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3 May 2017

Apple FQ2 17– New normal

Apple reported reasonable results and in increasing both the dividend and the share buy-back program, ushered itself squarely into a new normal of pedestrian growth.

FQ2 17A revenues / EPS were $52.9bn / $2.10 broadly in line with consensus at $52.9bn / $2.02. Gross margins were 38.9% at the high end of the guided range and slightly above consensus at 38.7% as the iPhone 7+ was a stronger contributor to the mix than anticipated, lifting profitability.

Unit shipments were:
 50.8m iPhones vs 51.4m expected with an ASP of $655 compared to $666 expected.
 Note that a higher than expected inventory adjustment (1.2m units) more than accounts for the difference.
 8.9m iPads and 4.2m Macs also shipped with Macs faring a little better than expected.

Services continued to be very strong with $7bn in revenue growing by 18% YoY with Apple stating that it now has a total of 165m paid subscriptions. This includes Apple Music, iCloud and the subscription services of others that it offers on the Apple App Store. There is obviously a degree of double counting going on here where for example, Spotify subscribers who pay through the App Store are also included here.

In our opinion, this renders this number virtually meaningless as Apple is counting subscriptions of its competitors as its own although it will still be making some money from these subscribers. This combined with both an increase in dividend and the share buyback program, indicate very clearly that there is no growth in this company unless it can conquer a new segment. Having (rightly, in our opinion) given up on making a car, there is no new segment in sight, and so we see Apple, by and large, growing in line with the world economy.

We suspect that it will swing above and below that average as new products drive replacement cycles but the long-term outlook is industrial in its nature. The next swing is likely to come from the iPhone 8 for which speculation and anticipation is already at fever pitch. This means that Apple has to come up with something pretty special to see another cycle that will push its revenue growth above its new long term average, albeit temporarily.

Fortunately, the valuation of the company is not too demanding with a PER of 13.0x but the buy case based on valuation has now evaporated. We see very little upside other than income coming from the shareholder return programs. We would prefer Microsoft, Baidu and Tencent for those looking for capital appreciation.”

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