Analysis: AAPL

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

On the top line, revenue of $81.434 billion (+36.4% YoY) outpaced expectations of $73.335 billion and set a June quarter record for the company. On the bottom line, earnings per share of $1.30 (+100% YoY) exceeded the $1.01 per share consensus. 

"This quarter, our teams built on a period of unmatched innovation by sharing powerful new products with our users, at a time when using technology to connect people everywhere has never been more important," said CEO Tim Cook on the release. "We're continuing to press forward in our work to infuse everything we make with the values that define us - by inspiring a new generation of developers to learn to code, moving closer to our 2030 environment goal, and engaging in the urgent work of building a more equitable future."

"Our record June quarter operating performance included new revenue records in each of our geographic segments, double-digit growth in each of our product categories, and a new all-time high for our installed base of active devices," added CFO Luca Maestri. "We generated $21 billion of operating cash flow, returned nearly $29 billion to our shareholders during the quarter, and continued to make significant investments across our business to support our long-term growth plans."

Higher 'Margins' of Services

On the margin front, services gross margins came in at 69.8%, while products gross margins came in at 36.0%. 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 21.47% of total sales, the strong segment margins result in services accounting for 34.6% of gross income. 

Combined, overall gross margins of 43.3% exceeded the 41.6% consensus coming into the print.


Similar to the recent quarters, management refrained from providing revenue, "given the continued uncertainty around the world in the near term." 

But management did, once again, provide some insight into expectations for the current quarter "assuming that the COVID-related impacts" to don't worsen more than current projections. 

On an annual basis, management believes that total company revenue will grow at a "strong double-digit" annual rate in the September quarter, however, it noted that the growth rate is expected to be below the 36% rate seen in the June quarter, because of currency headwinds, a return to a more normalized services growth rate and increased supply chain constraints compared to the June quarter -- primarily relating to the iPhone and iPad. The services growth rate, by the way, benefited in the June quarter from "a favorable compare" as certain services were significantly impacted by the COVID lockdowns a year ago.

Working through how to think about that revenue guide, we note that Apple reported $64.698 billion in the comparable year-ago period and the expectation for the September quarter coming into the release stood at $81.793 billion. So, coming into the print, Wall Street was looking for growth of ~26% YoY. What "strong double digits" means is open to interpretation, but that guide appears to be in line versus the consensus.

On the margin front, management expects gross margin to be between 41.5% and 42.5%. That's better than the 41.1% consensus. OpEx is expected to be between $11.3 billion and $11.5 billion. Management doesn't expect any contribution from other income and expenses and the tax rate is expected to come in at around 16.0%.

Capital Returns, Cash & Cash Flow

Apple returned roughly $29 billion to shareholders during the quarter, including $3.8 billion via dividends and equivalents and an additional $17.5 billion via open market repurchases of 136 million Apple shares. Additionally, Maestri called out that Apple "began a $5 billion accelerated share repurchase program in May, resulting in the initial delivery and retirement of 32 million shares."

The company finished the quarter with $194 billion in cash plus marketable securities and a net cash position of $72 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 $21.094 billion in cash from operations vs. the $22.937 billion consensus. If we back out the $2.093 billion of payments made for the acquisition of property, plant and equipment, we get a free cash flow figure of roughly $20.844 billion for the quarter vs. a roughly $19.153 billion consensus. That's nearly equal to the $21.744 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, payable on Aug. 12 to shareholders of record as of the close of business on Aug. 9, 2021.

The iResults

Total products sales of $63.948 billion crushed expectations of $56.888 billion.

Breaking down the segment results, iPhone sales came in at $39.57 billion, exceeding expectations of $34.189 billion and setting a June-quarter record driven by "very strong double-digit growth in each geographic segment." On the call, Maestri noted that the results exceeded management's expectations "as the iPhone 12 family continue to be in very high demand."

The team also called out that the active installed base of iPhones once again reached a new all-time high thanks to exceptional customer loyalty and the strength of the company's ecosystem. 

Total iPad sales of $7.368 billion came in above expectations of $7.171 billion. Mac sales of $8.235 billion were a June quarter record and better than the $7.863 billion consensus. On the call, Cook commented "We've seen a great response to the new iMac and iPad Pro, both powered by the M1 chip's exceptional speed and power efficient performance. The iMac's remarkable thin design and vibrant colors have made it a favorite for users everywhere. And the iPad continues to be an incredibly versatile tool in our users' toolbox, inspiring creativity and connection and keeping us entertained and productive in equal measure."

In Wearables, Home and Accessories, sales of $8.775 billion also outpaced expectations of $7.834 billion and also represent a June quarter record. Cook stated on the call, "Apple Watch remains a go-to choice for users to stay on top of their health and reach their fitness goals. And our newest accessory AirTag began shipping to an enthusiastic response from customers, making the Find My network more useful than ever, while protecting user privacy."

Remember, as important as quarterly device sales are, the installed base of active devices, which again reached a new all-time high across each geographic segment, is a far more significant measure than the number of devices sold in a three-month period, because it speaks to Apple's ability to sell higher margin Services.


Services sales of $17.486 billion outpaced expectations of $16.257 billion and set a new all-time record for the segment as well as June quarter records in each of Apple's geographic segments.

Additionally, on the call, Maestri commented that the company set "all-time records for cloud services, music, video, advertising and payment services and June quarter records for the App Store and AppleCare." He also noted that "newer service offerings, Apple TV+, Apple Arcade Apple News+, Apple Card, Apple Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth."

Ultimately, the key underlying drivers of Services segment sales are all trending in the right direction, with Maestri calling out three specific factors working to the segments favor. "First, our installed base of devices reached an all-time high across each geographic segment. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter in each geographic segment, and paid accounts increased double digits. Third, paid subscriptions continue to show strong growth."

Maestri also noted that Apple now has "more than 700 million paid subscriptions across the services on our platform." That's over 150 million than we saw last year and nearly four times the number of case subscriptions that Apple had just 4 years ago.

The Bottom Line

All in, this was once again the type of quarter we have come to expect from Apple, a clean beat with strong underlying fundamentals (think cash flows, installed devices, margin expansion and customer loyalty) that point to continued momentum in the current quarter. While shares are trading slightly lower after-hours, we attribute this more to profit taking and the fact that shares came into the print near all-time highs, than anything specific to the print

The one thing we will be on the lookout for when the sell-side releases their takes Wednesday is how Wall Street feels about that revenue guide, though again that's something for shorter-term traders to nitpick as we are more interested with the growing device installed globally, rapid adoption of new hardware products such as the Apple Watch, AirPods and AirTags and of course, the growth we are seeing in Services. The trends we are seeing on these fronts leave us confident that Apple's best days lie ahead -- and we are of course still on the lookout for clues as to when we will see a virtual/augmented reality headset and get more clarity on the company's automotive initiative.

Bottom line, similar to what we said last quarter, this was about as clean a print as anyone could have asked for, especially given the stock's strength into earnings season. As a result, we have even more conviction in reiterating our "own, don't trade" stance on the stock.