4Q18 Results Match Previously Lowered Expectations & 1Q19 Guidance Not Catastrophic Spells R-E-L-I-E-F R-A-L-L-Y For Market
AAPL reported 4Q18 results that essentially met (Revs $84.3bn (Street $84bn), EPS $4.18 (Street $4.17)) guidance that had been cut -8% by management earlier this month. Along with 1Q19 guidance that was not catastrophic relative to expectations (Revs $55-59bn (Street $59bn), Gross Margins 37-38% (Street 38%)), AAPL shares were +5% after hours in what might best be called a “relief rally.” Sure, Greater China sales collapsed -27% year/year ($13.2bn, 16% of total sales) and iPhone revenues were off -15% year/year ($52bn, 62% of total sales), but it should be noted that AAPL missing the market in China has been a train a long time coming as according to Canalys, 2018 smartphone shipments in China dropped to 396mm units, marking the lowest level since 2013. 4Q18 registered a -15% year/year drop, marking the 7th straight quarter of decline. While Huawei’s market share increased by +16%, AAPL shipments fell -13% and were down for the third consecutive year. Looks like AAPL has pushed the edge on its premium-priced smartphone product a bit too far and is now well off where the market stands globally. In other industrial sectors, this would generally call for some type of restructuring announcement. With $130bn in cash, AAPL has the wherewithal to absorb the necessary hit to become more competitive.
Services Margin Detail Nice, But The Subscription Business Prospects Depend On A Price-Competitive iPhone Product Line
As a fillip to investors after terminating disclosure of iPhone unit shipment data following the 3Q18 results release, AAPL provided more detail on its burgeoning Services operations where revenues of $10.9bn (13% of total sales) enjoyed +19% year/year growth as paid subscriptions hit 360mm, +50% year/year, and delivered gross margins of 63%. As AAPL management expects paid subscriptions to reach 500mm by 2020, at current revenue/subscription realization this implies quarterly services revenue of $15.1bn, an acceleration to a +39% annual growth rate if achieved. Should iPhone revenues continue to decline pending repositioning downwards in price point, we are skeptical that such Service revenue levels are achievable.
AAPL Not A Buy Until The Shoes Stop Dropping
With AAPL’s core product franchise clearly off the market and under pressure, we expect some sort of restructuring is necessary before management’s broader ambitions can be realized. With that the expected case, investors may consider further observation before increasing exposure to the name.