Apple's (AAPL) Q4 Earnings Beat, Services Boost Sales Growth

Zacks Equity Research
·6-min read

Apple AAPL reported fourth-quarter fiscal 2020 earnings of 73 cents per share that beat the Zacks Consensus Estimate by 5.8% but decreased 3.9% year over year.

Net sales increased 1% year over year to $64.70 billion, which surpassed the Zacks Consensus Estimate by 2.1%.

Services, along with iPad and Mac, continued their momentum in the quarter under review. Services (22.5% of sales) revenues grew 16.3% from the year-ago quarter to $14.55 billion.

Product sales (77.5% of sales) decreased 2.7% year over year to $50.15 billion. Non-iPhone revenues grew 30% on a combined basis, despite supply constraints on iPad, Mac and Apple Watch throughout the quarter.

Apple Inc. Price, Consensus and EPS Surprise
Apple Inc. Price, Consensus and EPS Surprise

Strong Americas & Europe Offset Weak China Sales

Apple witnessed record fourth-quarter sales in its history in Americas, Europe and Rest of the Asia Pacific. The company also had a record fourth-quarter sale in India courtesy the launch of its online store.

Americas sales increased 4.7% year over year to $30.70 billion and accounted for 47.4% of total sales.

Europe generated $16.90 billion in sales, up 13.1% on a year-over-year basis. The region accounted for 26.1% of total sales.

Greater China sales declined 28.6% from the year-ago quarter to $7.95 billion, accounting for 12.3% of total sales. Absence of new iPhone hurt sales.

Japan sales inched up 0.8% year over year to $5.02 billion, accounting for 7.8% of total sales.

Rest of the Asia Pacific generated sales of $4.13 billion, up 13% year over year. The region accounted for 6.4% of total sales.

iPhone Sales Decline

iPhone sales declined 20.7% from the year-ago quarter to $26.44 billion and accounted for 40.9% of total sales. Sales suffered due to absence of a new iPhone.

Markedly, Apple launched the iPhone 12 in October instead of its usual late September time frame as announced in third-quarter earnings conference call.

Nevertheless, for iPhone, through mid-September, customer demand grew double-digits despite coronavirus-induced store closures and social-distancing measures.

Apple quoted a recent survey report from 451 Research which stated that customer satisfaction was 98% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined in the reported quarter.

Services Momentum Continues

Services maintained momentum in the reported quarter. Apple set quarterly record for the App Store, AppleCare, Cloud Services, Music and Payment Services.

Apple TV+, Apple Arcade, Apple News+, and Apple Card also contributed to overall growth. These new services continue to add users, content and features.

Apple now has more than 585 million paid subscribers across its Services portfolio, up 35 million sequentially and 135 million year over year. The company expects to reach its target of 600 million paid subscriptions before the end of calendar 2020.

Moreover, the number of paid accounts increased double digits across all geographic segments.

iPad & Mac Jump on Strong Demand

iPad sales of $6.80 billion jumped 46% year over year and accounted for 10.5% of total sales. Sales grew strong double digits in every geographic segment, including an all-time record in Japan and a fourth-quarter record in the Americas.

Mac sales of $9.03 billion increased 29.2% from the year-ago quarter and accounted for 14% of total sales. The year-over-year growth was driven by strong adoption of the new MacBook Air and MacBook Pro and solid demand in the back-to-school season

Sales grew double digits in each of the geographic segments. Fiscal fourth-quarter Mac sales were an all-time record in the Americas and the rest of Asia Pacific. It also achieved fourth-quarter sales records in Europe and Japan.

Additionally, more than half of the customers who purchased iPads and Macs during the quarter were new to the device.

Apple quoted a recent survey report from 451 Research which stated that overall consumer satisfaction was 95% for iPad and 93% for Mac in the quarter under review.

Wearables’ Robust Performance

Wearables, Home and Accessories sales increased 20.8% year over year to $7.88 billion and accounted for 12.2% of total sales.

Moreover, Apple Watch’s adoption rate grew rapidly. Notably, more than 75% of customers who purchased Apple Watch during the reported quarter were first-time customers.

Operating Details

Gross margin expanded 20 bps on a year-over-year basis to 38.2%. Moreover, gross margin increased 40 bps sequentially due to cost savings and a higher mix of services.

Products’ gross margin expanded 10 bps sequentially to 29.8% driven by cost savings. Services’ gross margin was 66.9%, down 30bps sequentially, attributed to an unfavorable mix.

Operating expenses rose 14.1% year over year to $9.91 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses which increased 21.1% and 7.8% respectively.

Operating margin contracted 160 bps on a year-over-year basis to 22.8%.

Balance Sheet & Cash Flow

As of Sep 26, 2020, cash & marketable securities were $191.83 billion compared with $193.62 billion as of Jun 27, 2020.

Term debt, as of Sep 26, 2020, was $107.44 billion, up from $101.56 billion as of Jun 27, 2020.

Apple returned $22 billion in the reported quarter through dividend payouts ($3.5 billion) and share repurchases ($18 billion).

Guidance

Apple didn’t provide revenue guidance given the uncertainty around the impact of the coronavirus pandemic.

The company expects iPhone revenues to grow in the first quarter of fiscal 2021, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter.

All other products, on a combined basis, are expected to grow double digits. Services segment is also anticipated to report double-digit growth.

Gross margin is expected to be much similar to what was reported in the past few quarters. Operating expenses are expected between $10.7 billion and $10.8 billion.

Zacks Rank & Stocks to Consider

Currently, Apple has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector are Qorvo QRVO, CDW Corporation CDW, and Himax Technologies HIMX. While Qorvo sports a Zacks Rank #1 (Strong Buy) both CDW and Himax carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

CDW, Qorvo and Himax are scheduled to report their quarterly earnings on Nov 2, 4 and 12, respectively.

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