Perhaps you heard: Apple (NASDAQ: AAPL) recently informed investors that the long-dreaded iPhone revenue peak is now in the rearview mirror. Exacerbating the problems of an already beat-up stock, management's downgraded guidance for the first quarter of its fiscal 2019 had shares trading down 40% from their all-time high just a few months ago.
The reasons for weak iPhone sales are diverse, and include lower-than-anticipated support from Chinese consumers, less frequent replacement of older phones in developed markets, and Apple lowering the price for battery replacements on old iPhones. Whatever the reasons, the expected Q1 result is revenue in the $84 billion range, compared with previous guidance for $89 billion to $93 billion. During the first quarter a year ago, Apple hauled in sales of $88.3 billion, so the updated estimate represents a 5% year-over-year decline. Thus a new era for the hardware maker is being ushered in in haste.
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The new guidance and the bottom line
Besides revenue of $84 billion, CEO Tim Cook also said to expect gross profit margins of about 38%, operating expenses of about $8.7 billion, and other income of $550 million, which works out to operating income of $23.8 billion. That compares to gross margin of 38.4%, operating expense of $7.6 billion, and other income of $756 million a year ago, which equated to operating income of $26.3 billion. If the new guidance proves true, that would mean a year-over-year drop of 9.5% in operating income.
The saving grace for Apple could be a lower tax rate (Cook said to expect 16.5% compared with 25.8% a year ago) and the fact that the company has been repurchasing shares. Cook said the share count used to calculate earnings per share should be around 4.77 billion. At the end of the 2018 fiscal year (late September 2018), the share count was 4.85 billion, and the Q1 year-ago comparable number 5.16 billion. That reduction in shares should provide a boost to EPS. "... we also expect to report a new all-time record for Apple’s earnings per share," wrote Cook.
A new reality for Apple?
I'm not suggesting investors should be happy with a bottom-line increase given the bigger picture. Sales contraction is never a pleasant situation, even if earnings get a bailout. However, buoyant profits could buy the stock some time while Apple works to get back on the path to growth now that it seems to have discovered the maximum price tag iPhone users are willing to pay. Cutting prices to lure in sales could end up making the declining revenue situation even worse, so that makes Apple's search for the next growth driver beyond the iPhone that much more important.
The good news, though, is that Apple may have already found it. Cook said non-iPhone revenue grew 19% in the first quarter, which ended at the end of December. This part of the business includes Mac, iPad, wearables, Home, and services. With Apple sitting on a $130 billion net cash hoard and still raking in fat profits, this likely isn't the end of the road for the premium tech company.
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