Excerpts from the notes I’ve seen. More as they come in.
Toni Sacconaghi, Bernstein: Q1 19 Debrief – Should we feel any better? Unsurprisingly given the pre-announcement, Apple’s fiscal Q1 was largely in-line… More importantly, Apple guided Q2 below consensus – portending downward revisions to sell-side FY19 EPS estimates in the range of ~5%. That said, Q2 guidance now appears achievable, unless iPhone channel inventory build was significantly worse than history… More broadly speaking, last night’s earnings call reaffirmed our concern that several structural headwinds exist to iPhone’s business, including (1) elongating replacement cycles; (2) natural limits to pricing; and (3) a strategically challenged position within the China market. We view Apple’s responses to date as more tactical than strategic, underscoring the challenges. Market Perform. $160.
Katy Huberty, Morgan Stanley: Reasons to be more bullish. Apple faces macro headwinds but investor sentiment/positioning became overly negative, ignoring the strength of Apple’s platform. Importantly, non-iPhone revenue grew 19% ex-China revenue grew, and newly disclosed iPhone installed base and Services subs hint at sustained Services growth. Overweight. Lowers price target to $197 from $211.
Samik Chatterjee, J.P. Morgan: F2Q19 Guide Meets Low-Bar and Bookends Volume Downside; Should Drive Focus Back on Services Oppty. This quarter was clearly about investors putting bookends around downside risks to Apple’s iPhone unit volume outlook and the F2Q19 revenue guidance of $55-$59 bn managed to reassure investors that volume risks are largely priced in the shares at current valuation… Although yesterday’s announcement will do little in terms of addressing some of the medium-term concerns investors have relative to the drivers of revenue growth as the smartphone cycle matures, we believe book-ending the downside on volumes will help in driving investor focus back to the Services opportunity. Overweight. $228.
Andrew Uerkwitz, Oppenheimer: Price is a factor. While management cited FX headwind again as one of the major culprits for emerging market weakness, management finally openly admits that (high) iPhone price is another factor. We are not sure such observation will eventually impact design and pricing considerations but we believe pricing will stay a major hurdle if Apple chooses to protect hardware margin at 30%+. Perform. No price target.
Timothy Arcuri, UBS: Worst of Bad News Now Behind Us, Services Has a Lot of Runway, and 5G Could Help Upgrade Cycle. Apple stock should react favorably as revenue guide was better than feared, though there was ample information here for both bulls and bears (gross margin guide, elongating iPhone upgrade rates, big Y/Y declines in hardware margins despite big iPhone ASP increases). We remain optimistic because 1) we are now through the worst of the bad news for a while; 2) that AAPL is getting a paltry ~$30MM/Q from its largest 3rd party subscription app shows the vast fertile ground; 3) iPhone replacement cycles continue to elongate but AAPL’s numbers suggest they could now be close to some asymptote; and 4) new proprietary content (video) and aggregation services (gaming) this year should spur a pivot in the narrative. Video in particular does not seem like a zero-sum-game with room for AAPL to co-exist and while there are existing players in these content markets, AAPL can marry new content with distribution. Buy. Raises price target to $185 from $180.
Wamsi Mohan, Merrill Lynch: Services margins, installed base growth strong, but can that drive the thesis? Apple reported strong Services gross margin of 62.8% for F1Q19, and we expect margin strength in that segment to continue; yet overall gross margin for the Mar quarter was guided down 50bps q/q as other factors offset including sequentially lower revenue and FX headwinds. In our opinion, this underscores the fact that product revenue and margins continue to be important, and despite strong year-over-year growth in Services margins, overall margins are still under pressure. Neutral. Lowers price target to $180 from $190.
Pierre Ferragu, New Street: Macro is a small portion of the problem – thesis playing out in full. Details show the macro situation in China is indeed a small moving part and confirm our thesis is playing in full. 2FQ19 guide is weak and confirms the air pocket will last all of 2019. Apple maintains high level of spending to support the business. Management understands the situation and acts on it: All the call was about driving upgrades with trade-ins, making phones more affordable, etc. The question of repositioning the pricing of the iPhone nevertheless seemed taboo on the call. Neutral. $140.
