We’ve watched Apple report more than 70 quarters, and it hasn’t gotten old yet. The quarterly tradition is an opportunity for investors to check in on Apple’s progress toward maximizing what we call digital leverage: the simultaneous increase in value for both customers and shareholders.
Apple has written the playbook on digital leverage. The June quarter results are further evidence of the company’s proven process and its outcomes. Apple continually improves its hardware + software + services ecosystem to deliver more value to customers (driving revenue growth) and more value for shareholders (via improving profitability).
Let’s dive in. Apple reported June quarter revenue of $81.4B, up 36% y/y, well exceeding Street expectations of 23% revenue growth. EPS was $1.30 (up 100% y/y) compared to Street consensus of $1.01 (up 55% y/y). That’s digital leverage.
There were some doubts heading into the print about the sustainability of growth. It’s clear that growth will slow next year, as it will for almost all big tech. For Apple, revenue growth will likely end up mid to high single digits compared to the Street that’s looking for low single-digit growth. We believe that 7-9% top-line growth is sustainable for a few years until Apple launches into new product categories like AR, wearables, wellness, and automation (maybe vehicles). At that point growth will step up again, putting investors’ growth sustainability questions to rest, at least for a few more years.
Key June Quarter Results:
- Guidance: Apple doesn’t give formal guidance but instead offers high-level direction on its earnings call. On the call, the company said to expect growth rates to decline sequentially and still be firmly in the double digits. Translation: we believe September growth will come in around 25%, down from 36% in the just reported June quarter. That implies $81B in revenue, inline with the Street. Additionally, the number would have been higher if not for component shortages for the new iPhone and iPad that will likely have more than a $3B impact in September. In other words, if not for component shortages, guidance would have been closer to $84B. Notably, this is the first time the company has talked about iPhone being supply constrained. In the end, investors should be indifferent if the sales fall in the September or December quarter. Either way, iPhone users are upgrading to iPhones. Separately, gross margin guidance of 41.5%-42% is favorable, given it’s above the 38-40% range the company has reported over the past eight years.
- Cash: Apple ended the June quarter with $194B in total cash and $122B in debt, which is $72B in net cash. We had expected net cash to end June at $75B. Apple has previously stated their goal of being net cash neutral over time, with total cash equaling total debt. That goal still appears to be in place, given their decreased net balance, down from $83B total in March.
- Revenue: June quarter revenue was $81.4B (up 36% y/y) compared to the Street at $73.3B (up 23% y/y).
- Earnings: EPS was $1.30 (up 100% y/y) compared to the Street at $1.01 (up 55% y/y), driven by a favorable mix of products as well as a favorable mix of Services revenue.
- iPhone: Unlike March, July did not see the benefit of any new hardware releases. Because of this, iPhone revenue fell to $39.6B down from $47.9B last quarter, this is above the Street’s $34.0B estimate and still up y/y. This made up 49% of the company’s total sales for the quarter. Even though Apple lacked a big new iPhone launch this quarter, the emergence of 5G, which is the most significant technological upgrade to an iPhone in years, will likely drive more sustained sales in the future. We continue to believe the 5G upgrade cycle will be multiyear, as carrier 5G speeds improve over the next few years. On the call Tim Cook agreed with this outlook, suggesting we are early in the 5G transition, with only a few countries reporting 5G adoption of greater than 10%. The pace of 5G upgrades is in part in the carriers’ hands, given the need to increase network speeds to encourage upgrades. Our test of the three US carriers found 5G download speeds still well below 100MB, 10% faster than our end of 2020 poll, and well below the 5G goal of 1GB download speeds.
- Services: Services revenue was up 33% y/y to $17.5B (Street $16.3B), accelerating sequentially from 24% y/y growth in the December quarter. For context, the segment has averaged 19% growth over the past two years. This shouldn’t be a surprise, given App Store revenue has seen a doubled boost from increasing game revenue and the accelerating digital transformation tailwind.
- Mac: Mac revenue was 10% of sales, up 16% y/y to $8.2B (Street $8.0B). Given the Mac component constraints and difficult year-over-year comps, we expect low to mid-single-digit growth next quarter.
- iPad: iPad revenue represented 9% of sales, up 12% y/y to $7.4B (Street $7.3B). iPad is also benefitting from the work from home and distance learning trends. Given similar component constraints are affecting iPad, we expect iPad revenue to be flat in September.
- Wearables: Wearables, Home, and Accessories revenue was reported as $8.8B (Street at $7.8B). This is a 35% increase y/y.
- Profitability: Apple’s gross margin was 43.3% compared to expectations of 41.7% and up from 38.0% in the year-ago quarter.
Looking forward
We believe that, despite the relatively slow stock growth in the first half of the year, Apple will be the top-performing FAANG stock in the second half, based on three factors:
- The growth of 5G should entice more users to upgrade to new iPhones in the coming months. As 5G coverage improves, more and more will upgrade and switch to iPhone.
- The digital transformation will continue to benefit the Mac and iPad business from work and learn from anywhere.
- Increasing optimism about what Apple can do in new product categories including AR, auto, and wellness.