Apple’s 4Q18 Earnings Demonstrate Static Net Income Growth As Services Slow Down

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Just a handful of days after it launched new iPads, Apple (NASDAQ:AAPL) has released its fourth quarter and fiscal year results for 2018. The company made optimistic forecasts in the previous quarter. Now it's time to take a look at whether Apple has met its own expectations. As expected, the few numbers shared by the company follow in line with the forecasts.

Apple's market value decreased by an approximate $75 Billion after the company announced its 4Q18 earnings. The stock closed at $222.22, demonstrating a 31% year-over-year growth nevertheless. Apple missed analyst expectations slightly for total revenue. It reported $62.9 Billion dollars in revenue, below Wall Street's highest consensus. The company reported $2.91 in Diluted EPS,  which is below than what Morgan Stanley's estimate.

Take a look below for more details.

Apple Inc Reports Fourth Quarter Results: Company Demonstrates Little Annual Growth In Product Shipments As iPhone Lineup's Large ASP Is Still Buoying Revenues For The Lineup

The big highlight of yesterday's earnings release from the Cupertino tech giant is simple. The company's three major product segments are growing slowly for units shipped and revenues. As a result, Apple is finding it harder to maintain a solid growth momentum, particularly due to the fact that its growth in Services and Other products is insufficient to drive up overall revenues significantly.

Apple (NASDAQ:AAPL) has reported $62.9 Billion in Q4 Revenues This represents an 18% quarterly growth, which is higher than 4Q17's 16% sequential growth rate. Sales costs for 2018's fourth quarter have also grown at 18%, 1% higher than Q417's sequential increase in growth rate for cost of sales growth rate. Apple has increased its prices for the iPhone lineup, which continues to drive overall sales for the company. For the quarter ended, the iPhone accounted for 44% of Apple's Total Revenues.

Apple's manufacturing costs have increased for gadgets, particularly as it continues to equip them with ambitiously designed chips. Both the 2018 iPhone and iPad Pro upgrades feature larger Neural Engines and, for the iPad, Apple has incresed CPU cores by two. This, in turn, is driving up the company's sales costs, as highlighted below by the increase in sequential growth changes for sales costs between 4Q18 and 4Q17.

In Billions($): 4Q18 3Q18 4Q17 3Q17 FY18 FY17 Seq ('18) Seq ('17) Yearly (FY)
Revenues: 62.9 53.3 52.6 45.4 265.6 229.2 18% 16% 16%
Cost of Sales: 38.8 32.8 32.6 27.9 163.8 141 18% 17% 16%
Operational Expenses: 8.0 7.8 6.8 6.7 30.9 26.8 2.5% 1.5% 15%
Net Income: 14.1 11.5 10.7 8.7 59.5 48.3 23% 23% 23%

As Apple increased its retail presence worldwide, operational expenses have grown by 1% cross-sequentially this quarter. Finally, our brief snapshot of the company's performance also reveals static growth in Net Income. Apple continues to increase its rate of sequential cost and revenue growth, but Net Income does not reflect a similar increase in growth rate.

While Apple's sequential Revenue growth for 4Q18 grew by 2% over last year's 4Q, Net Income continues to grow steadily by 23%. This is in part affected by higher prices for the iPhone lineup and increased operational expenditure.

($): 4Q18: 3Q18: 4Q17: 3Q17: FY18: FY17:
iPhone ASP: 793 724 618 606 N/A 652
iPhone % of Total Revenue: 44% 46% 44% 55% N/A 62%

Apple Inc's Earnings And Product Report Demonstrates Decreasing Reliance On iPhone & A Slowdown In Services' Growth

iPhone ASP continues to increase, in line with Apple's continuity to introduce iPhone models with higher entry prices. In addition to the 'fastest iPhone ever', the company also launched its most expensive iPhone in 2018 i.e. the iPhone XS Max. Apple is milking the iPhone as much as it can, and the smartphone continues to contribute significantly to the company's Total Revenues.

Taking a look at the iPhone's contribution to Apple's Revenues in previous quarterly and fiscal data, it's also evident that the company has started to decrease its reliance on the iconic smartphone. The iPhone contributed 55% to Apple's total revenues in 3Q17, but this contribution decreased to 46% in 3Q18, and further slid down to 44% in 4Q18.

It's been a good quarter for the Mac, fueled in part by this year's MacBook Pro refresh. Apple finally introduced quad and hexa-core processors to the MacBook Pro lineup this year. Additionally, the company also beefed up security in the latest notebooks. All 2018 MacBook Pro variants feature Apple's T2 security chip. This chip is isolated from the notebooks' application processor and primary storage, and it also performs boot-level cryptographic operations to further isolate them from the laptops' primary hardware.

Mac sales grew by 39% sequentially and 3% year-over-year in 4Q18. In comparison, they grew by 28% sequentially and 25% year-over-year in 4Q18. Services performed poorly when compared against figures for 4Q17, which demonstrated healthy growth double-digit sequential and year-over-year growth.

Finally, Apple (NASDAQ:AAPL) has also announced its intention to stop disclosing iPhone units sales. The company bought back 92.5 million shares during the quarter. Apple provides the following estimates for 1Q19 as per its earnings release:

  • Revenue between $89 billion and $93 billion.
  • Gross margin between 38 percent and 38.5 percent.
  • Operating expenses between $8.7 billion and $8.8 billion.
  • Other income/(expense) of $300 million.
  • Tax rate of approximately 16.5 percent before discrete items.
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