Daniel Ives, Wedbush: Cook & Apple Take a Small Step in the Right Direction; Heavy Lifting Ahead. While the overall headline numbers were not a surprise, we would characterize the company’s March guidance as “better than feared” with many of the bears whispering that a sub $55 billion revenue guidance was potentially in the cards vs. Apple’s $55 billion to $59 billion range. Importantly the Street will be laser focused this morning on the initial gross margin numbers for the services business, which came in at 63% and were above our and investor expectations in the ~60% range and will be a linchpin to a higher sum-of-the-parts valuation over time for Cook & Co. Outperform. $200.
Walter Piecyk, BTIG: Trimming Apple Estimates and Target. The sub 20% growth in services is undoubtedly going to generate a good amount of dialogue among investors attempting to put its numerous pieces together. The company cited a number of reasons that contributed to the deceleration, but ultimately investors are going to want to understand how this segment can accelerate growth going forward given what is a fairly wide variety of possible drivers. The higher valuations assigned to recurring revenue services businesses are, in large part, a result of their predictability. However, the variety of elements within Apple’s services segment and its relatively low penetration of subscriptions among the installed base do not provide us that level of confidence yet. Buy. Lowers price target to $189 from $197.
Michael Olson, Piper Jaffray: Dec Qtr Largely In-Line, Q2 Outlook Better Than Many Had Feared. Apple reported Dec. quarter revenue and EPS fractionally above the Street’s post pre- release downwardly revised estimates. Revenue guidance for the March quarter is 3% below consensus (mid-point), with the gross margin outlook essentially in-line at 37.5% (Street at 38%). Many investors feared a more significant guide down was coming for March quarter revenue and with the “bad news,” which turned out not as bad as expected, out of the way, some that had been sidelined will likely re-visit the stock. Overweight. $187.
Aaron Rakers, Wells Fargo: Expect Persistent iPhone Weakness; Driving The Services Narrative. Apple expects continued iPhone weakness in F2Q19, driven by ongoing impacts from FX (-$1.3B y/y rev. impact), slowing upgrades / lack of carrier subsidies, and battery replacement program; however, Apple did note it exited F1Q19 with iPhone channel inventory at a “comfortable” level. Apple reiterated confidence in achieving its F2020 services target with revenue up 2x vs. F2016 (+19% CAGR); emphasizing some incremental key metrics as summarized below. While we consider Apple’s incremental installed base and services disclosures / expansion to be a positive, we maintain a Market Perform rating as we think Apple’s challenges in China will persist. Market Perform. $160.
Gene Munster, Loup Ventures: Apple’s Ecosystem Will Lead the Company Through a Difficult 2019. No company can escape macroeconomic conditions, but Apple is successfully navigating the headwinds. Despite a troubled quarter for iPhone sales, mostly in China, Apple’s ecosystem is stronger than ever, and the company is positioned to return to sustainable mid-to-high-single-digit revenue growth in Dec-19 after what will likely be a 5% decline in FY19.
Ben Bajarin, Creative Strategies: 900 Million iPhones. Apple’s Fiscal Q1 2019 was one of the better calls I’ve listened to in a long time. Partly, because CEO Tim Cook gave an elaborate and well structured roughly 18-minute commentary that should help get investors thinking more structurally about Apple’s business and less about metrics that don’t matter. But one highly elusive number, one many of us have always wanted was given on the call. That number was 900 million. 900 million iPhones are out there in the wild as a part of Apple’s 1.4 billion active devices installed base. I say this number has always been desired because that number approximately represents the true unique user base of Apple customers.
Neil Cybart, Above Avalon: Overall takeaway. Expectations heading into Apple’s 1Q19 earnings report were at multi-year lows. Apple very clearly exceeded those extremely low expectations. While it looks like 2Q19 will be another weak quarter for Apple due to declining iPhone sales, the rest of Apple’s business is firing on all cylinders. While Apple doesn’t provide full-year guidance, the impression given by management is that overall results will likely find some stabilization in the second half of 2019.