On Wednesday, Apple (AAPL, Financial) reported results for its first quarter of fiscal 2020.
It was a massive quarter, with revenues up 9% to $91.8 billion (up double digits after adjusting for currency headwinds). This was the third consecutive quarter of accelerating revenue growth.
From a geographic perspective, the gains were broad based, with the Americas (45% of revenues) and Europe (25% of revenues) both climbing double digits and Greater China (15% of revenues) returning to growth as well on double digit growth for iPhone, services and wearables (remember that revenues in the region declined by more than 20% in the first half of fiscal 2019).
These results largely reflect a solid quarter for the iPhone, with revenues up 8% (accounted for 61% of the company’s sales). While that’s an impressive result, it’s worth noting that this is lapping a 15% decline in the year ago period. As shown below, if we zoom out, iPhone revenues have increased at a roughly 2% compounded annual growth rate over the past five years.
The company also benefited from significant growth in wearables, home and accessories, with revenues up 37% to $10.0 billion – and that’s despite product shortages for both Apple Watch and AirPods due to outsized customer demand (wearables were up 44%). Collectively, the non-iPhone portion of Apple’s business grew by double digits for the fifth consecutive quarter.
As CEO Tim Cook noted on the conference call, services continue to grow for Apple:
“First quarter revenue reached $12.7 billion, an all-time record growing 17% over last year. Once again, we saw double-digit growth in all five of our geographic segments and established new records for multiple categories, including cloud services, music, payment services and our App Store search ad business as well as setting a December quarter record for the App Store and Apple Care.”
The active installed base of Apple devices reached another new all-time high (up mid-to-high single digits year-over-year to more than 1.5 billion devices), with growth in each major geography. As Cook noted on the call, the installed base “is fueling our growth across the board, particularly in services”. The company now has roughly 420 million paid subscriptions, an increase of 40% – and with expectations that they’ll exceed 600 million paid subscriptions by the end of the fiscal year.
The high-single digit increase in revenues exceeded growth in expenses, resulting in a 10% increase in operating income to $25.6 billion (operating margins expanded 10 basis points to 27.8%). Net income increased by a comparable amount (up 11% to $22.2 billion), with diluted earnings per share increasing 19% due to a significant reduction in the share count.
In the first quarter, cash flows from operations was $30.5 billion, with free cash flow of $28.4 billion (up 22%). In the first three months of the year, Apple spent $20.7 billion on share repurchases at an average cost of $284 per share – 135% more than they spent in the first quarter of fiscal 2019. As a result, the weighted average diluted share count declined by nearly 7% year-over-year.
Looking back a few years shows just how massive Apple’s capital return program has been: since the start of fiscal 2016, the company has spent $222.1 billion on repurchases and another $56.3 billion on dividends. But despite this nearly $280 billion in capital returns, the company’s net cash balance only declined by $42 billion over that period, reflecting the significant cash flow generation of the business. To me, the scale of those numbers is just mindboggling.
Apple currently has $99 billion in net cash, or $22 per share. As Chief Financial Officer Luca Maestri reiterated on the call, they are still on track to reach net cash neutral “over time”. Note that the despite more than $20 billion of repurchases, Apple’s net cash balance increased in the first quarter.
Conclusion
As I noted in a previous article, the scale of capital returns at Apple – and more specifically share repurchases – means that the recent run up in the stock price is bad for long-term owners. The tens of billions of dollars that the company is likely to spend every year on repurchases for the foreseeable future will not go nearly as far today as it would have 12 months ago. As shown below, the forward price-earnings ratio has nearly doubled since the beginning of 2019.
That said, I can understand why Mr. Market has become more optimistic. The company’s recent results are a lot stronger than they were a few quarters ago. The iPhone has returned to growth, with the non-iPhone portion of the business also thriving on the back of wearable and services. The company’s second quarter guidance calls for low double digit growth at the midpoint – a result that seemed out of reach a short while ago.
Whether this is sustainable over the coming quarters remains to be seen.
Disclosure: None
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