Apple 4Q and FY numbers - lower unit sales

Apple reported numbers after hours last evening, these are for their fourth quarter and ahead of the highly anticipated festive/holiday season. It does include a week of the iPhone 7 and iPhone 7 plus. These results also included guidance for the current quarter. These have possibly been the most anticipated results for some time now, whilst it is fair to say that this is the weakest comparable year in an absolute age (I think Bloomberg pegs it at 15 years), back then the iPod had only just been released (October 2001). In the Apple 2001 financial year the company had sales of 5.363 billion Dollars and registered a modest loss, they had 4.336 billion Dollars worth of cash (seems like that always is the case), there were 345 million shares in issue and share price ended the quarter at around 15.4 Dollars, adjusted for stock splits, that is 1.10 Dollars back then.

Last evening, the company reported annual sales for the financial year just passed of 215.63 billion Dollars. They have ended the quarter with around 237 billion Dollars worth of cash (securities and cash equivalents). So, without wanting to beat up on a headline, I am not too sure how the same company is comparable. That is just me. Oh, and the share price is nearly 9000 percent higher, a number that is too big to comprehend for most investors. Forget that. It is the past, it means nothing about the future and rather tells you where the company has come from. Just like a bunch of lines drawn on a historic graph, that is the road travelled. So what does the Apple of tomorrow and beyond look like?

It is difficult to believe that the iPhone was released on the 29th of June, 2007, after a show and reveal from Steve Jobs in January of 2007. Jobs was the master revealer. The first one I ever had was the iPhone 3G and I thought it was amazing. Looking at the photos of the newest iPhone, the 7, it is incredible to see how far we have come. The consumer globally has bought over one billion of the 15 models available to them since the release date. The 4G phone (on contract at the time) cost 499 Dollars, for double the memory, you paid 599 Dollars and were locked into a 2 year contract.

Strangely, and perhaps this is human nature, the "cheaper" 5C phones never really sold en masse. People want the real deal. With much improved specs and amazing electronic "art" form, the newer 7's sell from 649 Dollars for the "smallest" 32G phone, the bigger ones cost more. The 128G phone costs 749 Dollars, the 256G one costs 849 Dollars. The iPhone 7 plus (with the amazing camera) costs 969 Dollars for the 256G one. Obviously 9 years on the product is more amazing than before, consumers expect more and more every year. For reference purposes, the average selling price (ASP) of the current cycle is expected to be markedly higher than the current (last quarter) 600 Dollars. And it is easy to see why, right?

Let us focus on the annual numbers and the forecast. The company reported net income of 45.6 billion Dollars for the 12 months ending 24 September 2016 on revenues of 215.63 billion Dollars (said that already, sorry for the repeat). That translates to 8.35 Dollars a share, which at the closing price of 118.25 Dollars means that the stock trades on 14.16 times earnings. And the 57 cent per quarter dividend translates to a 1.93 percent yield. More than treasuries of course. Cash as a percentage of market capitalisation is 36.8 percent, the earnings multiple less cash is just under 9 times. That sounds dirt cheap. I guess the market is wary of the size and scale of the business, where companies "Nokia" and "Blackberry" come to mind. I expect the company to continue to sell their main product, the iPhone, strongly.

During the quarter past the company returned a whopping 9.3 billion Dollars to shareholders (dividends and buybacks) and since the capital return started, the company has returned 186 billion Dollars out of the 250 billion program. Operating cash flows for the quarter was an Apple record. Nice. International sales account for 62 percent of the total business. The highlight of the quarter was undoubtedly the services business, Apps, Music, Movies and all things you get from being inside the ecosystem. Revenues year on year for that business grew 24 percent year-on-year and now represents 13.5 percent of all sales.

Apple Pay for the month of September registered more transactions than it did in the entire of the 2015 financial year. Apple Pay actually launches in Japan today. The Music business, thanks to the monthly subscriptions (as a user I love it, my colleagues less so) grew 22 percent. The iPhones business still represents 60 percent of total sales. All product unit sales were lower year on year as a result of the release of the newer devices, expect that to change sharply. Tim Cook often points out, on sales alone, that the Apple Services business as a standalone would be a Fortune 100 business. That is the size and scale.

Guidance was as follows for the current quarter, 76-78 billion Dollars of sales, margins about the same as current, operating expenses a little higher than most people would have expected. The biggest issue is actually pent up demand, on the earnings call (read the transcript on SeekingAlpha -> Q4 2016 Results - Earnings Call Transcript): "Demand continues to outstrip supply, but we're working very hard to get them into customers' hands as quickly as possible." In particular the iPhone 7 plus, which has the awesome camera. Whilst the company doesn't deliver unit sales for the Watch, they have pointed out the new version is gaining huge traction, healthcare business Aetna have supplied 50 thousand to their employees, encouraging them to lead healthier lives. This version should comfortably outsell and outstrip the previous version.

The CFO, (Roman born) Luca Maestri said something interesting on the call, a "thing" we have seen circulating over the last few days, it has to do with the company IBM having adopted Apple. IBM have 90 thousand Macs across their organisation, 48 thousand iPads and 81 thousand iPhones. Which are expensive, right? Wrong! Maestri says: "IBM reports that PCs have three times the cost to manage, drive twice the number of support calls and are 5 times more likely to require a follow-up appointment to resolve an issue than Macs. Thanks to much lower support cost and significantly higher residual value, the company is saving as much as $535 per computer when comparing the total cost of Mac ownership to a PC over a full-year lifecycle."

You own Apple for a number of reasons. One, it is cheap (the stock) relative to many other great businesses. Two, this is an amazing business with beautiful products and great user experiences, that is VERY important, users return time and time again. Three, the improvement to existing products (the next iPhone form is going to be off the charts) and new products are going to be top notch. Growth prospects still exist in many parts of the world, China, India and many emerging market consumers want the same experience, reason four. We continue to accumulate what is a great company. The stock price is trading down after hours, nearly three percent, obviously the supply side looking strained is an issue for current quarter sales. This company still represents one of the biggest consumer opportunities over the next five years. Conviction buy from our side.