Apple's Surprise: Larger Dividends and Buybacks Coming

Brian Colello: Apple reported strong results for the December quarter. They gave weak guidance for the March quarter. This was a bit expected because there were some reports about iPhone X production cuts. Probably the biggest news from Apple's earnings, is that they intend to be net cash-neutral, after the U.S. tax reform, and their ability to bring [back] all of their cash overseas. Apple is holding onto $163 billion of net cash at this point, and they intend to spend almost all of it on dividends and buybacks over the next few years. They haven't given a time frame, but they'll update it in April after the March quarter. This is a move that surprised us. We thought that Apple would be a bit more conservative with its ability to access cash, as they have had a historically conservative capital structure. This one really caught us by surprise. That's why the stock moved to up 3% after hours. It was flat before that.

Looking at the actual results, Q1 revenue for the December quarter was quite strong. iPhone revenue was strong. iPhone units were slightly light, but not too bad. The bigger factor was the mix toward the iPhone X. These are higher priced phones, ASPs of $796 were exceptional, up 15% year over year. Flatish sort of sales, but higher prices on those phones, really led to a strong quarter for Apple. The other nice part was the other products business, wearables. Apple Watch and AirPods in particular, surprised us.

Apple's second-quarter forecast for the March quarter was weak, but it wasn't overly surprising, and it certainly could have been worse. We've seen reports that Apple is cutting production of the iPhone X. A couple of chipmakers that supply into Apple gave weak guidance for the March quarter, citing softness in smartphone demand. This isn't a total surprise to us. You have the iPhone X, the highest priced phone. These usually sell very early on in the process, and then inventory wanes, particularly when you get into the spring and summer months, so Apple does adjust inventory around this time. Not a total surprise that Apple is cutting production.

Certainly, it's a negative, and the guidance is weaker than expected, but it certainly could have been a lot worse. The gross margin guidance is good. It looks like there will still be decent sales of the iPhone 8 and 8 plus. And with the good news about the cash distributions coming out in the future, investors are still relatively happy with Apple's report.