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Apple’s Third Quarter EPS Results Exceed Expectations

Apple recently reported third quarter results, including EPS of $1.28, up 20% year-to-year exceeding estimates by $0.05. Upside came from strong iPhone and Mac sales and the Apple ecosystem has continued to grow. iPad sales fell short of expectations. Apple expects September-quarter revenue to range from $37 billion to $40 billion, which falls $2.1 billion below the consensus estimate of $40.6 billion at the midpoint. Entering the quarter, guidance implies EPS of $1.17 to $1.25 against a $1.34 prior consensus.
June-quarter results were viewed as impressive overall. While normally reviewing the reset with caution, on the September guidance front, the company’s launch of a new product or products is anticipated to keep investor interest piqued. Management’s guidance is seen as being conservative and estimates are expected to be moved up, depending on the timing of these products. At $94.15, Apple trades at 14 times the 2015 estimate (11 times excluding net cash/investments).

Apple is believed to be ready for upward revisions to estimates over the next couple of quarters with stable gross margin outlook and continued share repurchases, while the Outperform rating is unchanged. At $340 million above estimates, total revenue declined 18% to $37.4 billion. iPhone sales accounted for $319 billion of upside and non-iPhone revenue exceed estimates by $21 million. At 433,000 above estimates and 12.7% above year-to-year growth, iPhone sales were 35.2 million units. While mid-tier iPhones had the highest growth, all three tiers showed healthy growth.

Apple left the quarter within its four- to six-week target, while channel inventory fell by 150,000 sequentially. Down 3.4% year-to-year and in line with estimates, the ASP was $561. iPad shipments were down over 18% sequentially at 13.3 million units and declined 9% year-to-year when adjusted for channel inventory. Apple reduced channel inventory by 500,000 units during the quarter. Management remains positive on the product category in the long term.

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