Apple (AAPL) is trading up 5% at a six-month high premarket after beating second quarter estimates and guiding third quarter revenues above consensus. The company also raised its dividend by 5% and added $75 bln to it share buyback program.
Second quarter revenue fell 5% to $58 bln versus guidance for revenues of $55-59 bln, beating estimates by 1%.
iPhone revenue fell 17% to $31.05 bln, which was in-line with estimates and actually worse than the 15% decline reported in the first quarter. However, the company said that iPhone sales have improved in recent months and that declines were significantly smaller in March.
Revenue out of China fell 22%, which was an improvement from the 27% decline in the first quarter after the company cut prices in that market.
Services revenue was also in-line with estimates, growing 16% to $11.45 bln. Apple Pay transaction volume doubled yr/yr. Paid subscriptions grew to 8% sequentially to 390 mln. It's important to note that at nearly 64%, the services gross margin is more than double the 31% product gross margin.
iPad revenue growth of 22% (to $4.9 bln) was the strongest in six years, with the category returning to growth in China and posting double-digit growth in every other region.
Wearables, Home and Accessories revenue grew 30% to $5.13 bln. Apple's product portfolio includes the best-selling smartwatch and the most popular wireless headphones in the world. Tim Cook said that demand for AirPods has been incredible, "nothing less than a cultural phenomenon."
All told, earnings fell 10% yr/yr but beat estimates by $0.10.
Encouragingly, Apple's forecast for third quarter revenue came in above estimates. After two consecutive quarters of yr/yr revenue declines, the revenue outlook calls for a return to growth in the third quarter at the midpoint of seemingly conservative guidance.
Improving trends give hope to investors that the worst of the iPhone cycle is behind us.
However, expectations are quite low for the next generation of iPhones, which seem unlikely to garner much hype without any significant new innovation. Many consumers are expected to wait until the fall of 2020, when Apple is expected to release iPhones compatible with 5G networks. Apple usually unveils its newest iPhones in September.
Apple's ancillary businesses are so strong that analysts and investors are looking past the weak iPhone cycle. While an elongated iPhone upgrade cycle in a mature smartphone market is weighing on Apple's core business, the installed base continues to hit new highs, albeit relatively flat sequentially at 1.4 bln active devices. New iPads, AirPods, and iMacs released toward the end of the quarter bode well for its non-core businesses in the near term.
There remains ample opportunity to drive higher margin service revenues given the massive installed base. In late March, the company announced plans to launch a news service, a gaming service, a streaming video service, and even a credit card later this year to accelerate service revenues.
Apple will host its Worldwide Developers Conference on June 3-7, where it will unveil iOS 13.
Earnings are now expected to fall 4% this year but return to 13% growth in fiscal 2020 when pent up demand for a 5G iPhone could result in a strong cycle.
Apple is once again approaching a $1 trln market cap. The stock trades at ~18.5x fiscal 2019 EPS estimates compared to 13x three months ago. The multiple is closer to 16x excluding cash and liquid securities. The 50% rally we have seen since the bottom at the beginning of this year has come entirely on multiple expansion and a shift in sentiment. The stock now finds itself ~10% from its all-time highs set last fall.