iPhone Demand Still Solid
Our big takeaway from Apple earnings is that consumers still want iPhones and the accessories and services that go with it.
Apple reported second quarter earnings and we had two big takeaways.
The first is that there is no supercycle for the iPhone X this year. But we still see solid demand for those devices as seen in second quarter earnings and the third quarter forecast.
The second one is that other products and services, which is the revenue that is attached to the iPhone also did particularly well. It beat our expectations. We think sales of these other products, the wearables, the Airpods and the services like App Store around the iPhone create switching costs for Apple. We think it will allow Apple to keep most of its customers over time. That leads us to give Apple a narrow moat rating. Sales of these other products and services did quite well.
Apple had a good March quarter, it hit the middle of its foretasted revenue range. This really extends to the iPhone X. They noted that the iPhone X was the highest selling model each week in the March quarter. So more than 8, more than the 8 Plus and at higher prices that really boosted revenue. iPhone unit sales were only up 3% year-over-year but revenue was up 14%. Again, because of higher prices per phone.
Additional bright spots were other products and services. Wearables were up 50% year-over-year. Apple Watch sales did extremely well. They have another hit with the Airpods. Those sold extremely well as part of that wearables segment. And then services revenue was up 31% year-over-year. That's a higher growth rate than Apple saw a quarter ago. And services was one area where they certainly beat expectations this quarter.
Looking ahead to the June quarter, Apple's guidance wasn't as bad as originally feared. There is an inventory buildup at Apple. You can see it on the balance sheet. We had heard commentary from chipmakers. But it looks like demand for the iPhone X is still relatively strong.
It looks like Apple is going to be selling the iPhone Xs that it didn't sell as part of a supercycle in the December and March quarters, they are going to sell that inventory in the June quarter. This led to fewer chip orders so it is a problem down the supply chain for some of Apple's suppliers, but on Apple's end in terms of its demand with its customers it is still relatively strong. Better than feared, better than some of the commentary we heard form some of Apple's suppliers. We still think Apple is in pretty good position in terms of iPhone demand heading into the fall and next year's product line.
The other aspect of Apple's earning which was expected was an update to their capital allocation policy. They are adding another $100 billion to its buyback program. They are going to complete the prior $210 billion in the June quarter. They didn't put an end date on the $100 billion they do have, but because of U.S. tax reform they want to create that flexibility to spend efficiently and quickly. They expect to buy back $100 billion in shares in the near future. Apple also raised its dividend 16% to $0.73 per share per quarter.
These are nice capital allocation policies. It was expected that Apple would be a beneficiary of U.S. tax reform and bringing in that offshore cash in to the U.S. to pay out in dividends and buybacks. Apple is delivering in paying back this cash back to shareholders.
Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.