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Apple Beats Estimates, Increases Buybacks And Announces Stock Split

Apple Beats Estimates, Increases Buybacks And Announces Stock Split
By: Larry Darrell
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Apple Inc. (AAPL) reported results for the second quarter of its fiscal year 2014 (2QFY14; ended March 29, 2014) after the closing bell yesterday. The tech giant reported better-than-expected revenues and earnings for the quarter while providing strong guidance for the ongoing quarter. The improvement in revenues and earnings is attributable to improved iPhone shipments revenues from service during the quarter.

The smartphone maker also increased shareholder return by expanding the current share buyback program and quarterly dividends. The Cupertino, California-based company also announced a 7-for-1 stock split. All this optimism was reflected in the market, as Apple’s stock price went up 7.4% in pre-market trading to $563.7, around $11.4 below its 52-week high.

Results Beat Expectations

Apple reported revenues of $45.65 billion for the quarter, an increase of 4.7% year-over-year (YoY), beating analysts’ estimates of $43.53 billion by 4.9%. The company continued its trend of beating revenue estimates for the fifth consecutive quarter. The increase in revenues came due to stronger iPhone sales, which improved gross margin by 180 basis points (bps) YoY to 39.3% whereas consensus estimates had put the figure at 37.6% for the quarter. The reported gross margin also beat the company’s own expectations of 37-38%.

Apple reported net income of $10.2 billion during the quarter, which translates into adjusted earnings per share (EPS) of $11.62, beating consensus estimates of $10.17 by 14.3%. The earnings beat was significant and this can be gauged from the fact that the highest Street estimate was $10.69. The company has now beaten earnings estimates for the past six quarters.

Bidness Etc had already anticipated that the company would beat revenues and earnings estimates for the quarter.

Shareholder Return

The cash rich company increased its stock repurchase program and quarterly dividends as well. The technology giant expanded its share repurchase program by $30 billion to $90 billion. According to the company’s CEO Tim Cook, Apple has expanded its buyback based on the belief that its shares are undervalued. Currently, Apple is trading at a year’s forward price-to-earnings (P/E) multiple of 11.72x, which translates into a discount of 15.4% against Microsoft Corporation’s (MSFT) forward multiple of 13.85x.

The company has also announced a 7-for-1 stock split to make the stock more accessible to individual investors at a lower price. A stock-split increases the number of stocks outstanding and reduces the price of each share. The impact of the stock split will be effective from June 9. The company also increased quarterly dividends by 7.9% to $3.29, which translates into an indicated yield of 2.51%.

The maker of the iPhone also said it would return more than $130 billion to its shareholders by the end of 2015, up from its previous target of $100 billion. However, at the end of 2QFY14, Apple reported it had only $18.4 billion in cash in the US and would need to raise debt in order to pay dividends and fund the freshly-expanded share repurchase program.

Shipments

Despite the decline in average selling price (ASP) by $17.11 or 2.8% to $596.17 during 2QFY14, total revenues from iPhone sales increased 14% on the back of surging iPhone shipments that grew 17% YoY to 43.72 million.

However, on a sequential basis, Apple experienced a 14% decline in iPhone shipments as well as a decline in ASPs by $40.73 or 6.4%. Management cites higher sales of the iPhone 4S in emerging markets as a reason for the sequential decline in ASPs.

The company sold 16.35 million units of the iPad during the quarter, 17% lower than analysts’ estimates of 19.7 million. However, the lower sales were overshadowed by impressive numbers posted by the iPhone. On a yearly and a sequential basis, the iPad experienced a decline in shipments by 16% and 37%, respectively. The ASP of the iPad came in at $465.44, improving 5.6% on a sequential basis, and 3.7% on a yearly basis. The improvement in the iPad’s ASP can be attributed to a shift towards the iPad Air.

Guidance

Apple also provided revenue guidance for 3QFY14. The company expects revenues to be in a range from $36 billion to $38 billion, close to mean consensus estimates of $37.91 billion. Apple expects its gross margins to come in at 37-38%.

The company also expects operating expenses to remain between $4.4 billion and $4.5 billion, and a tax rate of 26.1%.

Moving On

Moving forward, Apple is expected to release its new operating system, iOS 8, at the World Wide Developer Conference (WDCC) in June. There are some significant changes expected in the new operating system for iPhone and iPad; a fitness-focus app by the name of Healthbook is expected to be included in the new OS. Improvements in the disastrous Apple Maps are also expected coupled with the introduction of iTunes Radio, which is Apple’s answer to Pandora.

The company has also sold over 20 million Apple TV subscriptions cumulatively since its launch, and moving forward Apple can be expected to produce original content like other competitors such as Yahoo Inc. (YHOO). Apple is expected to form a partnership with Nike Inc. (NKE) for its iWatch, which is also scheduled to be released later this year.

The smartphone maker is set to release the iPhone 6 this year. Rumors suggest the new smartphone will offer a larger, 4.7-inch sapphire screen, improved performance, and new features via the iOS 8. Recently, Samsung Electronics Co., Ltd. (SSNLF) launched the Galaxy S5 in 125 countries around the world and doubled its first-day sales compared to its S4 model. However, Apple’s iPhone continues to record better-than-expected sales, despite the high intensity of competition in the smartphone industry.

For an in-depth analysis on Apple Inc., read Bidness Etc's piece: Apple Looking Ripe for Investment.

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