Apple’s Results Reassuring

Demand for smartphones and PCs has been on the wane, but Apple’s latest results beat estimates and prove that it can defy industry trends. However, declining iPad sales remain a cause of worry. Will its enterprise push pay off?

Apple’s Financials

For fiscal year 2015, Apple (NASDAQ: AAPL) reported revenue of $234 billion, up 28% and $51 billion over 2014. Net income was over $53 billion and EPS grew by 43%. Over 300 million devices including a staggering 231 million iPhone, 55 million iPads and record 21 million Macs were sold in fiscal 2015.

Revenue for the fourth quarter was $51.5 billion, up $9.4 billion or 22% year over year. Greater China revenue grew 99% y-o-y to $12.5 billion. However, revenue has declined sequentially from $13.2 billion last quarter. Apple continues to invest heavily in China and last week opened its 25th store in Greater China. It plans to open 40 stores by the middle of next year.

Gross margin was 39.9%, up sequentially mainly due to lower than expected costs. Operating margin was 28.4% of revenue and net income was $11.1 billion, a new September quarter record. Diluted earnings per share were $1.96, up 38%. Analysts expected revenue of $51.12 billion and $1.88 earnings per share.

For the first quarter, it expects revenue to be between $75.5 billion and $77.5 billion compared to $74.6 billion in the year ago quarter. Gross margin is expected to be between 39% and 40%.

iPhone and Mac Remain Strong Growth Factors

The iPhone continues to be the hero in the Apple story and the Mac surprisingly played a strong supporting role. Its newer products iPad and Apple Watch don’t quite match up to them.

Consumer demand for smartphones is slowing worldwide as most people in developed nations already own a smartphone. That’s why emerging markets, especially China, is an important strategy for the iPhone. Emerging markets generated over $79 billion in revenue and grew 63% during fiscal 2014.

During the earnings call, CEO Tim Cook said that they are reasonably well-positioned for growth in China and was also impressed by their progress in Vietnam, Indonesia, and India. He added,

“Also, from the currency point of view and the weak global economies, we don’t overly focus on this. It’s – my view is that it’s sort of a transitional kind of thing and we invest for the long term, so we are continuing to invest for Apple’s future.”

Apple sold 48 million iPhones in the quarter, up 22% and accounted for 60% of the revenue. It is reported to have sold 13 million iPhone 6s and 6s Plus during the launch week. Its market share increased to 13.5% while Samsung’s market share decreased slightly to 23.8%. iPhone sales were up 120% in Mainland China and grew over 35% in South Asia. Sales in India grew 54% driven by aggressive online discounts for earlier models.

The iPhone ASP was $670, an increase of $67 year-over-year. The increased ASP and sales indicate that people still want to buy the iPhone and Apple is reaping in revenues with better ASPs and lower costs.

It sold 5.7 million Macs in the quarter, up 3% y-o-y driven by the positive response for its new MacBook. They accounted for $6.8 billion in Q4 revenue. This is an achievement for Apple as worldwide PC shipments, according to IDC and Gartner, are contracting.

What helped Apple achieve this was its increasing focus on the enterprise market. Enterprise markets accounted for about $25 billion in 2014, up 40%. Apple now has 75 enterprise partners, up from 40 a year ago. It entered into a mobility partnership with IBM last year to develop 100 MobileFirst industry-specific enterprise apps for iPhones and iPads by the end of 2015. They have developed 55 apps so far. During the September quarter, IBM released new iOS apps in healthcare, financial services, travel and transportation and industrial sectors, including new apps leveraging iOS 9 and Watch OS 2.

IBM has also deployed over 30,000 MacBooks and has committed to buying 50,000 MacBooks by the end of the year. Apple has also announced a strategic partnership with Cisco to optimize their net source for iOS devices and provide iOS mobile users a performance advantage over other mobile platforms.

iPad Sales Might Get a Leg Up with Enterprise Push

As for iPads, sales declined 20% from 12.3 million to 9.9 million. iPad sell-through was 10.4 million as channel inventory was reduced by about 500,000 units. The iPad did take off well when it was first introduced in 2010, but industry experts say consumers don’t upgrade to a newer model as often as they would upgrade their iPhone. Apple is however excited about the prospects of the recently announced iPad Pro with a larger screen for business users, which would go on sale next month. Coupled with the new enterprise apps, the iPad Pro would certainly have the potential for a significant impact in the tablet industry.

Apple did not disclose its sales figures for the Apple Watch, but said that it did better sequentially. According to IDC, Apple shipped 3.6 million watches in the previous quarter. Wall Street analysts estimate that Apple sold 4 million watches in the September period. You can also get an Apple Watch for your kids too so be sure to check those out as they are great for kids.

Apple believes that it has an impressive lineup for the holiday season with its latest iPhone models, the 6S and 6S Plus, the new Macbook, the upcoming new iPad Pro, and the Apple Watch. The next quarter results would be interesting to watch.

Several analysts are upbeat about the latest results, with Pacific Crest’s team upgrading their rating to overweight, and BTIG arguing the stock is undervalued.

Apple’s stock is trading at $120.53, about 10% from its mid-July peak of $132.97. Market cap is $672 billion.