These popular slides cover an in-depth analysis of Apple’s important Q3 2016 results
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1. Aquilla
Apple Results Q3 2016
Summary and Commentary
Note: Apple Q3 ≈ Calendar Q2
These data are derived from results published by Apple, Inc., from the published results
of other companies, and from assorted independent analysts, as identified in the slides.
The opinions are those of the author, and should in no way be interpreted as
investment advice.
2. Aquilla
Narrative
Apple Summary
•“Stronger customer demand and business performance than we anticipated” - Tim Cook
•“Revenue was near the high end of our guidance and gross margin at the top of our guidance” - Tim Cook
•“We saw tremendous performance from our Services businesses, which saw broad-based growth” - Tim Cook
Wall Street Response
•Surprise!
•Numbers beat expectations almost across the board
•Only Services and Mac fell short, narrowly, plus iPhone ASP was lower than expected (iPhone SE impact)
•Share price gained around 5% after the announcements
Analyst Response
•Beat expectations, but still reported declines in most metrics
•Guidance for Q4 is stronger than expected, but gross margins lower
•China a concern - 33% YoY decline. Strong results from weak countries (Ru, Br, Tr, In), with Japan a highlight
•Where is all the R & D money being spent?
3. Aquilla
Key Data Points - Q3 2016
Wall Street † Reported YoY
Revenue $ 42.1 B $ 42.4 B -15%
Net Income $ 7.8 B -27%
EPS (Diluted) $1.39 $1.42 -23%
iPhone Units 39.9 M 40.4 M -15%
iPhone ASP $606 $595 -10%
iPad Units 9.1 M 10.0 M -9%
Mac Units 4.4 M 4.3 M -11%
Watch Units 2.0 M Not reported Not reported
Services $ $ 6.1 B $ 6.0 B + 19%
Other Products $ $ 2.2 B $ 2.2 B -16%
Gross Margin 37.9% 38.0% - 1.7 points
Cash & Long Term Securities $ 232 B -1% *
Q3 Revenue Guidance $ 45.1 B $ 45.5 - 47.5 B FY15: $ 51.5 B
Q3 Gross Margin Guidance 38.4% 37.5-38.0% FY15: 39.9%
* QoQ† Fortune, Bloomberg, Others
4. Aquilla
Quarterly Revenue
Second Decline
•Revenues of $42.4B
declined by 15% YoY,
but were within Apple’s
April guidance, and
above the consensus,
which expected $42.1B
•This was however still
on the back of very
strong comps in 2015 (ie
13% up on Q3 2014)
•Channel inventories also
fell, especially on
iPhone
•These revenues are still
nearly double those of
Samsung Mobile,
Alphabet and Microsoft.
•Guidance for FQ3 of
$45.5-47.5B was weak,
implying a midpoint
decline of 10% YoY
Comparative
Revenues
CQ2 2016
SamsungElectronics
Microsoft
Alphabet
SamsungMobile
-20%
0%
20%
40%
60%
80%
100%
0
15
30
45
60
75
90
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Revenue
Growth
(%)
Revenue
(B$)
Apple Revenue
Revenue B$ Revenue YoY Growth
Source: Company Results
5. Aquilla
Net Income and Growth
Sharp Decline
•Net income declined
27% to $7.8B
•This decline was
anticipated
•Apple’s net income still
dwarfs other tech
companies:
•1.5x Samsung Electronics
•1.5x Alphabet
•3x Samsung Mobile
•2.5x Microsoft
Comparative
Net Income
CQ1 2016
Alphabet
Microsoft
SamsungMobile(OpIncm)
SamsungElectronics
-50%
0%
50%
100%
150%
0
5
10
15
20
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Net Income
Growth
(%)
Net Income
($B)
Apple Net Income
Net Income B$ Net Income YoY Growth
Source: Company Results
6. Aquilla
Net Income, Margin and Tax
Income Declined, Tax Steady
•A further drop in net margin to 18%,
the lowest since 2008
•This and the Gross Margin figures
were put down primarily to iPhone
mix and inventory adjustments
