Greater China, iPhone Drive Apple’s Strong Q2 Numbers

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Apple (NASDAQ:AAPL) posted a strong set of FY Q2 2015 numbers on April 27, beating market expectations on both earnings and revenues, driven by robust demand for the new iPhones and record sales in Greater China. Quarterly revenues grew by 27% year-over-year to $58 billion, while net profits rose 33% to about $13.6 billion. [1] Here are some of the key takeaways from the company’s earnings release.

Our $128 price estimate for Apple is slightly below the current market price. We will be revisiting our price estimate to account for the earnings release.

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iPhone Shipments Soar, ASPs Decline Sequentially On FX Headwinds

Apple shipped 61.2 million iPhones during Q2, up 40% from the same period last year. While ASPs grew by about 10% year-over-year to $659, driven by the popularity of higher storage capacity models and the 6 Plus, they declined slightly on a sequential basis likely due to foreign exchange headwinds. The iPhone accounted for 69% of Apple’s quarterly revenues, up from 57% a year ago, which helped overall gross margins rise to 40.8% from about 39.3% a year ago. While iPhone revenues grew by about 55% year-over-year, the company’s other product lines together saw their combined revenues shrink by 10% due to weaker iPad shipments. Although the increasing concentration of Apple’s revenues around a single (and maturing) product line does raise some concerns, we believe that there remains some more room for growth. For instance, the company estimates that just about 20% of its active iPhone users have upgraded to the latest iPhone 6 and 6 Plus units. ((Apple’s (AAPL) CEO Tim Cook on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, April 2015)) Additionally, the company said that it was witnessing a higher rate of people switching to iPhone than it had experienced in previous product cycles.

Record Sales In Greater China

Greater China– which includes China, Taiwan and Hong Kong –  was the biggest geographic driver of quarterly growth, driven by the Chinese New year shopping season and solid demand for all three of Apple’s major product lines. Revenues from the region rose by 71% year-over-year to about $16.82 billion (over 3x the growth rate of Europe and the Americas regions). For the first time, China emerged as Apple’s largest market for the iPhone, overtaking the United States, likely driven by China Mobile’s rapid 4G expansion and demand for large-screen models. The company also noted that iPad sales in the country hit an all time high during this quarter, while Mac unit sales were up 31%, compared to the broader Chinese PC market which fell by about 5% according to IDC. [2]

iPad Struggles While Mac Continues To Shine

Apple’s iPad continued to struggle, with shipments declining 23% year-over-year to 12.63 million while ASP’s also fell slightly. The iPad has been facing significant headwinds over the past few quarters owing to cannibalization from the large-screen iPhones and lower-end Macs as well as increasing saturation in the high end of the tablet market. The company also noted that a reduction in channel inventory (1.1 million units) contributed to lower sell-ins for the iPad. However, Mac sales remained very strong at 4.56 million units, representing 10% year over year growth, defying a shrinking global PC market.

Expansion of Capital Return Program

Apple’s cash reserves grew to over $193 billion during the quarter and the company said that it would be expanding its capital return program to about $200 billion from the previously announced $130 billion. This estimate comes from the company boosting its dividend 11% to $0.52 per share and increasing its share repurchase authorization to $140 billion from the $90 billion announced last year.

FYQ3 Margin Guidance Weighed Down By FX, Apple Watch

Apple has guided for FYQ3 revenue of between $46 billion and $48 billion, with gross margins expected to be between 38.5% and 39.5%. The sequential decline in margins is likely to be due to FX headwinds, the launch of the Apple Watch (which will have lower margins than the company average) and also due to seasonality.

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Notes:
  1. Apple Q2 Earnings Press Release []
  2. ref:2 []