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For Apple investors, earnings declines outweigh capital returns, positive commentary


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For Apple investors, earnings declines outweigh capital returns, positive commentary

Apple Inc.on April 26 reported its first year-over-year decline in 13 years, and that superlativeweighed heavily on shares in after-hours trading.

Apple saw net sales drop to $50.56 billion in its fiscal secondquarter ended March 26, down 13% from $58.01 billion in the prior-year period, butstill in the company's guidance rangeof $50 billion to $53 billion, executives pointed out on a same-day earnings webcast.

Speaking during a same-day earnings conference call, CEO TimCook called it a "very busy and challenging quarter."

"Despite the pause in our growth, our results reflect excellentexecution from our team," the executive said in his opening remarks.
He pointed to currency headwinds, a challenging global economy and tough year-over-yearcomparisons as reasons for the decline.

The headwinds also hit profits. Net income dropped to $10.52billion, or $1.90 per share, down from $13.57 billion, or $2.33 per share, in theprior-year period.

The S&P Global Market Intelligence consensus normalized EPSestimate for the just-ended quarter was $2.00. For revenue, the consensus estimatewas $51.98 billion.

Further weighing against investor sentiment, the declines willnot be contained to the second quarter. CFO Luca Maestri said revenue will likelyfall in a range of $41 billion to $43 million in the company's fiscal third quarter,implying a decline of 15% to 19%. Currency and last year's comparisons were alsooffered as reasons for the downbeat guidance.

Also affecting third-quarter revenue guidance, the company saidthe supply-demand balance for the iPhone SE, its newest 4-inch smartphone, was off,with demand exceeding supply. The final third-quarter revenue result will dependon how the company can manage that dynamic, the executives said.

Adding more fodder for the bears, average sale prices for theiPhone declined in the second quarter and are expected to decline in the third quarteras the iPhone 6s and 6s Plus mature and the lower-priced SE penetrates the productmix. The weakening ASP on the iPhone led to Maestri's guiding to gross margins between37.5% and 38%, what one analyst called "the worst gross margin in a year anda half." The second-quarter gross margin came to 39.4%.

International results offered little relief from the dreary commentary.Greater China revenue was off by 26% year over year, joining declines in every othermarket except Japan, which saw 24% revenue growth.

However, the executives said they were still optimistic aboutChina. Cook explained that on an adjusted sell-through basis, sales were down just5% in China, even against a prior-year quarter where they were up 81%.

"I think China is not as weak as has been talked about.… We may not have the wind at our backs as we once did, but it's a lot more stablethan I think the common view of it. So we remain really optimistic on China,"the executive said.

Cook tried to drum up optimism across the company's productsand initiatives. Perhaps most notably, the company is expanding its capital returnprogram to $250 billion from $200 billion, with a share-repurchase authorizationboost to $175 billion from $140 billion. Apple's board of directors also approveda 10% increase to its quarterly dividend, up to 57 cents per share, payable May12 to shareholders of record as of close of business on May 9. The company plansto continue to boost its dividend on an annual basis, Cook said.

He said the upgrade cycle for the iPhone 6s is still strongerthan it was during the iPhone 5 cycle, even though it is much weaker than the iPhone6 cycle. Customers switching from Android and other smartphone platforms increasedat a "very high rate," with the first half of 2016 showing more switchersthan any other six-month period to date. Also, the iPhone is "still attractingmillions of first-time smartphone buyers each quarter." To illustrate, he pointedto 56% sales growth in India.

IPhone SE sales were also moving along nicely, though those wouldnot start to show until the third quarter, Cook said.

The executives also touted the company's growth in its Servicessegment, which saw the strongest quarter of growth yet. Segment revenue was up 26%,with App Store revenues up 35%.

"Music revenue has now hit an inflection point after manyquarters of decline," Cook said.

The purchase value of services was up 27% to $9.9 billion, headded, a record. Also, Apple Pay expanded to 5x the transaction volume comparedto the prior-year period. There are 2.5 million Apple Pay locations in the U.S.

The executives also pointed to strong Apple Watch sales, whichled to 30% revenue growth in the Other Products segment. The Apple Watch is thebest-selling smartwatch in the world, Cook said, and it has exceeded iPhone salesduring that product's first year.

However, investors could not shake the negative results and guidancefor the positive commentary. Shares were bid down sharply during the webcast, downabout 8.4% as it came to a close.