•Apple’s net tax rate held steady at
26% of Net Income before tax
0%
5%
10%
15%
20%
25%
30%
35%
0
5
10
15
20
25
30
35
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Tax Rate,
Net Margin
(%)
Tax,
Net Income
($B)
Apple Net Income, Margin, Tax
Net Income B$ Tax B$
Net Income % Net Tax %
Source: Apple Results
7. Aquilla
Cash, Investments & Capital Return
Cash Machine Still Delivering
•Apple generated $10.6B of cash from
operations in the quarter
•The company returned $13.1B to
shareholders, mostly through Stock
Repurchases ($10.0B), which offer
Apple greater flexibility than
dividends
•Long and short term cash holdings
declined by $1.4B in the quarter, and
the company has a still incredible
$232B in cash
•The share of cash held outside the
US, for tax reasons, grew again, to
93% of the whole ($215B): Apple is
borrowing in the US to fund the
capital return programme, with a new
round in July at even better rates
Source: Apple Results
0%
20%
40%
60%
80%
100%
0
50
100
150
200
250
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Ex-US
%
(B$)
Apple Cash & Capital Return
Short Term Cash B$ Long Term Cash B$
Cash Generated B$ Capital Return B$
Non-US Held Cash %
8. Aquilla
Debt Growth
Long Term Debt Grows
•Apple’s overseas-held cash would
trigger substantial tax liabilities if
repatriated, so the capital return
programme of stock purchases and
dividends is being funded largely
through debt
•Most of this has been placed in the
US, though increasingly other markets
are being tapped
•Total long term debt held steady
during the quarter at $72B, equivalent
to 31% of long term cash
•A further round of $7B has since been
placed by Apple, at advantageous
rates
•In the current low-interest financial
climate this strategy has good logic,
but it would seem important that
Apple pays careful attention to the
balance between these two figures,
especially as headwinds mount for
the core business
0%
10%
20%
30%
40%
50%
0
50
100
150
200
250
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Long Term
Debt %(B$)
Apple Debt Share of Cash
Total Cash B$ Long Term Debt B$ Long Term Debt %
Source: Apple Results
9. Aquilla
Capital Expenditure
Apple Invests
•Apple’s capital expenditure leapt in
2012, more than doubling the 2011
figure, to $10.3B
•It seems likely that this reflected the
build out of iCloud data centres, and a
dramatic increase in tooling placed in
suppliers’ facilities
•Outlook for 2016 was for another jump,
to $15B, now reduced to $13B,
(possibly due to delays in the planned
Irish data centre), to cover: “product
tooling and manufacturing process
equipment; data centres; corporate
facilities and infrastructure, including
information systems hardware, software
and enhancements; and retail store
facilities”
•The purchase of land for the new
corporate campus took place in 2011,
but the main CapEx for the site will fall
in 2016
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY '11 FY '12 FY '13 FY '14 FY '15 FY'16 3Q
CapEx vs
Revenue
(%)
CapEx
($M)
Apple Capital Expenditure
Capital Expenditure M$ CapEx % of Revenue
Source: Apple Results
10. Aquilla
Research & Development
Upward Trend
•Apple has not traditionally been a big
spender on R&D, preferring smaller
focused teams
•However R&D spend has been rising in
recent quarters, from around 2.2% to
nearly 5% of revenue annualised, and
6% in Q3
•This appears to be deliberate, with Cook
stating: “it is for products we are
shipping, and ones we are not shipping.
I will not talk about the split.”
