In an otherwise brutal week for Big Tech, Apple (AAPL) was the sole outlier, beating estimates for sales and profits after the bell on Thursday. It once again justifies the premium that the market has been awarding it for some time. This impressive quarter and the stand-out amongst other big tech companies prompted us to re-enter the position, which we exited some 30 points higher.

• Revenue rose 8% year-over-year to $90.1 billion, exceeding expectations of $88.9 billion and marking a September quarter record. That was despite a foreign-exchange drag of more than 600 basis points.

• Earnings of $1.29 per share came in ahead of the consensus $1.27.

• Operating income of $24.9 billion outpaced expectations of $24.5 billion.

• Gross margin was 42.3%, in line with estimates.

Companywide results

Operating cash flow of $24.13 billion was in line with expectations of $24.24 billion and marked a September quarter record. Free cash flow of $20.84 billion slightly missed the expected $21.1 billion. As a result of the strong cash generation, Apple ended the quarter with $169 billion in cash and marketable securities on the balance sheet and a $49 billion net cash position after subtracting $120 billion of debt.

We always pay close attention to Apple’s cash flow for two reasons.

• As is the case with all companies, comparing cash flow to net income can tell us the quality of earnings. Higher-quality earnings have more actual cash backing them. In Apple’s case, free cash flow edged out net income, indicating very high quality.

• Apple has a policy of being “net cash neutral over time,” meaning if the cash isn’t used for acquisitions or organic growth investments, it is returned to shareholders through buybacks and dividends. To this point, Apple returned over $29 billion to shareholders in the reported quarter, including $25.2 billion via the repurchase of 160 million shares and $3.7 billion in dividends. Additionally, management declared a $0.23 per share dividend payable on Nov. 10, 2022, to shareholders of record as of Nov. 7, 2022.

Segment results

Services sales rose 5% to $19.19 billion, slightly below the $20.11 billion consensus. Still, it represented a September quarter record. Products revenue of $70.96 billion beat the $69.44 billion consensus.

Services gross margin was 70.5%, while products gross margin was 34.6%. This demonstrates why growth in the services segment is such a huge factor for earnings growth over time. The recurring nature of sales also supports the valuation multiple placed on those earnings. On the conference call with investors, management said Apple now has more than 900 million paid subscriptions across its services, an increase of 155 million from the year ago period and double the level from three years ago.

In the products segment, device sales were as follows:

• iPhone: $42.6 billion versus $43.1 billion expected

• iPad: $7.2 billion versus $7.8 billion expected

• Mac: $11.5 billion versus $9.2 billion expected

• Wearables, home and accessories: $9.7 billion versus $9.3 billion expected

The company’s slight revenue miss on iPhones appears to be a supply — not demand — issue. That’s important because oversupplying has been the central theme driving down the stock market. Management said supplies for the 14 Pro and 14 Pro Max have been constrained since launch and remain so today. Management stressed the iPhone is a hit, citing a 98% customer satisfaction score. Apple also makes three of the top four smartphones in the U.S. and the UK, the top three in urban China, the top six in Australia, four out of the top five in Germany, and the top two in Japan, according to Apple.

Guidance

As has been the case since the start of the Covid pandemic, management refrained from providing quantitative guidance, instead opting to provide some “directional insights” based on an assumption that Covid-related impacts do not worsen.

On sales, management expects annual revenue growth to decelerate in the December quarter versus the September quarter due to a 10% headwind from foreign exchange, a tough Mac comp as we lap the M1 launch and a slowdown in advertising and gaming in its services division. The Street was looking for 3.4% revenue growth in the December quarter coming into the print so a deceleration from the 8% rate we saw in the reported quarter is in line with expectations.

Additionally, December quarter gross margin was guided to be in the range of 42.5% to 43.5%, versus estimates of 42.6%. 

Operating expenses are expected at between $14.7 billion and $14.9 billion, while other expenses are expected to hit roughly $300 million.

Bottom line

Despite growing fears of a recession and a strong U.S. dollar that dents international sales, Apple sales posted a September quarter record for the Americas, Europe, Greater China and the rest of Asia-Pacific. The company’s iPhone business slightly missed expectations: Revenue hit $42.63 vs. $43.21 billion estimate. Still, that represented growth of nearly 10% over last year.

Because of a relatively strong quarter from Apple, we decided to re-enter this position, which is backed by the cash from our sales of companies such as Meta or Google who reported disappointing results.