Growth, dividend investing, long-term horizon, value

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1 5 Key Insights From Apple's Earnings Feb. 5, :59 PM ET About: Apple Inc. (AAPL) Stefan Redlich Growth, dividend investing, long-term horizon, value Summary Apple recorded by far its biggest quarter ever fueled by a strong holiday season and record average iphone selling prices. Records were set across the board despite the quarter lacking one week compared to previous year. Apple released and discussed a wide array of customer and financial metrics but 5 things clearly stand out and will drive the investment thesis going forward. Apple (AAPL) just released fiscal Q results beating estimates and after some topsy-turvy after hours trading the sentiment initially changed before the stock was heavily sold in a weak Friday trading session and sold even further during Monday's market selloff. Apple beat EPS by $0.04 and revenue by a whopping $670M. A spectacular quarter is now in the books and despite the market's disappointment with the figures, I personally am thrilled

2 by what Apple just reported. Listening to the earnings call, reading the press release and listening to analyst reactions, 5 key things from that report stand out to me. These will drive the bullish investment thesis going forward. In a previous article I wrote to "keep calm and buy the dip". This thesis remains but it has just gotten that much stronger. I am not going through every earnings item but will shift focus to what I think really matters and should not be overlooked. 13 Weeks Apple recorded record revenue of $88.3B for the quarter which represented a 12.7% Y/Y increase easily beating the Street. That is staggering growth for a company the size of Apple. However, what is even more remarkable is that the comparison period in the 2016 December quarter featured 14 weeks whereas this quarter only contained 13 weeks. Apple stressed that fact multiple times during the earnings call and adjusting for that one week less would actually show 21% revenue growth. This also means that reported Y/Y growth figures for iphone (+13% in revenue), ipad (+6% in revenue), Services (+18%) and Other Products (+36%) would be substantially stronger if compared on a weekly basis. Equally overlooked is the fact that Apple comfortably beat its own guidance. Its fiscal 2017 Q4 report guided for revenue between $84B to $87B whereas actual sales came in substantially higher at $88.3B or around 3.3% above the mid-

3 point of that guidance. This was what catapulted the stock into the high $170s back then and to see it trading in the mid $160s before earnings was thus a nice bargain. Interestingly, back then consensus only called for sales of $84.9B. Also, it remains a mystery to me as to why analysts keep on raising their estimates above Apple's guidance continually. In the end what drives my investment thesis is to see whether the company can meet its own expectations and not some intransparent Wallstreet estimates. And although percentage figures of that 12.7% revenue increase are already impressive, absolute figures should be digested as well. A 12.7% increase in revenue means that Apple added around $10B in sales to its top line over a period of just 12 months. $796 That's the average selling price (NYSE:ASP) for Apple's most recent December quarter which easily topped the $755 projected by analysts, is $97 up on Y/Y basis and up by $178 on a sequential basis. This clearly shows that there is no shortage in demand for the newly released and most expensive iphone ever, the iphone X. Apple does not release any breakdown figures by iphone model but judging from CEO Tim Cook's comments that iphone X "has been our top selling phone every week since it launched" as well as the sky-high ASP demonstrates that it is highly sought after. Basically, with every new release over the last three years ASP

4 has been increasing as Apple is exploring the market potential for more expensive phones. So far it seems that it has not reached a peak and given that its product line-up also includes much lower priced iphones there should be something in it for every purse. That surge in ASP has helped Apple to post record sales for iphone in the quarter despite selling 1% less units. Compared to Q the difference is even more remarkable as selling 3% more iphones yielded 19% higher sales.

5 285 and from 163 to Zero Apple ended the quarter with another record level of liquidity. Its cash position which includes marketable securities increased by $16.2B to $285.1B of which 94% was held overseas. Given that Apple issued a lot of debt over the past years to fund its dividends and massive share buy-backs this leaves us with a net cash position of $163 at the end of the December quarter. With the new tax law Apple is repatriating massive amounts of liquidity back to the U.S. Based on its $38B tax payment estimates this means around $180B of cash inflow to the U.S.