•This quarter saw R&D spend jump again
to $2.6B, 26% up on Q3 2015, taking
the spend to 4.6% of 12 month average
quarterly revenues
R&D $ R&D %
Samsung Electronics $ 3.2 B 6.5%
Microsoft $ 3.0 B 12.9%
Google $ 3.1 B 16.4%
Intel $ 3.0 B 21.9%
R&D Spend (Avg/Qtr 2015, % of Rev)
Quarterly R&D is here tracked against average 12 month trailing
revenues to reflect the non-seasonal nature of R&D spend
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0
500
1,000
1,500
2,000
2,500
3,000
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
R&D vs Rev
12m Trlg
(%)
R&D Spend
($M)
Apple Research & Development
R&D M$ R&D % of 12m Avg Rev
Source: Apple Results
11. Aquilla
Inventory
Inventory Stable
•Apple’s miracle inventory management
continues, ending the quarter with 3.9
days of stock, a small downtick from
Q2
•This is 93 annual stock turns!
•And this despite having 484 retail
stores at quarter end, with product on
the shelves
•For comparison, Samsung Electronics
reports typically over 30 days of stock
(32 in CQ2 2016)
•For a technology, company being able
to manage stock this efficiently is a
huge asset
•It is driven by Apple’s very tough
supplier negotiations, which smaller
players will always struggle to match
•Channel inventory was reported to
have been reduced, particularly for
iPhone, and sits at the low side of
Apple’s targets
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0
500
1,000
1,500
2,000
2,500
3,000
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Days of
Stock
Inventory
(M$)
Apple Inventory
Inventory M$ Days of Stock
Source: Apple Results
12. Aquilla
Revenue by Product Line
Apple Still a Phone Company
•iPhone’s dominance continues
despite it losing 23% by value, (and
15% by units) YoY
•iPhone seasonality remains marked, a
function both of market and launch
cycles
•All the main Geos other than Japan
saw iPhone declines, but inventory
reduction of 4m units compared
favourably with 0.5M reduction in
Q3’15, implying that sell through was
down only 8% in units
•iPhone SE has been very strong, both
with switchers and upgraders
•42% smartphone penetration leaves
still a huge opportunity
•iPhone dominates such that the other
product lines are expanded on the
next slide, for better visibility
Services: Music, App, Mac App & iBooks Stores, AppleCare, Apple Pay, licensing, other services
Other Products: Watch, iPod, Apple TV, Apple-branded, Beats and third-party accessories
0
10,000
20,000
30,000
40,000
50,000
60,000
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Revenue
(M$)
Product Line Revenue Streams
iPhone M$ iPad M$ Mac M$ Services M$ Other Products M$
Source: Apple Results
13. Aquilla
Revenue by Product Line (rescaled)
Services Bright Spot
•Services continued their inevitable
growth, moving to become Apple’s
second largest product category, with
14% share. (Note $0.5B one-off
royalties reported in Q1)
•This was across the board, with App
Store growing 37%, and a new record
for iTunes revenues
•Mac had another weak quarter, with
11% YoY unit and 13% revenue
decline
•IDC reports sell-through, and saw a
4.5% decline in the PC market, and
marked Apple with a loss in share for
the first time in many years
•iPad returned to dollar growth,
gaining 7% YoY though declining 9%
in units, suggesting success with the
iPad Pro into enterprise
•Other Products includes the Watch,
and declined 16% YoY, the first
comparable quarter since the launch
Services: Music, App, Mac App & iBooks Stores, AppleCare, Apple Pay, licensing, other services
