Quick Thoughts: AAPL – SURPRISE! AAPL beats! (actually, not a surprise)


–          AAPL delivered 4QFY14 EPS of $1.42 on sales of $42.1B, handily beating the published consensus, on very strong sales of the iPhone 6 and 6 Plus that had been widely anticipated

–          Sales growth of 12.4% was the best since December 2012. iPhone unit sales of 39.3M were up 16.2% YoY, with ASPs up 4.3% to $6.02. iPhone is 56.2% of AAPL sales, up 340bp YoY.

–          Mac sales had a big quarter, up 18% YoY and 15.7% of total. The iPad franchise, down 14% to 12.6%. of AAPL sales, is deteriorating. iTunes grew 8% YoY, falling to 10.9% of total sales.

–          We expect another big beat in December. Increasing dependence on iPhone raises risks as high end smartphone market saturates. Strong Apple Watch sales needed to sustain growth in 2015.

Having already reported selling 10 million units during the opening weekend sales of the iPhone 6 and iPhone 6 Plus, and ongoing press commentary of the vigorous global demand for Apple’s foray into modern larger screen form factors, it would have been shocking if the company had not blown out the published consensus numbers. In that context, the fairly sleepy after-hours response to the obviously excellent results is not all that surprising.

And blow out the results they did. The 12% sales growth hit levels Apple hadn’t delivered in nearly two years, accelerating from less than 5% just two quarters ago. It was all iPhone, which saw sales up 21% on 16% unit growth and a 4% jump in average selling prices vs. the year ago quarter. Those sales took the iPhone to more than 56% of the total, returning to where it had been in 1H14 and threatening to set new records during the upcoming quarter. Given that the iPhone is Apple’s highest margin product category, its rise has an even greater impact on Apple’s profits. Demand for the new iPhones should be even greater during the Holiday quarter, as the products roll into additional markets, including China, and as order backlogs begin to clear.

The resurgent Mac line also had a fantastic quarter, growing 18% YoY and blowing past the moribund iPad franchise to become Apple’s second biggest business unit, at 15.7% of total sales. iPad sales were off another 10% sequentially and 14% YoY, as Apple hemorrhaged market share in the increasingly price sensitive tablet market. The full quarter sales of the iPhone 6 Plus phablet look to be a death star for iPad mini sales during the Holidays, so the news does not look likely to get better for the iconic product line.

So December looks to be more of the same. Expect significant upward revisions to consensus and for Apple to go ahead and beat that revised consensus on those iPhone 6 and 6 Plus sales. Still, the growing reliance on the iPhone is a double edged sword. This year’s blowouts are next year’s super tough compares. Moreover, I suspect that there has been a substantial pent up demand for an iPhone with a larger screen, and some of this year’s demand may be coming from early upgraders, thus pulling some of next year’s demand forward. Big screens were at the top of the wish list for Apple users, and now that they are here, it is not clear that there is another change that could come close to topping them when it comes time for the iPhone 7.

This puts the onus on the Apple Watch to really deliver in 2015. Given the starting price point, I don’t see it as a product to sell in tens of millions of units. If it is successful, I think it will be a smaller number of units at a MUCH higher average selling price. I think investors will get a little more juice from Apple over the coming quarter, but I am more than a little nervous about it in the quarters beyond.

For our full research notes, please visit our published research site.

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