Apple Clocks Record Revenues, iPhone Sales

iPhone shipments grew 5% to a record 78.29 million units after falling 5% in Q4 FY16

Iconic technology major Apple Inc. (NASDAQ: APPL) announced its Q1 FY17 financial results on January 31st, 2017.

Headquartered in Cupertino, California, Apple engages in the design, manufacture, and marketing of mobile communication, media devices, personal computers, and portable digital music players. The Company also sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. Apple’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessories, services, and support offerings.

It operates through the following geographical segments: Americas, Europe, Greater China, Japan, and Rest of Asia/Pacific. The Americas segment includes both North and South America. The Europe segment consists of European countries, as well as India, the Middle East, and Africa. The Greater China segment comprises of China, Hong Kong, and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries not included in the reportable operating segments of the company. Read more about Apple’s financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Apple revenue grew 3% to a record high of $78.4 billion versus $75.9 billion in the year ago same period. Apple reversed three straight quarters of falling revenue on strong holiday demand for its new iPhone 7, which was launched in September 2016. Total iPhone shipments grew 5% to a record 78.29 million units after falling 5% in Q4 FY16. The iPhone accounted for two-thirds of Apple’s sales of $54.37 billion during the reporting quarter.

The new iPhone has been promoted aggressively by wireless carriers, amid a massive recall of rival high-end phone, the Samsung Galaxy Note 7, over safety concerns. Still, US sales of Samsung devices remained strong, with a 29% share of smartphone sales in Q4 FY16 versus Apple’s 31% share, according to consumer-analytics firm Kantar Worldpanel. Apple benefited from rising demand for the iPhone 7 Plus, which helped lift the iPhone’s average selling price during Q4 FY16 to a record $695 from $619 in Q3 FY16.

In recent months, the iPhone has been facing intense competition in Greater China, the world’s largest smartphone market, Apple lost market share to less expensive smartphones from local rivals like Oppo Electronics and Huawei Technologies Co. Moreover, during the peak holiday season, several of Apple’s biggest products suffered from insufficient supply, including the Apple Watch, its new AirPods wireless earbuds and the iPhone 7 Plus, making the company lose additional sales.

Apple’s services business – which includes its App Store sales and its music and payments services – jumped 18% from a year ago to $7.2 billion during the reporting quarter. The number of users of Apple Pay tripled over the past year, with transaction volume up 500% Y-o-Y.

The Company’s gross margin declined to 38.5% compared to 40.1% in the year ago comparable quarter as new iPhone features like longer battery life and more memory increased costs. Over the past year, the Company has pushed suppliers to cut component costs to protect margins as iPhone shipments stagnate. International sales accounted for 64% of Q1 FY17 revenue.

Chief Executive Tim Cook said that India was poised to boom in smartphone sales as a more powerful 4G cellular network was put in place this year and next. He also hinted at potential future areas of business, commenting that media content creation and ownership was a great opportunity. Overall, Apple’s net income fell 2.6% to $17.89 billion, or $3.36 per share, during Q1 FY17, from $18.36 billion, or $3.28 per share, a year earlier. During Q1 FY17, Apple generated $27 billion in operating cash flow, with cash reserves of $246.09 billion at the end of the reporting quarter.

Regional highlights

During Q1 FY17, Apple’s revenue from the Americas grew 9% to $31.96 billion versus $29.32 billion in the year ago corresponding period, pointing to strong sales during the peak holiday season. On the other hand, Apple’s revenue from Europe grew 3% to $18.52 billion versus $17.93 billion in Q1 FY16.

More worrying is the fact that revenues from Greater China fell 12% to $16.23 billion from $18.37 billion. This is mainly because Apple faced major headwinds in China during the reporting quarter, where it lost market share to homegrown rivals like Oppo Electronics, Vivo, Xiaomi, and Huawei Technologies Co. that sell less expensive smartphones with almost similar features as that of the iPhone.

Apple’s revenue from Japan jumped 20% to $5.76 billion versus $4.79 billion in the year ago same period. Revenue from Rest of Asia grew 8% to $5.86 billion versus $5.44 billion in the prior year’s comparable period.

Other highlights

Returns to shareholders: Apple returned nearly $15 billion to investors through share repurchases and dividends during Q1 FY17, bringing cumulative payments through our capital return program to over $200 billion. Apple’s board of directors also declared a cash dividend of 57 cents per share. The dividend is payable on February 16th, 2017 to shareholders of record as of the close of business on February 13th, 2017.

Investment in SoftBank: Apple and Japanese internet and telecommunications investment giant SoftBank Group Corp. have held talks for Apple’s investment of up to $1 billion in a $100 billion tech fund being raised by SoftBank on December 12th, 2016. Apple has confirmed the investment, which would connect the world’s most valuable company with market value of over $621 billion, with one of the world’s largest technology fund.

The deal would also signal a shift in Apple’s investment strategy, which mostly focuses on acquiring startups valued at less than $1 billion. It would also bring Apple’s cash, estimated to be $238 billion at the end of September 2016 and located mostly outside the US, into one of the world’s biggest investment funds. The SoftBank fund is expected to invest in emerging technologies, such as artificial intelligence and the Internet of Things. Apple could gain a much-needed insight about innovations in these new categories.

Foxconn to move manufacturing to US: Apple-supplier Foxconn to set up US plant: iPhone assembler Foxconn plans to set up a US plant with an investment of $7 billion. Such a move would bring manufacturing closer to the largest market for iPhones and iPads, a potential advantage for Apple, which accounts for about half of Foxconn’s revenue. The new plant to be set up in the US could also be built as a joint investment with Apple. However, an iPhone made in the US could retail for as much as $740 to $1,300 for a 32GB iPhone 7 versus $650 today, due to logistics costs for shipping parts and non-availability of natural resources.

Lawsuit with Qualcomm: Apple has locked horns with its iPhone chip supplier Qualcomm Inc. (NASDAQ: QCOM) by filing a $1 billion lawsuit against the company on January 20th, 2017. Apple’s move comes days after the US government accused the chip maker of resorting to anti-competitive tactics to maintain a monopoly over key semiconductors that are used in high-end smartphones. San Diego, California-based Qualcomm, a leader in wireless chip technologies, is a major supplier to both Apple and Samsung Electronics Co Ltd for modem chips that connect phones to wireless networks. The two companies together accounted for 40% of Qualcomm’s FY16 revenue of $23.5 billion.

In its lawsuit filed in US District Court for the Southern District of California, Apple accused Qualcomm of overpricing smartphone chips and refusing to pay some $1 billion in promised rebates. Apple also said that Qualcomm has withheld the rebates because of Apple’s discussions with South Korea’s antitrust regulator, the Korea Fair Trade Commission. The complaint also challenged the validity of some key Qualcomm patents for wireless technologies. Apple asks the court to rule that, if the patents are upheld, that the royalty amount is significantly lower than what Qualcomm currently charges.

Outlook for Q2 FY17

Apple forecasts revenue between $51.5 billion and $53.5 billion during Q2 FY17, with gross margin expected to range between 38% and 39%. Operating expenses are expected to range between $6.5 billion and $6.6 billion, with other income/(expense) of $400 million during the quarter. The tax rate is predicted at 26% during Q2 FY17.

Stock Performance

Apple’s stock stood at $128.53, falling 0.17%, at the close on Thursday, February 02nd, 2017, having vacillated between an intraday high of $129.39 and a low of $127.78 during the session. The stock’s trading volume was at 33,609,709 for the day. The Company’s market cap was at $675.79 billion as of Thursday’s close.

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