Other Products: Watch, iPod, Apple TV, Apple-branded, Beats and third-party accessories
0
2,000
4,000
6,000
8,000
10,000
12,000
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Revenue
(M$)
Product Line Revenue Streams (rescaled)
iPhone M$ iPad M$
Mac M$ Services M$
Other Products M$ IB Services M$
Source: Apple Results
18. Aquilla
Apple Watch Estimates
Apple Watch Estimates
•Watch attracted no analyst questions,
which may be significant, but
indications are of steady growth
•Reviewing the likely trends for the
main product groups reported in
Other Products suggests a figure of
$1,258M ex the Watch
•This suggests Apple Watch revenues
of $961M
•Unit estimates depend on the ASP
•At $350: Watch sold 2,745kU
•At $400: Watch sold 2,402kU
•At $450: Watch sold 2,135kU
•At $500: Watch sold 1,922kU
•At $550: Watch sold 1,747kU
•The most likely scenario is modelled
on a mix dropping to 64% Sport and
36% Watch, which suggests an ASP of
$470
•Hence Q3 Watch sales amounted to
2,043kU
•Cumulative Watch Sales add up to
12,476kU
Tracking the trailing 12 months (current and 3
previous Quarters) eliminates seasonality, and
gives a better indication of the longer term trends
Source: Apple Results, Aquilla Estimates
1,081
1,527
2,053
909 961
0
4,000
8,000
12,000
16,000
20,000
0
1,000
2,000
3,000
4,000
5,000
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Trailing 12m
Revenue
($M)
Revenue
($M)
Other Products Revenue - Watch Estimates
Others Ex Watch Estimate M$ Watch Estimate M$
Other Products Trailing 12m M$ iPod Trailing 12m M$
19. Aquilla
Active Installed Base Growth and Revenues
Over 1B Active Devices
•Apple announced passing 1 billion
active devices in Q1’16, and 1 billion
iPhones during July, and this was
reflected in continuing growth in
Services
•A number of considered estimates are
used to derive this chart - unlikely to
be perfect, but it does give an
indication of the trends for iOS and
Mac, plus the revenues per active
device
•Note: these numbers include all
Services revenue, including Music
revenues on other platforms (PCs),
and those linked to device purchase,
such as AppleCare, while only
counting Apple hardware units
Source: Apple Results, Aquilla EstimatesServices: Music, App, Mac App & iBooks Stores, AppleCare, Apple Pay, licensing, other services
0.0
6.0
12.0
18.0
24.0
30.0
36.0
0
200
400
600
800
1,000
1,200
FY '11 FY '12 FY '13 FY '14 FY '15 FY'16 3Q
Revenue per
Device
per Year
$
Millions
Active Installed Base Estimates
iPhone Active Base MU iPad Active Base MU
Mac Active Base MU iPod Touch Active Base MU
Services Rev/Device $/Yr Other Prods Rev/Device $/Yr
20. Aquilla
Geo Revenue and 12m Trailing
Slowing in Key Regions
•Trailing 12 months shows clearly why
Peak Apple has been called, as the US
and China head down
•China’s reversal is particularly sharp,
and in this fickle market
•China’s closure of the iBooks and
iTune Movies Stores is potentially
very significant - how this resolves
itself is a pointer to Apple’s future
trajectory in this market, though
Apple’s investment in Didi may
counter-balance this
•EMEIA remains flat - much depends
on the impact of Brexit in the short
term, and on South Asia (India - the ‘I’
in EMEIA) in the medium term
•Japan ticked up a noticeably, with no
reasons shared
•APAC is bouncing along in slow
decline
Tracking the trailing 12 months (current and 3
previous Quarters) eliminates seasonality, and
gives a better indication of the longer term trends
0
20,000
40,000
60,000
80,000
100,000
120,000
Q1
'11
Q2
'11
Q3
'11
Q4
'11
Q1
'12
Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
Q3
'15
