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Apple Inc. Earnings: Look Beyond The Headlines

This article was originally published on Fool.com

WASHINGTON, DC — Apple (NASDAQ: AAPL.US) stock was plunging by 7% on Tuesday after official market hours, as investors showed their disappointment with the company’s earnings report for the third quarter of 2015. However, while iPhone sales were below expectations, the overall picture is not nearly as dismal as the initial price reaction would indicate. 

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Financial performance

Total earnings per share came in at $1.85, better than the $1.81 average Wall Street forecast, and growing by almost 45% year over year. Revenue was ahead of forecasts, too, as Apple delivered $49.6 billion in total sales versus an average forecast of $49.3 billion, representing a solid 33% annual increase. 

Gross margin was 39.7% of sales during the quarter, a small increase from 39.4% in the same period last year. The company’s guidance was for gross margin to be in the range of 38.5% to 39.5%, so the number came in above Apple’s own forecasts. Wall Street analysts polled by FactSet were expecting 39.5% in gross margin, meaning Apple outperformed both its own guidance and Wall Street expectations on the margin front.

Over the nine-month period ended on June 27, Apple produced $67.8 billion in operating cash flow. The company reinvested $7.6 billion in capital expenditures, leaving $60.2 billion in free cash flow. That’s a big 48% increase from $40.8 billion in free cash flow over the same nine-month period in 2014. 

Apple distributed $8.6 billion to investors via dividends and $22 billion in the form of buybacks over the first nine months of fiscal 2015. When considering cash and liquid investments, Apple is sitting on a massive cash hoard of nearly $203 billion on its balance sheet.

On products and growth drivers

The company sold 47.5 million iPhone devices during the quarter, a 35% increase over the same period last year. Wall Street analysts were on average expecting 49 million units, so the number was marginally below expectations. Prices were remarkably strong, though. The average selling price in the iPhone segment was $660, a record for Apple. In terms of revenue, iPhone sales grew 59% to $31.4 billion, and the product represents a dominant 63% of total sales.

Most companies can only envy the kind of growth Apple is enjoying in the iPhone segment, but short-term stock market reactions are usually about data versus expectations, and Wall Street was expecting even more growth from the iPhone. This is probably the biggest negative in the report.

iPad unit sales declined 18% to 10.9 million, while Mac sales increased 9% to 4.8 million computers sold during the quarter. Both products were broadly in line with expectations.

Apple didn’t provide specific sales figures for the much-awaited Apple Watch in the earnings release, but sales in the “other products segment,” which includes sales of Apple Watch, Apple TV, Beats Electronics, iPod, and third-party accessories, grew 49% to $2.6 billion.

CEO Tim Cook said in the press release that Apple Watch was off to “a strong start,” but chances are the company will face more questions regarding specific sales figures for Apple Watch during the earnings conference call. 

China was quite strong, especially considering the growing concerns about economic instability in the country. Total revenue in the Greater China region jumped 112% year over year during the last quarter, reaching $13.2 billion and accounting for almost 27% of total company-level revenue.

iPhone unit sales were below Wall Street forecasts, but the device is still selling like hotcakes, and pricing trends are quite encouraging. Both total revenue and profitability were remarkably strong and better than forecasted, so investors in Apple stock have no reason to panic when it comes to the overall health of the business. Short-term reactions to earnings announcements are many times misguided and exaggerated, and this seems to be the case with the latest release from Apple.

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The author of this post, Andrés Cardenal, owns shares of Apple. The Motley Fool owns shares of Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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