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Apple Reports Winning Quarter

Updated on January 28, 2015

Apple (AAPL:Nasdaq) reported earnings this evening that were very strong. The shares are up 5% in after-hours trading and I am not surprised. Expectations were high and the company easily beat even the whisper numbers. The clear highlight was the strength in the iPhone sales, but Macs also posted better-than-expected results and the mix helped margins exceed company guidance and consensus estimates. One of the most impressive figures from CEO Tim Cook was that "on average we sold 34,000 iPhones every hour, 24 hours a day, every day of the quarter.” That’s just a wow.

Fiscal first-quarter earnings per share came in at $3.06 vs. the $2.60 expectations and rose 48% year over year (y/y). Revenues rose 30% y/y to $74.6 billion vs. the $67 billion consensus. The revenue growth would have been 4% higher on a constant currency basis. Revenue growth was broad-based -- developed growth rose 20% y/y, Emerging Markets increased 58% and China advanced 70% y/y.

By product, iPhones grew 46% y/y to 74.5 million units, with 46% growth in U.S., 97% in BRICs, and a doubling in China. Average selling prices (ASPs) rose $50 y/y to $687 and led to iPhone revenue growth of 57% y/y with the quarterly sales figure exceeding $50 billion for the first time ever. Certainly it helps that the company is now working with 375 carriers, or 72% of the world mobile phone subscriber base.

Mac sales were also ahead of expectations, with 5.5 million units ahead of the 5.3 million projection. This is a 700,000-unit increase y/y and 14% y/y growth. ASPs also rose $58 quarter to quarter, driving an all-time record Mac revenue figure of nearly $7 billion. Growth came from both desktops and portables -- vs. IDC's estimate for PC market declines of 3% -- so clear, continued market share. In fact, the company now has seen market share increases in 34 out of the last 35 quarters. Sales of iPads totaled 21.4 million units vs. 26 million units last year and slightly below the 22.5 million consensus. While below plan, it's important to note the upgrade cycle is longer vs. an iPhone and PC as well as cannibalization from other products. And yet share growth is still strong, with usage 6x stronger vs. the competitors' average. I would imagine the new iPad will spark sales over the next few quarters, but the story and margins are driven by the iPhone.

The company opened 10 new retail stores and now has a total of 447 units -- 182 that are outside the U.S.

Gross margins were ahead of guidance and consensus, at 39.9%, and operating margins of 32.5% were the highest in 10 quarters. Cash flow from operations was exceptional at $33.7 billion and a new all-time record. And total cash/marketable securities came in at $178 billion, up $22.7 billion sequentially. The company spent $5 billion on share buybacks, or 46 million shares, paid $2.8 billion in dividends and retired an additional 8 million shares via its accelerated share program. Apple will update its cash distribution policy in April.

Guidance was typically conservative, with March-quarter revenue seen at $52 billion-$55 billion vs. $45.6 billion y/y and consensus of $54 billion; gross margins at 38.5%-39.5%, in line with consensus of 38.9%; and operating expenses at $5.4 billion-$5.5 billion, slightly higher than the $5.3 billion consensus. The company said that forex had a negative impact on guidance. Revenue growth would have been 4% higher and gross margins 100 basis points higher, which also includes some of the hedges rolling off.

So, a fabulous December quarter and stronger-than-expected March-quarter guidance, excluding forex and rolling off hedges. The stock remains attractive, cash flow will lead to further cash friendly initiatives and the product cycle story in iPhones and Macs is on fire. The company's watch was pushed out to April, but the next exciting initiative at the company and a new iPad should increase units into 2015.

I continue to own Apple for the long term and are very impressed with the results last night along with "good enough" guidance.

How do you feel about AAPL?

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