Analysis: AAPL

Apple (AAPL) reported a top-and bottom-line beat after the bell on Wednesday, with its fiscal 2021 second-quarter earnings.

On the top line, revenue of $89.548 billion (+53.6% YoY) outpaced expectations of $77,089 billion. On the bottom line, earnings per share of $1.40 (+118.75% YoY) exceeded the $0.99 per share consensus.

"This quarter reflects both the enduring ways our products have helped our users meet this moment in their own lives, as well as the optimism consumers seem to feel about better days ahead for all of us," said CEO Tim Cook on the release, adding that Apple has entered a period of "sweeping innovation" across its product lineup. Cook pointed to products like the new iMac and iPad Pro as evidence of this innovation, and touted the company's clean energy efforts and recently unveiled, 5-year, $430 billion investment in the U.S.

"We are proud of our March quarter performance, which included revenue records in each of our geographic segments and strong double-digit growth in each of our product categories, driving our installed base of active devices to an all-time high," added CFO Luca Maestri. "These results allowed us to generate operating cash flow of $24 billion and return nearly $23 billion to shareholders during the quarter. We are confident in our future and continue to make significant investments to support our long-term plans and enrich our customers' lives."

Higher 'Margins' of Services

On the margin front, services gross margins came in at 70.1%, while products gross margins came in at 36.1%. As we've noted repeatedly, comparing these two segments makes it clear why we have been, and continue to be, so intensely focused on the services side of the business. In addition to the associated recurring revenue stream that demands a higher multiple, given its increased visibility -- which it makes it easier to reliably forecast future earnings -- growth in this higher margin business provides for overall margins to expand.

With this, we can see that while services accounted for 18.87% of total sales, the strong segment margins result in services accounting for 31.1% of gross income.

Combined, overall gross margins of 42.5% exceeded the 39.7% consensus coming into the print.


Similar to the recent quarters, management refrained from providing revenue, but did once again provide some insights into expectations for the current quarter.

On an annual basis, management believes that total company revenue growth will grow "strong double digits" annually, however, it noted that the sequential seasonal decline will be greater than in prior years. The increased magnitude of sequential decline was attributed to two factors, according to Cook, who said that because of the later launch timing and strong demand, the iPhone only achieved supply-demand balance during the March quarter. This will cause a steeper sequential decline than usual, he said. Second, he said, the company believes supply constraints will have a revenue impact of $3 billion to $4 billion in the next quarter.

Working through how to think about that revenue guide, we note that Apple reported $59.685 billion in the comparable period and the expectation for the June quarter coming into the release stood at $68.904 billion. So, coming into the print, Wall Street was looking for growth of ~15% YoY. What "strong double digits" means is open to interpretation, but that guide sounds good to us versus the consensus.

On the margin front, management expects gross margin to be between 41.5% and 42.5%. That's better than the 39.8% consensus. OpEx is expected to be between $11.1 billion and $11.3 billion. Other income and expenses are expected to be around $50 million and the tax rate is expected to come in at around 14.5%.

Capital Returns, Cash & Cash Flow

As for capital return, Apple returned nearly $23 billion to shareholders during the quarter, including $3.4 billion via dividends and equivalents and an additional $19 billion via open market repurchases of 147 million Apple shares. Maestri also committed the company's commitment to being net cash neutral over time.

Speaking of cash, Apple finished out the quarter with over $204 billion in cash plus marketable securities and a net cash position of $83 billion. That's an important metric to be aware of as management's commitment to being net cash neutral over time means that cash is either used to reinvest in growth and innovation -- organically or via acquisitions -- or coming back to us shareholders via buybacks and dividends.

Of course, that also brings us to cash flow. During the quarter, Apple generated $23.981 billion in cash from operations vs. the $15.9 billion consensus. If we back out the $2.269 billion of payments made for the acquisition of property, plant and equipment, we get a free cash flow we get a figure of roughly $ 21.712 billion for the quarter vs. a roughly $13.688 billion consensus. That's nearly equal to the $23.63 billion of net income reported in the quarter.

