenue growth is expected to be similar to the March quarter with management calling out headwinds impacting areas like digital advertising and mobile gaming. Gross margins look like they have some upside, with management guiding to between 44% and 44.5% versus estimates of 43.82%. One trend working in Apple's favor is favorable component pricing, like in memory. Putting it all together, these comments appear to be more or less in line with expectations, with the market likely putting more emphasis on the margin upside than the possible annual decline in revenues. (Jim Cramer's Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Apple's iPhones are on display in an Apple store in Miami, May 4, 2023.

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