Apple’s Earnings Shine As iPhone 7 Cycle Turns Out Better Than Expected

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Apple (NASDAQ:AAPL) posted a record set of first quarter earnings on Tuesday, beating market expectations on both revenues and earnings, amid a strong uptake for its iPhone 7 smartphones, higher Mac sales and a fast growing services business. Below, we provide some of the key takeaways from Apple’s earnings release. [1]

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iPhone Has A Solid Quarter Amid Shipment And ASP Growth 

Shipments of the iPhone touched record highs, growing by 5% year-over-year to about 78.3 million units, driven by strong demand for the iPhone 7 and carrier promotions in the United States. Sales growth could have been higher (~8%) on a sell-through basis, as Apple reduced channel inventory over the quarter. iPhone ASPs came in at a record high of $695 per unit, as the demand mix for the larger 7 Plus was higher compared to previous iterations. Moreover, the increasing shift towards mechanisms such as equipment installment plans and leases, where buyers do not pay anything upfront for their devices, are also helping to skew the demand mix towards higher-tier models. Apple’s total revenue guidance for Q2 FY’17 stands at $51.5 billion and $53.5 billion (4% year-over-year at the mid-point). This is relatively strong, considering that the iPhone 7 is largely viewed as a bridge device, with Apple prepping to unveil a completely overhauled 10th anniversary iPhone this fall.

Greater China Sees An Improvement On Constant Currency Basis

Apple’s gross margins came in at 38.5% for the quarter. While this was at the high end of the company’s guidance range, it was roughly 150 bps lower than last year’s figure. There are likely to be two key factors driving this reduction. Firstly, the strong dollar is hurting Apple’s price realizations in many key emerging markets. Moreover, there is a possibility that manufacturing costs on the new iPhones are higher, on account of the more advanced components and higher memory capacity per devices. (Related: Apple’s Flagship iPhone Keeps Getting More Expensive To Build) However, this is likely to have been partially offset by a higher mix of service revenues (9.1% of total sales, up from 8% last year), which have significantly higher gross margins. Apple is projecting gross margins of between 38% and 39% for Q2 FY’17.

Greater China Sees An Improvement On Constant Currency Basis

Apple’s performance in Greater China saw some improvement, driven by a strong uptake for the iPhone 7, which emerged the best selling smartphone in the country during the holiday quarter, as well as double digit growth in iPad shipments. Revenues from the region came in at $16.23 billion, marking a 12% year-over-year decline, amid depreciation of the Chinese Yuan (down 6% year-over-year) as well as a significant decline in sales from Hong Kong.  However, the company says that sales from Mainland China would have actually been up by about 6% on a constant current basis, marking a significant improvement over the firm’s performance in the recent quarters.

Services Growth Remains Strong, Watch Could Be Gaining Momentum 

Services revenues rose by roughly 18% year-over-year to an all time record of $7.17 billion, driven primarily by the App Store, which saw revenues grow by 43% over the quarter and the Apple Music streaming music service. This is positive, considering that the rate of growth in Apple’s iDevice installed base is likely to be slowing down, potentially indicating that per-device spending on services is trending upwards. Apple indicated that it was looking to double its services revenues over the next four years. Apple also noted that the Apple Watch had its best quarter ever both in terms of units and revenues, with demand outstripping supply.

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Notes:
  1. Apple Press Release []