6 With that giant amount of money also comes giant responsibility to allocate it thoughtfully and deliberately. According to CFO Luca Maestri Apple wants to make the right decisions in the best interest of our long-term shareholders. Source: Apple Earnings Call Q1/2018 This could mean anything from increased dividend growth, extending the buy-back program ($34B are still remaining under the current one), paying back debt as well as M&A. Although Apple did not yet discuss any specific capital allocation plans (this will happen in April when it discusses its March quarter), the CFO mentioned that Apple plans to reduce its net cash position to zero! That leaves $163B on the table up for distribution as of December 31, 2017 and given Apple's enormous cash flow generation will very likely exceed $170B by the end of March. I am not going to speculate on how exactly that money will be channeled to shareholders but one thing is for sure it is exciting times and you do not want to miss that windfall of cash coming to you. $18B That is the expected absolute growth in sales over two quarters, i.e. Apple is guiding to grow sales by $18B in the first half of fiscal 2018 compared to the prior year period.

7 That is an impressive number and should ease overblown concerns from analysts about soft guidance for Q2. Interestingly, unlike to previous earnings calls, Apple went into a great level of detail regarding Q2 guidance with the two most important messages being: And maybe the two most important messages are that we believe iphone revenue will grow double digits as compared to last year, during the March quarter. And also and importantly that iphone sell-through growth on a year-over-year basis will be actually accelerating during the March quarter as compared to the December quarter. Source: Apple Earnings Call Q1/2018 Especially the first part is intriguing and should now really calm down investors when assessing the rumor of a 50% cut in iphone X production. Regardless of how you interpret that fear of a cut, investors should take Apple's guidance for granted as it explicitly calls for double-digit revenue increase and an implicit increase of ASP. This will likely mean that it will sell less units than expected but in the end that should not matter at all since it can extract more revenue from every iphone sold than ever before. Apple is guiding for $60-62$B in revenue for Q2 which significantly undershoots consensus estimates of $65.26B but that should not matter at all to investors. There is no reason to panic unless you are dissatisfied with double-digit revenue growth.

8 $49B Apple remains on plan to double its fiscal 2016 Service revenue of $24.4B to $48.8B by Service revenue is already making up around 10% of total sales and if we take the expected 2020 figure and apply it to Apple's current sales that ratio increases to 14%. This segment is strongly growing in significance along with the "Other Products" segment and reduces Apple's reliance on the iphone to grow. For the current quarter iphone's revenue share was at a dominant 70% but largely fueled by the release of the new iphone generation. In the previous quarter it was only at around 55%. In an early reaction to the press release one SA user stephenmcmahon83 made the following statement: IPhone is now only slightly more than HALF if the revenue mix...strip out all sales of IPhone and Apple is trading at 38X earnings - on par with Microsofts current PE, and a fraction of Amazon's PE...oh yeah, and Apple has $300 billion in the bank account. Very strong company. That is a very interesting way to look at and shows a very attractive valuation mismatch in the market. Apple's PE is only at 18 times earnings whereas Microsoft (MSFT) boasts a PE of 32 times earnings and both companies are growing double digit on a similar level, give or take 1-2pp. For years analysts have been worried about iphone dominance for Apple's financials and now that it is decreasing the valuation of Apple stocks remains strikingly

9 low. Investor Take-Away Apple reported a blowout quarter with records across the board and while guidance for Q2 initially "disappointed" analysts that sentiment changed once Apple gave more color on its impressive results and guidance. The 5 things mentioned in this article stand out to me and provide sufficient reason to stay long or finally go long. Particularly the prospect of accelerating dividend growth and intensified buy-back programs once Apple starts to distribute its $163B net cash position is more than enticing. Apple's current yield of 1.6% is rather mediocre but 10%ish dividend growth paired with substantial repatriation benefits also creates a strong investment case for dividend investors. Investors should not be obsessed with the fact that Apple's guidance is below consensus since in the end it is not Apple bringing up these expectations but individual models by Wallstreet. Apple is a company which is growing at double digits, innovating across its product line-up and a brand everybody is aware of. It is the richest company in terms of cash and about to launch its biggest ever capital return program thanks to the tax reform. I'm certainly in for that illustrious ride and the current general market sell-off provides another good opportunity to accumulate

10 more shares. Apple has lost around 13% from its high which provides a nice discount and safety cushion.