WIC Portfolio's Apple (AAPL) reported their fiscal 2022 first quarter results after the bell yesterday. Sales hit an all-time record of $123.9 billion (+11% YoY) surpassing the $118.788 billion consensus, while earnings of $2.10 per share (+25% YoY) handily beat expectations of $1.90 per share.

"This quarter's record results were made possible by our most innovative lineup of products and services ever," CEO Tim Cook said. "We are gratified to see the response from customers around the world at a time when staying connected has never been more important."

Improved margins

Gross margins came in at 43.8% ahead of the 42% consensus, 399bps YoY improvement. These benefited from the growth in Services, which boast a higher-margin profile.

• Driving that result was a 72.37% Services gross margin (+397bps YoY) and a 38.42% Products gross margin (+336bps YoY). Once again, we can see why the growth in Services is so important in terms of overall profitability.

• While Services represented 15.75% of sales, it represented 26.04% of gross income.

As discussed in our investment thesis for Apple, the combination of stronger profitability and the recurring nature of the Services is a pillar for higher valuation multiple.

Breaking down the business segments

Product sales hit $104.429 billion (+9% YoY), exceeding expectations of $99.483 billion. This comes despite CFO Luca Maestri calling out "significant supply constraints." Driving the segment's topline results:

• iPhone: $71.628 billion exceeded expectations of $68.06 billion

• iPad: $7.248 billion missed expectations of $8.182 billion

• Mac: $10.852 billion exceed expectations of $9.458 billion

• Wearables, Home and Accessories: $14.701 billion exceeded expectations of $14.2 billion

Huge cash pile benefits shareholders

Taking a look at some other financial metrics, Apple ended the quarter with a net cash position of $80 billion. Additionally, the company generated $46.966 billion in operating cash flow and roughly $44.163 billion in free cash flow (operating cash flow subtracting out payments for acquisition of property, plant and equipment). Management reiterated Apple's "net cash neutral over time" policy, meaning that the company will continue to reward shareholders via buybacks and dividend payment. When a company is buying back shares, mechanically the earnings per share number will rise because the dominator is consistently getting smaller over time. 

Apple returned over $25 billion to shareholders, including $3.7 billion via dividends, $14.4 billion via open market repurchases and an additional $6 billion via an accelerated share repurchase program initiated in November. The open market repurchases led to the retirement of 93 million Apple shares while the accelerated repurchase program led to the retirement of another 30 million shares.

Looking ahead

Apple once again refrained from providing quantitative forward guidance, instead opting to provide qualitative thoughts on the current quarter. Starting on the top line, management expects to achieve "solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints." Though supply is expected to improve versus the December quarter. That said, the growth rate is expected to decelerate versus the 11% rate we saw on this release.

For services specifically, management expects strong double-digit growth, though again, at a decelerated pace versus the December quarter. In terms of profitability, management expects gross margin to be between 42.5% and 43.5%, which is better than the 42.7% expected at the midpoint. Operating expenses are expected to be between $12.5 billion and $12.7 billion. 

Lastly, Apple's Board of Directors declared a cash dividend of $0.22 per share of common stock payable on Feb. 10, 2022, to shareholders of record as of Feb. 7, 2022.

Our take

Following a miss on the topline in the last quarter due to supply constraints, Apple returned with a vengeance to once again remind investors why you want to own this tech powerhouse. 

One key point: With the market seeing increased volatility, we want to reiterate the importance of that "net cash neutral over time" policy for long-term investors:

• Net cash-neutral means that Apple will not be sitting on that huge pile of cash that they have, but either be investing in growth opportunities or reward shareholders via paying out dividends or repurchasing shares. 

• In terms of shares repurchase, when shares are at a discount (such as now), management can buy back even more shares. Simple math: let's say management is authorized $14 billion to buy back shares. If shares are trading at $170, management can buy back 82,352,941 shares. But if shares are at $160, they can buy back 87,500,000 shares. That is a difference of 5,147,059 shares out of ~16.5 billion shares outstanding. Ultimately, this means share owners will be rewarded on the other side with an even greater ownership of the company than they would have been were shares never to decline.

Bottom Line: When you get a strong quarter like this, look at the stock being off 10% from all-time high as a buying opportunity.