Apple's (AAPL) Q3 Earnings Beat, iPad & Mac Aid Sales Growth

Apple AAPL reported third-quarter fiscal 2020 earnings of $2.58 per share that beat the Zacks Consensus Estimate by 27.1% and increased 18.3% year over year.

Net sales increased 10.9% year over year to $59.69 billion, which surpassed the Zacks Consensus Estimate by 14.9%. Forex volatility negatively impacted sales by 300 basis points (bps).

Product sales (78% of sales) increased 9.9% year over year to $46.53 billion. iPad sales of $6.58 billion jumped 31% year over year and accounted for 11% of total sales. Mac sales of $7.08 billion increased 21.6% from the year-ago quarter and accounted for 11.9% of total sales.

Services (22% of sales) revenues grew 14.8% from the year-ago quarter to $13.16 billion.

Apple Inc. Price, Consensus and EPS Surprise

 

Apple Inc. price-consensus-eps-surprise-chart | Apple Inc. Quote

Geographical Performance

Americas sales increased 7.8% year over year to $27.02 billion and accounted for 45.3% of total sales.

Europe generated $14.17 billion in sales, up 18.5% on a year-over-year basis. The region accounted for 23.7% of total sales.

Greater China sales climbed 1.9% from the year-ago quarter to $9.33 billion, accounting for 15.6% of total sales.

Japan sales increased 21.7% year over year to $4.97 billion, accounting for 8.3% of total sales.

Rest of the Asia Pacific generated sales of $4.20 billion, up 17% year over year. The region accounted for 7% of total sales.

iPhone Sales in Detail

iPhone sales inched up 1.7% from the year-ago quarter to $26.42 billion and accounted for 44.3% of total sales. The slight year-over-year growth was driven by strong demand in May and June, primarily for iPhone SE. Moreover, continued economic stimulus and phased reopening of some economies globally, helped sales.

Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 98% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined in the reported quarter.

Services Momentum Continues

Services maintained momentum in the reported quarter. As anticipated, advertising and AppleCare were negatively impacted by coronavirus-led store closures and lower economic activity. This was fully offset by double-digit growth in App Store, Apple Music, video and cloud services. Apple also witnessed strong engagement with iMessage, Siri and FaceTime.

Markedly, Apple achieved its goal of doubling fiscal 2016 services revenues six months ahead of schedule.

Apple now has more than 550 million paid subscribers across its Services portfolio, up 35 million sequentially and 130 million year over year. The company expects to reach its target of 600 million paid subscriptions before the end of calendar 2020.

Moreover, the number of paid accounts increased double digits across all geographic segments.

In June, the company launched Apple Card Monthly Installments for more products in its U.S. stores. The program offers 0% interest to customers buying Apple devices.

iPad & Mac Details

Mac sales grew double digits in each of the geographic segments. Fiscal third-quarter Mac sales hit an all-time record in Japan and the rest of Asia-Pacific. It also achieved third-quarter sales records in the Americas and Europe.

Additionally, more than half of the customers who purchased iPads and Macs during the quarter were new to the device.

Apple quoted a recent survey report from 451 Research which stated that overall consumer satisfaction was 97% for iPad and 96% for Mac in the quarter under review.

Wearables’ Robust Performance

Wearables, Home and Accessories sales increased 16.7% year over year to $6.45 billion and accounted for 10.8% of total sales.

Moreover, Apple Watch’s adoption rate grew rapidly. Notably, more than 75% of customers who purchased Apple Watch during the reported quarter were first-time customers.

Apple Gaining Traction Among Enterprises

Apple devices continued to gain traction among enterprises amid coronavirus disruption. The company witnessed rapid adoption in healthcare, particularly in telehealth. Markedly, UVA Health, Rush University Medical Center and UC San Diego Health are using apps on iPads and iPhones to take care remote patients.

Apple Business Chat adoption increased in the fiscal third quarter. Notably, HSBC HSBC deployed Apple Business Chat in its contact centers in the United States and the United Kingdom.

Operating Details

Gross margin expanded 40 bps on a year-over-year basis to 38%. However, gross margin contracted 40 bps sequentially due to unfavorable forex of 90 bps.

Products’ gross margin contracted 60 bps sequentially to 29.7% due to unfavorable mix and forex. Services’ gross margin was 67.2%, up 180 bps sequentially, driven by a favorable mix.

Operating expenses rose 10.4% year over year to $9.59 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses which increased 11.8% and 9.2% respectively.

Operating margin expanded 50 bps on a year-over-year basis to 21.9%.

Balance Sheet & Cash Flow

As of Jun 27, 2020, cash & marketable securities were $193.62 billion compared with $192.84 billion as of Mar 28, 2020.

Term debt, as of Jun 27, 2020, was $101.56 billion, up from $99.48 billion as of Mar 28, 2020.

Operating cash flow was $16.3 billion, an improvement of $4.6 billion year over year.

Apple returned $21 billion in the reported quarter through dividend payouts ($3.7 billion) and share repurchases ($10 billion).

Apple’s board also approved a four-for-one stock split. Each shareholder of record at the close of business on Aug 24 will receive three additional shares for every share held on the record date, and trading will begin on a split-adjusted basis from Aug 31, 2020.

Guidance

Apple didn’t provide any guidance given the uncertainty around the impact of the coronavirus pandemic.

However, the company expects fiscal fourth-quarter iPhone sales to benefit from strong demand for iPhone SE. Apple stated that sale of new iPhones will begin a few weeks later against the usual late September.

Apple expects iPad and Mac to post strong year-over-year growth. Services are expected to benefit from strong usage of App Store, video, Music and cloud services. However, AppleCare is expected to face tough year-over-year comparisons.

Further, operating expenses are expected between $9.8 billion and $9.9 billion.

Zacks Rank & Stocks to Consider

Currently, Apple has a Zacks Rank #3 (Hold). A Couple of better-ranked stocks in the broader technology sector is Dropbox DBX and Everbridge EVBG. Both stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Both Dropbox and Everbridge are scheduled to report earnings on Aug 6.

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