Evercore: Five takeaways from Apple's SEC 10-Q

From a note to clients by analyst Amit Daryanani that landed on my desktop Tuesday:

ALL YOU NEED TO KNOW:

    1.  Off balance sheet purchase commitments were up 50% y/y vs. Dec-19. The increase points to strong iPhone expectations, consistent with our thesis that iPhone demand will be stronger for longer.
    2. Operating margins were up in each of the 3 major regions (Americas, China, and Europe). The increase in the Americas was particularly notable at +240bps y/y. China also recovered well after lack of iPhone sales drove unusually low margins in the Sept-qtr.
    3. Warranty accruals were up y/y and had a ~110bps negative impact on margins on a q/q basis. This we think makes the gross-margin print at 39.8% all the more impressive for Dec-qtr. We do note that there was a 80bps positive impact in the Sept-qtr.
    4. AAPL returned $30.5B to shareholders in the Dec-qtr, above the $22B returned in the Sept-qtr. Despite the high capital returns, Apple’s net cash position actually increased to $84B vs. $79B at the end of the Sept-qtr.
    5. We estimate FX was an ~20bps tailwind to gross margins.

Net/net: Purchase commitments remain elevated, pointing to continued strength in iPhone demand. Capital returns remain very large and this should not change given the sizable net cash position.

Maintains Outperform rating and $163 target.

My take: Watch those pesky warranty accruals.

7 Comments

  1. bas flik said:
    Google popping on results, why AAPL stays behind?

    2
    February 2, 2021
  2. Robert Paul Leitao said:
    @PED A quick look at the warranty accruals in the Form 10-Q for the December quarter doesn’t indicate a forward-looking challenge. To my knowledge, the accruals and Cost of Warranty Claims will fluctuate from quarter to quarter. I think the issue was mentioned because it highlighted the attractive gross margin in the period that was slightly reduced by the accruals. Removing the accrual benefit from the September quarter and the slight negative impact in the December quarter reveals more of the GM progression on q/q and y/y basis.

    1
    February 2, 2021
    • “Watch those pesky warranty accruals.”

      I meant that ironically. Always a mistake in text. But thanks for your due diligence…

      “A quick look at the warranty accruals in the Form 10-Q for the December quarter doesn’t indicate a forward-looking challenge.”

      1
      February 2, 2021
      • Robert Paul Leitao said:
        @PED Thank you. I was puzzled. Looking at the accrual numbers it wasn’t worth the mention in the analyst’s note. It was just a minor point from the analyst to try and explain GM is moving higher.

        1
        February 2, 2021
  3. Gregg Thurman said:
    Chug a chugga chugga. Woo ah woooo. Engine #9 now departing on track #1. All aboard!!!

    1
    February 2, 2021
  4. Fred Stein said:
    Wow: Cap return – up, cash position – up, and just borrowed $14B more.

    And likely increase cash flow this qtr.

    That’s a lotta dough, bro.

    2
    February 2, 2021
    • Robert Paul Leitao said:
      Fred: I’m more concerned with FY2022 revenue and earnings growth rates y/y than I am about the March quarter performance. I agree. It will be another strong quarter for FCF and Apple will announce the annual update to the capital return program concurrent with the release of March quarter results. I’m hopeful with the proverbial coffers full from the December quarter (and the in-progress March quarter), Apple will aggressively repurchase shares under the existing repurchase authorization ahead of the announcement a new buyback authorization. There’s plenty of room remaining for repurchases under the current plan.

      1
      February 2, 2021

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