Apple's declining iPhone sales are not a problem with growing margins and buybacks

Instead of hyping up iPhone revenue, Wall Street chose to focus on the upside. Apple's gross profit margin expanded to 46.6%, continuing an upward trajectory that reflects the company's growing services business, which brings with it significant profits.

Apple also indicated that total revenue growth in the current quarter will be in the low single digits, after a 4% decline in the second period. Analysts were expecting growth of 1.3% in the third quarter, according to LSEG.

Gene Munster of Deepwater Asset Management described the guidance as a “relief” given the recent trajectory of the business.

“I was expecting this to be flat, and some investors were saying it would go down a few percent in June,” Munster told CNBC's Fast Money after the report. “I think that's been a big part of that move up.”

But perhaps the biggest catalyst for this popularity was Apple's announcement that it had agreed to $110 billion in stock buybacks, the largest amount ever for a public company. Over the past three years, Apple has approved $90 billion in annual buybacks.

The after-hours jump shows how much investors value Apple's massive cash flow and the company's willingness to return more of it to shareholders. It's a shift in the way Wall Street has viewed Apple over the years, away from a hardware business driven by hits and toward a financial powerhouse.

“Our free cash flow generation has been very strong over the years, especially in the last few years,” Apple CFO Luca Maestri said on the earnings call.

Apple revealed earlier this year that it has 2.2 billion active devices, demonstrating the massive reach of its customer base as the company rolls out new subscription services. Despite a 4% decline in revenue, Apple reported profits of nearly $24 billion, down just over 2% from the previous year.

Apple said iPhone sales suffered a tough comparison to last year, when sales rose after previous shortages. However, investors are eyeing future iPhone growth, and many analysts say a potential iPhone with AI features could do the job and help the company lure customers from Android. Annual iPhone revenue peaked in Apple's 2022 fiscal year.

While Apple provided some guidance for total revenue, it avoided providing any kind of forecast for iPhone sales.

That's a change, even for a company that has been offering less forward guidance since the pandemic. Maestri typically provides iPhone sales trends, and has been for the past four quarters.

There's no guarantee that investors will be able to continue to count on increased buybacks from a company that has been more aggressive in this department than any other. Apple says it is trying to withdraw its massive cash pile, which amounted to $162 billion at the end of the quarter. When its debt roughly equals its cash balance — meaning the company is cash neutral — Apple will evaluate what to do next, executives said Thursday.

As of the end of 2023, Apple has spent $658 billion on buybacks over the past 10 years, far ahead of second-place Microsoft, according to Standard & Poor's Dow Jones indices.

“Over the last two years, we were doing $90 billion, and now we're doing $110 billion,” Maestri said on the phone call.

As for what happens when Apple reaches net cash neutral, Maestri said: “Let's get there first. It's going to take some time.”

“And when we get there, we will reevaluate and see what the optimal capital structure is for the company at that time,” he said.

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