Despite headline misses, Apple gave us a lot to like under the hood in its fiscal 2023 first quarter. Revenue fell 5.5% year-over-year to $117.15 billion, missing expectations of $121.1 billion. That was despite a foreign-exchange (foxex) drag of nearly 800 basis points (bps). Earnings of $1.88 per share came up short versus the $1.94 consensus estimate. Operating income of $36 billion missed expectations of $37.56 billion. Gross margin was 43%, in line with estimates. Bottom line With yet another record-setting quarter for Apple’s installed base of active devices, which now exceeds 2 billion, in all geographic segments, along with a new record for Services revenue, we are looking through the headline misses. While we never like to see misses and understand why shares got dinged more than 3% after-hours on the release, the installed base and Services records significantly outweigh a softer-than-expected three-month performance from the perspective of long-term investors. Management called out three primary headwinds impacting the reported results: the aforementioned forex drag; as well as supply chain disruptions that impacted the iPhone 14 Pro and Pro Mac models through most of December (Apple updated us on this back in November); and a combination of geopolitical and macroeconomic dynamics including inflation, Russia’s war in Ukraine and the overhang from the Covid pandemic. While the forex issue remains, it’s expected to moderate in the current quarter to a roughly 500bps headwind. As for the supply chain, management said on the call, “We’re now at a point where production is what we needed it to be, and so the problem is behind us.” Though inflation, the war and the Covid overhang remain, we’re seeing relief on inflation and China appears to finally be ditching its zero-Covid policy behind and working to reopen its economy. The operating environment is far from ideal, and the magnitude of this Fed-engineered slowdown remains to be seen, we do believe the path ahead to be improving versus what was seen in the just reported December quarter. Sales guidance appears to indicate another annual decline, but the magnitude of that decline will lessen versus what we saw in the reported quarter and better yet, thanks to an expectation for continued growth in the high-margin Services segment, along with efforts by management to improve the company’s overall cost structure, which are paying off, management sees gross margins in the upcoming quarter expanding more than the Street was modeling coming into the print. The worst appears to be behind us — and as a result, we reiterate our 1 rating and continue to believe that Apple stock is something to own for the long-term, not trade quarter to quarter. AAPL 1Y mountain Apple (AAPL) 1-year performance Cash flow As a result of the strong cash generation, Apple ended the quarter with $165 billion in cash and marketable securities on the balance sheet and a $54 billion net cash position after subtracting $111 billion of debt. We always pay close attention to Apple’s cash flow for two reasons. As is the case with all companies, comparing cash flow to net income can tell us the quality of earnings. Higher-quality earnings have more actual cash backing them. In Apple’s case, free cash flow edged out net income, indicating very high-quality earnings. Apple has a policy of being “net cash neutral over time,” meaning if the cash isn’t used for acquisitions or organic growth investments, it’s returned to shareholders through buybacks and dividends. In its December quarter, Apple returned $19 billion via the repurchase of 133 million shares and another $3.8 billion in dividends. Additionally, management declared a 23-cent per share dividend payable on Feb. 16 to shareholders of record as of Feb. 13. Quarterly commentary Products, the installed base of active iPhones achieved another all-time high across all geographic segments. iPad sales surged on the back of improved supply and demand for the new M2 chip-powered models. The iPad installed base also reached an all-time high, with over half of the buyers being new to the product. Finally, though Wearables, Home and Accessories sales were down versus the year-ago period, the installed base of devices in the category set a new all-time record. Moreover, nearly two-thirds of Apple Watch buyers in the quarter were new to the product. On the Services front, revenue reached an all-time record in the Americas, Europe and the rest of Asia Pacific, and a December quarter record in Greater China. Even more impressive, this milestone was achieved in spite of a greater than 700bps headwind resulting from foreign exchange dynamics. Within Services, we also saw all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare. Guidance As has been the case since the start of the pandemic, management refrained from providing quantitative revenue guidance, instead opting to provide some “directional insights” based on an assumption that Covid-related impacts do not worsen. On sales, management expects the year-over-year revenue decline to be in line with what we saw in the just December quarter, though noted that this would actually indicate an acceleration in underlying year-over-year business performance given the benefit of an extra week in the December quarter. Foreign exchange remains a headwind and management anticipates it being a 5 percentage point impact for the March quarter. Services are expected to see annual growth and iPhone sales performance is expected to accelerate. Mac and iPad sales are both expected to decline double digits annually as a result of strength in the prior year period and ongoing macroeconomic headwinds. Those comments appear to be more or less in line with expectations, we hesitate to draw conclusions for expectations given the lack of actual growth rates from management, however, one figure that was certainly ahead of expectations was management’s gross margin guide with the team forecasting this profitability metric to be in the range 43.5% to 44.5%, ahead of the 43.4% expected even on the low end. Operating expenses are expected at between $13.7 billion and $14.9 billion. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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A person walks out of the Apple Store in Annapolis, Maryland, on February 2, 2023.
Jim Watson | AFP | Getty Images
Despite headline misses, Apple gave us a lot to like under the hood in its fiscal 2023 first quarter.