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Apple Reports Slowing Sales and Huge Earnings

By Andrés Cardenal - Jan 27, 2016 at 10:01AM

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It looks like Apple is finally facing slowing revenues, but the company is still a cash flow-producing machine.

IMAGE SOURCE: APPLE.

On Tuesday, Apple (AAPL 2.62%) delivered its much-anticipated earnings report for the quarter ended in December. The smartphone industry is clearly maturing, and this is a major headwind in terms of revenue growth for Apple. On the other hand, the company is still producing rock-solid earnings and cash flows.

Sales are running out of battery
Apple reported $75.8 billion in revenue during the first quarter of its fiscal 2016, only a 2% increase from $74.6 billion in the same period last year. Apple has traditionally stayed away from putting too much emphasis on macroeconomic factors when reporting earnings, but CEO Tim Cook said in the conference call that global currency depreciation was a major drawback during the quarter and that sales measured in constant currency would have grown by a much stronger 8%.  

Investors and Wall Street analysts are increasingly concerned about the health of the Chinese economy. While Apple still delivered a 14% revenue increase in China, Cook admitted that the company is being hurt by slowing economic growth there. Here's how sales performed in different markets and regions for Apple in the quarter:

  • Sales in the Americas region fell 4% to $29.3 billion. 
  • Revenue in Europe increased 4%, coming in at $17.9 billion. 
  • Sales in Greater China jumped 14% to $18.4 billion.   
  • Japan showed a 12% decline to $4.8 billion.
  • The rest of Asia-Pacific region delivered a 4% revenue increase, reaching $5.4 billion.

The iPhone produced 68% of revenue during the quarter, and a maturing smartphone industry is proving to be a considerable headwind for Apple. The company sold 74.8 million devices during the quarter, nearly flat year over year. 

iPad sales have been remarkably weak over the past several quarters, and the latest earnings report was no exception. Mac revenues are slightly declining but still outperforming the rest of the PC industry. Apple is experiencing rapid growth in services and other products -- which includes Apple TV, Apple Watch, iPod, and Beats products -- but these segments aren't big enough to have much of a financial impact on the overall business level at this stage.

ProductUnits Revenue Change in UnitsChange in Revenue
iPhone 74.8 $51.6 0% 1%
iPad 16.2 $7.1 (25%) (21%)
Mac 5.3 $6.7 (4%) (3%)
Services   $6   26%
Other   $4.3   62%
Total Apple   $75.9   2%

Sales in billions. Units in millions. Data source: SEC filings.

For the second quarter of fiscal 2016, meaning the quarter ending in March of this year, Apple is expecting revenue to be in the range of $50 billion to $53 billion. This would represent a considerable decline versus $58 billion in revenue during quarter ended in March 2015, so management is confirming to investors that the company is facing declining revenues in the middle term because of maturation in the smartphone industry.

If sales come in near management expectations, the coming quarter will be the first time Apple delivers declining revenues in more than a decade, and this is arguably the main negative in the report.

Massive earnings and cash flows
Apple is one of the most profitable corporations in the world, and the company looks stronger than ever in this area. Gross margin was 40.1% of revenue during the quarter, a slight increase over 39.9% of sales in the year-ago quarter.

The business produced $27.5 billion in operating cash flow during the quarter, and capital expenditures absorbed only $3.6 billion of that money, leaving Apple with almost $24 billion in free cash flow. Management allocated almost $3 billion to dividends and $6.9 billion to buybacks, so total capital distributions approached $10 billion during the quarter. As of December, Apple had a gargantuan cash hoard of nearly $216 billion.

On the back of generous stock buybacks, Apple reduced the amount of diluted shares outstanding by nearly 5% versus the year-ago quarter, meaning that earnings per share are growing at a faster rate than overall earnings because of a reduced share count. Earnings per share came in at $3.28, a 7% increase year over year and a new historical record for Apple.

Investors were having a calm initial reaction to the report. Shares of Apple were falling by a modest 1.5% after the news hit the wires on Tuesday, probably because the slowdown in growth was widely anticipated, and Apple stock is already priced accordingly. 

Andrés Cardenal owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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