Apple (AAPL) is trading modestly lower today after reporting Q2 (Mar) earnings last night. EPS grew 10.5% YoY to $2.10, which was better than market expectations. Revenue rose 4.6% year/year to $52.9 bln, within prior guidance of $51.5-53.5 bln. Gross margin came in at 38.9%, at the high end of prior guidance of 38-39%, and up a bit from 38.5% in DecQ.
In terms of guidance for Q3 (Jun), Apple expects revenue of $43.5-45.5 bln, which is a bit below market expectations, while JunQ gross margin is expected at 37.5-38.5%, in-line with market expectations. Apple does not guide for EPS. Apple also approved a 10.5% increase to its quarterly dividend. The new quarterly dividend of $0.63/sh computes to an annual yield of 1.7%. Apple is also upping its stock repurchase authorization to $210 bln from $175 bln.
With Apple, just as important as the financial results, investors also closely watch sales of individual products. MarQ iPhone sales came in at 50.76 mln units ($33.25 bln in dollars), which was below last year's 51.19 mln and it was below market expectations. iPad sales came in at 8.92 mln units ($3.89 bln) vs 10.25 mln last year. iPad sales were also below market expectations. Mac sales were 4.20 mln ($5.84 bln), up from 4.03 mln last year and basically in-line with market expectations.
On the call, the company said that iPhone sales were line in-line with internal expectations. Apple says it is seeing continued strong demand for iPhone 7 Plus with its beautiful large display and dual-camera system. Its active installed base of iPhones grew by double digits YoY. And, based on the latest data from IDC, Apple gained market share in nearly every country it tracks.
For the second quarter in a row, Apple's Services segment saw revenue above $7 bln. You may be surprised to hear that while iPhone sales are by far Apple's largest segment at $33.25 bln in MarQ sales (63% of total sales), its next biggest segment is Services, which is comprised of iTunes, Apple Music, the App Store, iCloud storage, ApplePay, AppleCare etc. Its services segment saw revenue rise 18% YoY to $7.04 bln.
Apple says its services segment is well on its way to being the size of a Fortune 100 company in its own right. This was the strongest growth out of any of Apple's major segments other than its Other segment (AppleTv, Apple Watch, Beats, accessories) which grew 31% YoY to $2.87 bln. Apple says it's goal is to double the size of its Services segment by 2020.
On the call, Apple said it was very happy to see a deep level of customer engagement with the Apple ecosystem across all of its services. App Store momentum is terrific, with revenue growing 40% YoY to an all-time quarterly record. The number of developers offering apps for sale on its store was up 26% over last year and Apple is thrilled to see their success. Apple also saw double-digit revenue growth from Apple Music subscriptions and iCloud storage and overall very strong growth in the total number of paid subscriptions.
Apple Pay is experiencing phenomenal traction. With the launch of Taiwan and Ireland in MarQ, Apple Pay is now live in 15 markets with more than 20 mln contactless-ready locations, including more than 4.5 mln locations accepting Apple Pay in the U.S. alone.
In sum, the stock is modestly lower due to somewhat softer iPhone sales than the market had expected. It may just be that consumers are waiting for the iPhone 8 launch this fall, which may have an OLED screen and wireless charging. Also, the stock has run 23% since Apple reported DecQ earnings on January 31, so we are not surprised to see a bit of a muted reaction to the MarQ results. But overall, it was a good quarter for Apple and its Services segment continues to impress. Suppliers to keep on radar include: CRUS, INVN, SWKS, QRVO, QCOM, NXPI, AVGO, TXN, KYO, OLED.