Apple: 4Q15 Results Largely As Expected; 1Q16 Guidance Positive

Apple reported fiscal 4Q15 results after market close yesterday, and investors reacted positively (Apple is currently up +1% in the premarket). While the quarter's results were largely in line with investor expectations, investors were generally positive on Apple's 1Q16 guidance for positive iPhone revenue and unit growth. However, many investors remain concerned that growth could decline the rest of the year in fiscal 2016. A key question going forward will be whether Apple will be able to grow iPhone units and revenue in 2016 on top of the highly successful prior year. 


Apple's 1Q16 Guidance for Positive Growth

As I wrote in a prior Word on Wall Street post, the focus going into Apple's 4Q results was management's guidance for 1Q, where many investors feared that revenue and units could turn negative on difficult comparisons. Tim Cook assuaged investor fears by noting that he expected iPhone to grow in 1Q16 (although he didn't specify whether it was unit or revenue growth, many investors interpreted the comment on both revenue and units). The reasons behind his confidence: only ~30% of iPhone's installed base have upgraded to a larger screen, and Apple saw the largest percentage of Android switchers it has ever seen this quarter with 30% of upgrades coming from Android owners.  These two factors (sales from current iPhone owners, and new iPhone owners) remain key drivers behind continued iPhone sales. 

While investors were generally positive on the 1Q16 guidance, investors remain concerned that growth could slow in the following quarters beyond 1Q as the company will continue to face difficult comparisons when the iPhone 6 launched last year. In some ways, the concerns around 1Q16 were simply shifted to the following quarters.


China Growth Was Strong

As I noted in my prior article, another key focus is Apple's performance in China. China revenue growth grew 99% in 4Q and represented 24% of revenue (up from 15% of revenue last year). If the Chinese economy is slowing, it did not appear to significantly impact Apple's numbers in 4Q. Investors continue to look for China to be a key driver of iPhone growth, as the installed base in emerging markets remains low. 


Strong Gross Margin Gains

Gross margins came in at 39.9%, which was above company guidance (of 38.5% - 39.5%) and investor expectations (of roughly 39.3%), and drove much of the EPS upside relative to consensus estimates. If Apple's iPhone 6S sales are able to beat expectations, look for margin upside given the high margin contribution from the phones.