That speaks to the quality of earnings, as these are nearly 100%-cash backed. But they also speak to Apple's ongoing ability to pay dividends and keep pulling shares out of the market via buybacks, which leaves "buy don't trade shareholders," such as ourselves, continually owning more and more of the company over time.

Looking ahead, Apple's board of directors has declared a $0.22 per share common stock dividend (a 7% increase), payable on May 13 to shareholders of record as of the close of business on May 10.

Now that dividend increase is certainly welcome, but the big news here is that in addition to the dividend increase, the board of directors also authorized a $90 billion increase to the existing share repurchase program.

The iResults

Total products sales of $72.683 billion crushed expectations of $60.821 billion.

Breaking down the segment results, iPhone sales came in at $47.938 billion, exceeding expectations of $41.35 billion and setting a March-quarter record and was "driven by the strong popularity of the iPhone 12 family."

When asked about the opportunity to refresh the iPhone installed base, Cook noted on the call that Apple saw double-digit increases in both new-to-iPhone and iPhone upgrades, adding that this was a March-quarter record for upgrades. Moreover, Cook called out that it is "obviously the early days of 5G," and that as global penetration remains low, "a lot of the 5G upgrades will be in front of us."

When asked about the mix of iPhone sales, management wouldn't get too specific, but Cook responded that, "The iPhone 12 is the most popular. But we did see very strong sales of the Pro portion of the family, as well, the Pro plus the Pro Max."

The takeaway was that the iPhone revenue growth was a function of both unit growth and revenue per unit growth. But remember, the team believes the installed base of active devices, which was again a new all-time record in each major product category, is a far more significant measure than the amount of devices sold in a given quarter, because it speaks to Apple's ability to sell higher margin Services. We agree.

Total iPad sales of $7.807 billion came in above expectations of $5.641 billion. Mac sales of $9.102 billion were better than the $6.786 billion consensus. In Wearables, Home and Accessories, sales of $7.836 billion also outpaced expectations of $7.392 billion.

"Apple Watch is a global success story, and the category set March quarter records in each geographic segment, thanks to strong performance from both Apple Watch Series 6 and Apple Watch SE," said Cook on the call.


Services sales of $16.901 billion outpaced expectations of $15.484 billion and set new records for services in each of Apple's geographic segments.

In fact, Apple Services saw all-time records for the App Store, cloud services, music, video, advertising and payment services, said Maestri on the call. "Our new service offerings, Apple TV+, Apple Arcade, Apple News Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction."

Maestri went on to note that the number of both transacting and paid accounts on Apple's digital content stores reached a new all-time high during the March quarter, with paid accounts increasing double digits in each of its geographic segments.

The company also added over 40 million paid subs in the quarter, bringing the total to "more than 660 million paid subscriptions across the services on our platform," said Maestri.

That's a 145 sub increase from the year-ago period and double the number of paid subscriptions seen 2.5 years ago.

The Bottom Line

All in, this was once again a very strong print from Apple. The guidance looks solid - arguably ahead of expectations given the information we were provided. And, that monster buyback was the icing on the cake; Morgan Stanley was calling for a $60 billion buyback authorization increase ahead of the quarter and we would have been more than happy to just see that.

In addition, as Cook noted, Mac sales fueled by the M1 chip have set an all-time revenue record.

"The last three quarters for Mac have been its three best quarters ever," said Cook.

Given last week's introduction of a new iMac and iPad designed around the revolutionary chip, we wouldn't be surprised to see that M1-fueled momentum hit the other hardware lines as well. So, while Services remains the longer-term driver of value given the recurring nature and higher-margin profile of those sales, we expect to see more attention once again paid to the hardware side of the operation in the near-to-mid-term.

Bottom line, this was about as clean a quarter as anyone could have asked for. With shares trading within spitting distance of all-time highs coming into the release, expectations were high and Apple did not disappoint. We reiterate our "own, don't trade" philosophy, when it comes to Apple.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long AAPL.