Q4
'15
Q1
'16
Q2
'16
Q3
'16
Q4
'16
Revenue
$M
Geo Revenue and 12m Trailing Revenue
APAC Japan Greater China EMEIA Americas
APAC 12m Trailing Japan 12m Trailing Greater China 12m Trailing EMEIA 12m Trailing Americas 12m Trailing
Source: Apple Results
21. Aquilla
Competitive Landscape - Smartphones
Chinese Brands continue the Great Leap Forward
•IDC sees Samsung retaining the top global slot, with a strong quarter,
gaining share
•Apple’s challenges are visible, declining 15 points more than the market
•Huawei continues to gain, with 58% growth, and a clear #3 rank
•OPPO and vivo entered the charts, both domestic Chinese brands starting
to branch out into Asia, and both still showing stunning growth
•With the overall market flat the undifferentiated Android space could get
brutal, as it already has for HTC, ZTE and even Xiaomi
Q2’16 M Q2’16% Q2’15 M Q2’15% Change
Samsung 77.0 22.4% 73.0 21.3% 5.5%
Apple 40.4 11.8% 47.5 13.9% -15.0%
Huawei 32.1 9.4% 29.6 8.6% 8.4%
OPPO 22.6 6.6% 9.6 2.8% 136.6%
vivo 16.4 4.8% 9.1 2.7% 80.2%
Others 154.8 45.1% 173.6 50.7% -10.8%
Total 343.3 100.0% 342.4 100.0% 0.3%
Q2 2016 Smartphone Units (IDC)
Source: IDC Source: Apple, IDC
-20%
0%
20%
40%
60%
-10%
0%
10%
20%
30%
Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16
GrowthShare
iPhone Share and Growth vs Market
iPhone Smartphone Share iPhone Units YoY Growth Smartphones YoY Growth
22. Aquilla
Competitive Landscape - Tablets
Apple Declining less than the Market
•Apple held on to top slot, and gained a little share
•Focus has switched strongly to enterprise, with Apple’s partnerships with
IBM, SAP and Cisco touted strongly, and the iPad Pro important
•Lenovo has secured third place, and is the standard bearer for Windows
10 tablets
•Huawei also continues to make waves in tablets
•Amazon surged again, and may yet become a force to be acknowledged,
especially if it succeeds in capturing significant developer interest
Q2’16 M Q2’16% Q2’15 M Q2’15% Change
Apple 10.0 25.8% 11.0 24.9% -9.2%
Samsung 6.0 15.6% 8.0 18.2% -24.5%
Lenovo 2.5 6.6% 2.5 5.6% 3.1%
Huawei 2.2 5.6% 1.3 2.9% 71.0%
Amazon 1.6 4.0% 0.1 0.3% 1208.9%
Others 16.4 42.4% 21.3 48.2% -22.9%
Total 38.7 100.0% 44.1 100.0% -12.3%
Q2 2016 Tablet Units (IDC)
Source: IDC Source: Apple, IDC
-40%
-20%
0%
20%
40%
60%
-40%
-20%
0%
20%
40%
60%
Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16
GrowthShare
iPad Share and Growth vs Market
iPad Share iPad Units YoY Growth Tablets YoY Growth
23. Aquilla
Competitive Landscape - PCs
Apple Consolidates 4th Place
•IDC sees Mac slip to 5th place, with a decline greater
than the market’s 4.5%
•Apple’s own numbers reported an 11% decline, which
reflects continued channel inventory reduction (IDC
measure Sell Through)
•Mac needs another round of magic for both the
MacBook Air and MacBook Pro, which are looking old
Q2’16 M Q2’16% Q2’15 M Q2’15% Change
Lenovo 13,202 21.2% 13,511 20.7% -2.3%
HP Inc 12,964 20.8% 12,330 18.9% 5.1%
Dell 9,963 16.0% 9,560 14.6% 4.2%
ASUS 4,518 7.2% 4,285 6.6% 5.4%
Apple 4,420 7.1% 4,820 7.4% -8.3%
Others 17,297 27.7% 20,791 31.8% -16.8%
Total 62,363 100.0% 65,296 100.0% -4.5%
Q2 2016 PC Units (IDC)
Source: Apple, IDCSource: IDC
-40%
-20%
0%
20%
40%
60%
80%
-5%
0%
5%
10%
Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16
GrowthShare
Mac Share and Growth vs Market
Mac Share Mac Units YoY Growth PCs YoY Growth
24. Aquilla
Apple’s Q3 2016 Results Analysis
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Apple’s important Q3 2016 results
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