Apple 1Q numbers - better than expected

Apple, the biggest company in the world by market cap, reported numbers for the "holiday" (their 1st of their new financial year) quarter last evening after the market had closed "regular" hours. The headline pretty much sums it up - iPhone, Services, Mac and Apple Watch Set All-Time Records. iPads, not so much! My feeling on the iPad is that more businesses will be drawn to it in time. Quarterly revenues of 78.4 billion Dollars bested the markets expectations, and unit sales of the newer iPhone clocked 78.29 million. Again, above expectations, which were in the region of 76 million.

China was the only geography with a significant fall in revenues, the quarter on quarter growth in that region was huge (up 85 percent). Perhaps waiting for the year of the Rooster? The services business (music, apps) continues to impress, growing revenues by 18 percent. That is now a 7 billion Dollars a quarter business. Cash and cash equivalents topped 246 billion Dollars. An eye popping number, one that always needs a little bit of context. There is a very, very short list of stocks with a greater market capitalisation than the cash that Apple has. It is worth "printing", Apple (obviously), Alphabet, Microsoft, Berkshire Hathaway, Amazon, Facebook, Exxon Mobil, JNJ, JP Morgan, Wells Fargo, GE, AT&T, TenCent and Alibaba. Those are the only ones that have market capitalisations of greater than 246 billion Dollars. No other companies. Apple has more cash than the market cap of Nestle. More cash than the market cap individually of Procter & Gamble, Bank of America and Royal Dutch Shell. Context sometimes throws some crazy numbers at you.

The market cap is 636 billion Dollars, the cash represents 38.6 percent of the value of business. Of course in the context of a US domiciled company, if the business were to repatriate that cash, they would have tax issues. Even though the company has paid tax in places that they have sold their products (the EU says that it is too low), in terms of US laws, they have to pay tax on it again if they decide to repatriate it. That is still ongoing, expectations are for the Trump administration to announce something on overseas cash for US businesses. Apple, just by the way, missed a deadline to pay the European Union 13 billion Euros, for "enjoying" illegal tax concessions. Ireland clearly does not see it that way. Ireland seemingly at loggerheads with their EU brothers, they don't want it. That is ongoing.

Earnings per share crept up marginally, 3.36 Dollars per share, a "beat" of 14 cents on earnings (and 1 billion on revenue). Dividends, remember those have increased from 52 to 57 cents per quarter, it is payable at the end of next week. Shares in issue over the last year have decreased to 5,298,661 from 5,558,930 this time last year. That is fairly significant. This is part of the capital return program (dividends and buybacks) of 200 billion Dollars thus far. Since it started, that is, in the post Steve Jobs era, where dividends and buybacks were part of the norm. The long term impact of retiring shares and by extension juicing up earnings per share is felt in later years.

That is all very nice, what are we to think of the future? Guidance for Q2 is as follows: "revenue between $51.5 billion and $53.5 billion, gross margin between 38 percent and 39 percent, tax rate of 26 percent." Whilst people suggest that the trajectory of the phone sales may be slowing, the mix upwards to the better camera (the iPhone 7 plus) means that this caught the company a little off guard, their supply balance only came back in January. You can read the opening statement of the conference call here - Tim Cook's Opening Statement, in which he says: "iPhone 7 Plus has earned rave reviews for its advanced new features, especially the dual camera system which produces stunning portraits and high quality zoom. This is a uniquely Apple feature that is surprising and delighting our users."

I think that statement is at the core of the DNA of the business. They continue to make awesome products that delight their customer base. As long as this continues to be the case, be it artificial intelligence (an Alexa/Echo competitor), augmented reality (a Snap/Google glass competitor) or inserts into vehicle parts (competing with all the self drive folks), Apple will produce wonderful products that their customers want. AirPods shake things up, from a wireless point of view. There is a case to be made that once customers are inside of the ecosystem, they rarely, if ever, leave the ecosystem.

We continue to accumulate and own what is a tremendous company. It is a compelling investment too, the growth rates may have slowed, I suspect that there will continue to be innovative products that will drive growth, and products that create a better experience, be they the watch or the earphones. The stock is cheap (cheaper when you strip out the cash) and will deliver great products. More to the point, the next generation phone, the ten year anniversary is highly anticipated. Called the 10 or the 8 or even the x, no doubt the new form will be beautiful.