Wednesday, April 24, 2013

Stock Focus: Apple's mini QE

Tim Cook and Co are beating on revenues, earnings and sales for the March quarter. Revenues grew but earnings slowed, in a nutshell:
  • Revenues $43.6bn vs. Est. $42.3bn, and 11% growth YoY
  • 2Q EPS at $10.09 vs Est. $9.98, and 18% decrease YoY
  • Gross margins at 37.5% vs 47.4% a year earlier
  • 37.4m iphones vs. 34m consensus,+7% YoY
  • 19.5m iPads vs. 18.5m consensus, +65% growth YoY
Guidance for the 3Q is not exiting:
  • Revenues mid point is 11% below consensus. ($33.5bn-$35.5bn compared to $38.9bn)
  • Gross margins expected to fall in the 36%-37% range

Decreasing margins, still

This disappointing guidance means that we should not expect any product launch this quarter as Tim Cook somehow confirmed during Q&A when he was hinting at great stuff coming into fall this year and more in 2014. This is clearly a negative when compared to competitors like Samsung that are busier on this front and can be frustrating for those nostalgic of 2012 that was all about shelf revamping. Compound that with the average selling price of iPhones going down because of incentives on the 4 to attract first time buyers and the same phenomenon on iPad due to the tremendous success of the mini and you have some of the ingredients explaining lower revenues ahead. The PC market is also continuing its slide, impacting Mac, but they do better than the competition in the quarter with -2% vs a -14% industry average.

Cash party

On the capital structure side, news were more encouraging. The long awaited cash distribution boost is finally unveiled and the figures are staggering. The strategy is built on three pillars:
  1. The board is accelerating the share repurchase program by $50 billions to $60 billions until the end of 2015. This is the largest authorization for shares buyback in history.
  2. The quarterly dividend payment is increased by 15% to $3.05 a share to further attract investor looking for yield. The dividend policy is to be reviewed annually. With annual paiment of around 11bn, Apple is one of the largest dividend payer in the world.
  3. The intent is to tap the debt market in order to finance this program and avoid repatriating offshore cash subject to taxation. Microsoft already used that trick in the past. The future dividends will also be funded by US generated revenues.

Under this accelerated scheme, the total cash that will be returned to shareholder in the 40 months timeframe spanning from Aug12 to Dec15 will be $100 billions or $2.5 billions a month. This is huge, almost qualifying as a mini QE in the tech space.

Apple is confident that it earns cash in excess of what is needed to invest in growth and feels comfortable about the scheme considering the $144.7bn cash pile it was sitting on at the end of March.


There was a lot of figure dropping as well as stats and facts bombarding during the call, but the part relating to the iOS ecosystem was particularly interesting. Indeed, if Apple is to make it in the long run, their hardware needs to be solidly complemented by content, software and services. This is how they will be able to keep barriers to entry and secure steady cash flow generation.

Here are some key stats for the March quarter, just days ahead of iTunes' 10th anniversary on Sunday:

  • $4bn billing on digital content were generated, translating in $2.4bn revenues for Apple and $1bn for developers
  • Apple has the largest digital offering
  • 74% apps sales worldwide were made on the iOS platform, YoY apps revenues doubled
  • 800 apps were downloaded per second
  • There are 850k apps out there, of which 350k optimized for the iPad
  • 300 million people use iCloud. Great pipeline ahead
  • Customer satisfaction results beat competition and the secure environment attract corporate clients (77% of activations, excluding BlackBerry)

Final comments

How should we feel about all this? I think okay given the gloomy mood around the stock lately. Apple management's bold move on the capital structure shows that they care about shareholders, which is a good sign. The scheme is likely to attract new investors and hopefully give some support to the stock price as we walk through the quarter that separates us from the suggested product launch period.

Hold on to the stock and see you around soon,