Apple Puts Its Money Where Its Mouth Is

So much for a slow summer for the iPhone. Apple (NASDAQ: AAPL  ) reported its latest digits last night, and the headline was an impressive 31.2 million iPhone units sold, well ahead of the Street's best guesses. However, it wasn't all sunshine and unicorns; there were some notable weak spots on numerous fronts. Let's dive in.

Back to basics
Revenue in the fiscal third quarter totaled $35.3 billion, near the high end of guidance. Net income was $6.9 billion, or $7.47 per share. Apple delivered gross margin of 36.9%, also at the high end of its forecast.

The strong iPhone sales go hand-in-hand with the healthy iPhone activation figures that Verizon reported last week. Older models continue to sell well, which is contributing to a precipitous drop in average selling price ($581 this quarter). The iPhone remains the biggest revenue driver, so investors cheered the outperformance here.

iPad unit sales, on the other hand, were less impressive. In fact, the 14.6 million iPads sold this quarter is the first year-over-year decline that Apple has ever posted in the product's history. There are a few reasons for the tough comparison. In the year-ago quarter, Apple had just launched the iPad 3, which was the first model to sport a Retina display. That led to a busy quarter as Apple filled channel inventory. Slowing sales this quarter are an inevitable consequence of shifting the iPad product cycle, since Apple refreshed the lineup in October. Channel inventory declined this quarter by about 700,000 units, making the comparison even harder.

Mac units fell 7% to 3.8 million units, though still beat the overall PC market, which saw worldwide units drop 11%. The only Mac updates were the new MacBook Airs announced at WWDC featuring Intel's newest Haswell chips.

Domestic domination is not enough
International performance was also a soft spot, with 57% of sales coming from outside the U.S., a noticeable sequential drop from the 66% notched last quarter. The "Greater China" segment also saw sales shrink to $4.9 billion including retail.

Source: Conference calls. Fiscal quarters shown.

That's a troubling decline for Apple's hottest growth region, which CEO Tim Cook primarily attributed to macroeconomic factors. However, Cook did admit that it wasn't "totally clear" why Hong Kong saw sales fall 23% on a sell-through basis.

Apple is still planning to double its number of retail stores in the region over the next two years, although retail stores in China fared poorly. After isolating retail-only revenue in Greater China, average revenue per store fell by over half sequentially, to $23.6 million.

This is just another painful reminder that Apple needs to better address emerging markets.

Cash is not king
As expected, Apple's cash position took a hit from rising interest rates. Total cash increased to $146.6 billion, a modest sequential rise of $1.9 billion. Investors can tell that Apple's investment portfolio declined in value because accumulated other comprehensive income on the balance sheet swung abruptly from $964 million in March to negative $234 million in June.

Due to the way that Apple accounts for its investments, other comprehensive income is where Apple records market fluctuations from its long-term cash investments. Speaking of cash, where did the $17 billion that Apple just raised through a bond offering go?

$16 billion says Apple is cheap
Investors already knew that Apple raised that money to help fund its capital return program, but what we didn't know was the rate at which it would do so. Apple boosted its share repurchase program by $50 billion in April to a total of $60 billion, with the goal of executing it through the end of 2015. Apple just blew threw a big chunk of that allowance, likely in order to take advantage of how cheap shares are.

After the bond offering, Apple turned around and immediately -- less than a week later -- repurchased $16 billion in shares. Of that, $12 billion is through an accelerated share repurchase, or ASR, program and $4 billion were open-market purchases.

That's a huge figure that deserves some additional perspective. The amount that Apple just repurchased in one quarter is greater than Nokia's market cap. It's more than what Google paid for Motorola (before selling the Home division). Apple could have bought more than three BlackBerrys with that total.

Sources: SEC filings and Reuters. Fiscal quarters shown. ASR programs occur over several months. Only initial payments shown.

That's over a quarter of the entire authorization spent in one fiscal quarter, which allowed the company to retire approximately 32.5 million shares. That helped juice earnings per share, which otherwise would have fallen short of consensus if theoretically Apple had not bought back any shares.

That aggressive repurchase activity will save Apple $397 million alone in annual dividend costs considering the current $3.05 per share quarterly payout. At a weighted average rate of 1.85% on $16 billion, Apple is paying less than $300 million annually in interest to save almost $400 million in dividends. Not a bad deal. The tax deduction on the interest is just the cherry on top.

Apple is just three fiscal quarters into its capital return program, and it's already spent 30% of its allowance reinvesting in itself. If that's not putting your money where your mouth is, then I don't know what is.

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Read/Post Comments (14) | Recommend This Article (49)

Comments from our Foolish Readers

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  • Report this Comment On July 24, 2013, at 10:51 AM, dbtuner wrote:

    nice article

  • Report this Comment On July 24, 2013, at 11:32 AM, jspatel wrote:

    Great analysis, Evan. I found the buyback figures most compelling. I had a thought regarding Apple's overseas cash. Is there anything barring them from using that cash to repurchase shares in the locales the cash is domiciled? For example if $30B was sitting in Ireland, repurchasing shares on the Irish market through an ADR. What are your thoughts on that, have I oversimplified this exercise?

