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Apple’s falling iPhone sales not a problem as margins and buybacks grow

Instead of focusing too much on iPhone revenue, Wall Street chose to focus on the positive. Apple’s gross margin expanded to 46.6%, continuing an upward trajectory that reflects the company’s growing services business, which brings strong profits.

Apple also noted that overall revenue growth in the current quarter will be in the single digits, following a 4% drop in the second period. Analysts expected growth of 1.3% in the third quarter, according to LSEG.

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

“I expected this to hold steady, some investors were saying it was going to go down a few percent in June,” Munster told CNBC’s “Fast Money” after the report. “I think that was a big part of this bullish move.”

But perhaps the biggest catalyst for the pop was Apple’s announcement that it had approved $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 are valuing Apple’s huge 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, moving it away from a blockbuster-driven device business and toward a financial powerhouse.

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

Apple revealed earlier this year that it has 2.2 billion active devices, illustrating the enormous reach of its customer base as the company launches new subscription services. Despite the 4% drop in revenue, Apple still posted nearly $24 billion in profits, a drop of just over 2% from the previous year.

Apple said iPhone sales suffered a difficult comparison from last year, when sales rose after earlier shortages. Still, investors are looking for future iPhone growth, and many analysts say a potential iPhone with AI features could be the solution and help the company capture Android customers. Annual iPhone revenue peaked in Apple’s fiscal 2022 year.

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

That’s a change, even for a company that has been giving less guidance since the pandemic. Maestri often provides trends on iPhone sales, and has done so for the past four quarters.

There’s no guarantee that investors can continue to count on bigger buybacks from a company that has been more aggressive in that department than any other. Apple says it is trying to reduce its huge cash hoard, which stood at $162 billion at the end of the quarter. When its debt is roughly equal to its cash balance, meaning the company is net cash neutral, Apple will evaluate what to do next, executives said Thursday.

As of the end of 2023, Apple had spent $658 billion on buybacks over the past 10 years, far ahead of second-place Microsoft, according to S&P Dow Jones Indices.

“Over the last few years we made $90 billion and now we’re making $110 billion,” Maestri said on the call.

In terms of what will happen when Apple reaches net cash neutrality, Maestri said, “we’re going to get there first. It’s going to take a while yet.”

“And then when we’re there,” he said, “we’re going to reassess and see what the optimal capital structure is for the company at that time.”

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