Apple’s Share Buybacks a Plus, Outlook Still a Concern

The tech giant’s dismal June-quarter guidance underscores to the importance of a successful iPhone 5S launch later this year, says Morningstar’s Brian Colello.

Brian Colello, CPA 24.04.2013 | 10:21
Apple's fiscal second-quarter results were in line with our expectations. We're modestly concerned about the company's third-quarter forecast until we gain further clarity on the timing of a new iPhone launch. Perhaps the biggest news, however, came from Apple's announcement of a 15% dividend increase, and an additional $50 billion stock buyback plan, as Apple distributes more of its vast cash cushion to investors. We're maintaining our $600 fair value estimate and narrow moat rating.
The 37 million-unit iPhone shipments in the March quarter were slightly better than the 35 million units sold during the year-ago quarter, which coincided with the iPhone 4S launch. However, a 4% decline in iPhone average selling prices, or ASPs, points toward shifting consumer preferences toward older, cheaper models. 

At 19.5 million, iPad unit sales were strong. However, a mix shift toward lower-priced iPad Minis led to a 4% decline in iPad ASPs. Mac unit sales were down only 3% sequentially, as Apple caught up to unmet demand in the December quarter, helping to offset an otherwise dismal PC demand environment. Corporate gross margins of 37.5% were at the low end of the company's forecast, reflecting the less favorable product mix stemming from Apple's focus on emerging market growth. We're also encouraged by the apparent new boldness in Apple's capital allocation plans, and think that tapping the debt markets in a low interest rate environment to fund a portion of its stock buybacks and dividend increase is a wise move. 

We view Apple's June outlook of $34.5 billion in revenue and just over $7 in EPS as a dismal forecast. However, if an exciting iPhone 5S were to arrive this summer, as some of Apple's chip suppliers have hinted, we'd consider the weak guidance to be less of a concern. However, CEO Tim Cook's comment about "really great stuff coming in the fall" clearly tempers such enthusiasm, and the forecast implies that June iPhone unit sales may be worse than the year-ago quarter. While we still foresee long-term iPhone growth as Apple grows in China and garners repeat sales to iOS customers in the U.S. and elsewhere, near-term iPhone sluggishness may place greater importance on Apple's ability to deliver a follow-up iPhone hit later this year.

Looking at iPhone results, unit sales of 37.4 million were down 22% sequentially but up 7% from the year-ago quarter, and in line with our expectations. We should note, however, that 1.0 million units were sold into the channel, and not yet sold to end customers. We believe that most iPhone buyers in the March quarter didn't come from previous iPhone owners--where Apple's moat is a factor--but rather new customers who traded in feature phones and older smartphone models for iOS devices. These unit sales levels are disappointing relative to expectations a few months ago, as it reflects a notable decline from 47.8 million units sold in the December 2012 quarter. Still, we don't believe that lower near-term iPhone sales, nor the company's outlook for the June quarter, point toward an eroding moat or weaker switching costs around the iOS platform.

One of our concerns from Apple's prior earnings call in January revolved around iPhone 4 shortages. ASPs of $613, down 4% sequentially, indicates an unfavorable trend of a greater portion of iPhone sales coming from older models. ASPs should erode further in the June quarter as Apple's iPhone lineup ages. We view such a mix shift as inevitable in the long-term, as Apple sees faster growth in emerging markets. However, the less favorable mix at the start of the iPhone 5 launch also indicates that customers may have perceived less value in Apple's newest flagship phone. 

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Om forfatteren

Brian Colello, CPA  er senior aksjeanalytiker hos Morningstar.

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