  • Report this Comment On July 24, 2013, at 12:17 PM, SkepikI wrote:

    oh, ow.... I was intending to buy more yesterday and got distracted. The possibility of the "Bad Apple" crowd eating crow will numb the pain though.

  • Report this Comment On July 24, 2013, at 12:41 PM, TMFNewCow wrote:


    Sure, dividends and repurchase programs are typically implemented through the transfer agent (AAPL's is Computershare), and this occurs in the home country. This is partially why only domestic cash can be used for dividends/repurchases.

    Some companies offer dividends in foreign currencies, but for a fee and it is not common.

    -- Evan

  • Report this Comment On July 24, 2013, at 12:45 PM, TMFNewCow wrote:

    Oh and regarding repurchasing of an ADR/GDR, those share are being held by a financial institution and repurchasing those would have unnecessary transaction costs for that would increase the cost of doing so, especially when domestic shares can be repurchased more easily and cost effectively.

    -- Evan

  • Report this Comment On July 24, 2013, at 1:00 PM, chilero wrote:

    The iPhone result were great but people are letting them off too easy on the iPad. The drop of 14.6% is worse than the PC decline of 11%.

    The tablet market is booming and the iPad is supposed to be the best and the best selling. They suffer this drop and then most people are content to simply accept that most of it is due to the lack of a new iPad.

  • Report this Comment On July 24, 2013, at 5:34 PM, hohocake wrote:

    I rarely comment on these things but for once I will.

    Do not equate an iPhone to an iPad as a similar product. iPads are basically PCs or, more accurately, laptops. They have a lot of negative factors working against them.

    First, their life cycle is going to be longer. How often do you replace your laptop? How often do you replace your phone? The answer is probably 4 years and 2 years. This means that all those sales we saw in the last 2 years for iPad still have another 2 years to go before they start getting replacements.

    Second, their need is lower. Or basically the market size for iPads is smaller than phones. According to NPD 56% of the upper middle class+ already own one. A lot of people below that can't really afford one, a computer is good enough. The low hanging fruit has been grabbed. From here it will be convincing the rest of that 40% or so that they actually DO need one.

    Third, an iPad is a household item, a phone is a personal one. This goes hand in hand with the idea that the iPad market is simply smaller than phones by a HUGE margin (Still hugely profitable). Two adults = two iphones, but 1 iPad. Toss a teenager (or older?) in there and you've easily got 3 times the market size.

    So basically in short you've got iPads with at least half the market size and twice the lifespan and people wonder why its having trouble keeping pace with iPhone sales? Apple's biggest problem is people have unrealistic expectations. It doesn't NEED to hit 2011 growth levels, it just has to solidify, expand, and grow its moat further and it should just keep churning out money and steadily raise its share price.

    I'm long Apple, but not because I think it's going to hit 700 again by the end of the year. Long term value play.

  • Report this Comment On July 24, 2013, at 8:18 PM, damastr wrote:

    @hohocake, good point about ipad market..I am long AAPL as well.

    Nice article @Evan. I was planning on going thru the earnings report and then 10-Q to figure out about repurchases. You provided the answer.

    You can't go wrong with a company with almost 3% dividend (which in all probability will grow at 10-20% each year) and over $140B in cash..


  • Report this Comment On July 24, 2013, at 11:01 PM, StockGamingCom wrote:

    Microsoft vs Apple. Two ships going in opposite directions. Microsoft copied Apple's Mac, copied Apple's tablet and tried to copy Apple's organizational structure. Eventually, the copying stops working.

  • Report this Comment On July 24, 2013, at 11:55 PM, xmfpetra wrote:

    @Evan, spot on analysis on Apple's strategy to reinvest in itself. Great article!


  • Report this Comment On July 25, 2013, at 12:37 PM, TheRealRacc wrote:

    Watch out long-term with AAPL. Just enough going for them. Boom-and-bust always ends with "bust".

  • Report this Comment On July 25, 2013, at 2:56 PM, hohocake wrote:

    @therealracc you are right, everything ends in bust eventually. Jnj, png, 3m, life as we know it. Why invest at all?

    If you have an infinite time horizon all investing is day trading ;)

  • Report this Comment On July 26, 2013, at 1:51 PM, JungleGent wrote:

    @hohocake: "If you have an infinite time horizon all investing is day trading." That's an awesome statement. I love it!

  • Report this Comment On July 27, 2013, at 12:03 PM, SkepikI wrote:

    ^ at 20 you are certain you have an infinite time horizon. At 40 you begin to suspect you don't. By 60 you learn one way or another that nobody on this planet has an infinite time horizon, and most who think their institution, company or family does have read enough history to know it ain't so.

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