Apple (AAPL) reported fiscal second-quarter results at the high-end of its guidance, owing to continued growth in services as well as stabilisation in its iPhone business. CEO Tim Cook highlighted improvement in Greater China, thanks to recent pricing actions, trade-in and financing programmes, stimulus efforts by the Chinese government, and improved trade dialogue between the United States and China. Additionally, Cook noted iPhone declines were considerably smaller during the final weeks of the March quarter, which is a reassuring trend.
Meanwhile, the services segment delivered another impressive quarter, with App Store, Apple Music, cloud services, and App Store search ad businesses all recording all-time levels. Combined with a growing active installed base, our narrow moat rating stemming from switching costs remains comfortably intact, particularly as Apple customer satisfaction and loyalty continues to be healthy. We are maintaining our $200 fair value estimate and we think shares are fairly valued at current levels.
Second-quarter sales were $58 billion, down 5% year over year primarily due to iPhone weakness. Revenue for Apple’s largest product segment fell 17%, though year-over-year performance improved in China, Japan, and the Americas. The top-line decline also reflected 200 basis points of negative foreign exchange effects stemming from a stronger US dollar. Mac and iPad sales were $5.5 billion and $4.9 billion, respectively. The former fell 5% year over year due to processor constraints that we attribute to Intel. Positively, Cook expects this headwind to have minimal impact on Apple’s third quarter. The latest iPad Pro drove iPad sales growth of 22%, with a return to growth in China. Other products rose 30% to $5.1 billion, with wearables growing nearly 50% thanks to the likes of Apple Watch and AirPods. We view these tangible products with high regard, as they support Apple’s sticky iOS ecosystem.
Product gross margins fell 270 basis points year over year to 31.2%, which we attribute to lower iPhone sales volume and price-cuts in areas such as China. Services grew 16% year on year to $11.5 billion, with paid subscriptions reading 390 million, an increase of 30 million over the past quarter and 120 million over the past year. Importantly, Apple’s cut from the largest third-party subscription app in the App Store accounted for only 0.3% of total services revenue, illustrating the diversity in Apple’s subscription business. Gross margins in services expanded 100 basis points sequentially, thanks to a more favourable mix.
Management expects third-quarter sales to be at a midpoint of $53.5 billion, which implies effectively flat sales year over year and incorporates a 300 basis point negative foreign exchange hit. We think this forecast includes another strong double-digit growth quarter in services and wearables, mostly offset by continued iPhone weakness, though we concede the latter is trending in the right direction. Furthermore, management didn’t provide any new details on Apple’s recent TV, news, gaming, and card offerings, though our overall take is that each product should support our services growth expectations. The smartphone titan also increased its quarterly dividend by 5% to $0.77, while Apple’s board authorised an additional $75 billion for share repurchases as the firm remains committed to reaching a net cash neutral position over time.
