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Apple, Microsoft, Facebook,
Alphabet Report Financial Results

Ingrid Hendershot, CEO, Hendershot Investments Inc., an investment management firm, reviews Quarterly Results for four of the firms portfolio holdings: Apple, Microsoft, Facebook and Alphabet.

Apple: Total Revenue Grows, Services Revenue
Reaches All-Time High of $13.3 Billion

Apple (Nasdaq: AAPL) reported second quarter sales rose 1% to $58.3 billion with net income down 3% to $11.2 billion and EPS up 4% to $2.55.

International sales accounted for 62% of total revenues. Despite the global impact of COVID-19, the company generated record Services sales which increased 17% to $13.3 billion.

Subscriptions to Apple’s services increase by 125 million year-over-year to 515 million with the company expected to reach its goal of 600 million paid subscriptions by the end of the 2020 calendar year.

Wearables, Home and Accessories revenues increased 23% to $6.3 billion with double-digit growth in all geographic segments.

iPhone revenues declined 7% to $29 billion impacted both by supply and demand constraints in China due to COVID-19 during the quarter. Supply chains in China have now returned to typical levels. While store traffic in China has not returned to pre-virus levels, Apple reported record retail sales driven by robust on-line sales.

Mac sales declined 3% during the quarter to $5.4 billion with iPad sales down 10% to $4.4 billion. As remote learning and remote working continues, Apple expects both Mac and iPad segments to show growth in the third quarter due to strong demand.

Trends in iPhones and Wearables are expected to worsen in the quarter ending in June.

Apple’s active installed base of devices reached an all-time high in all geographic segments and all major product categories.

Free cash flow increased 24% during the first half of the year to $40 billion.

During the first half, the company paid $6.9 billion in dividends and repurchased $39.3 billion of its common stock. Apple ended the quarter with $192.8 billion in cash and investments and $89 billion in long-term debt.

Given the company’s extraordinary financial strength and unmatched free cash flow generation, Apple announced a 6% increase in its dividend and announced a new $50 billion share repurchase program. The company currently has $40 billion remaining authorized for future share repurchases which brings the total repurchase program authorization to over $90 billion.

After a very depressed month in March, Apple saw sales begin to pick up in the second half of April due to new products and help from economic stimulus.

Management remains confident in Apples future and continues to make significant investments in all areas of their business, including a five-year commitment to contribute $350 billion to the U.S. economy.

[Editor’s Note: tracks analysts, hedge fund managers, financial bloggers and corporate insiders on a daily basis analyzing their data to discover trends that help investors outperform the market. TipRanks notes that of the 32 analysts offering 12 month price targets for Apple in the last 3 month, 27 rate AAPL a Buy, versus 4 Hold and a single Sell. The average price target is $302.07 with a high forecast of $370. And a low forecast of $243.]

Microsoft Cloud Strength Drives Third Quarter Results

Microsoft (Nasdaq: MSFT) – On April 29th reported fiscal third quarter revenue increased 15% to $35 billion with net income increasing 22% to $10.8 billion and EPS up 23% to $1.40.

Revenue in Productivity and Business Processes was $11.7 billion, up 15%, driven by a 25% increase in Office 365 Commercial revenue, a 15% increase in Office Consumer products and cloud services revenue with continued growth in Office 365 Consumer subscribers to 39.6 million.

LinkedIn revenue increased 21%, Dynamics products and cloud services revenue increased 17% on a 47% increase in Dynamics 365 revenue.

Revenue in Intelligent Cloud increased 27% to $12.3 billion on a 30% increase in server products and cloud services revenue, driven by Azure revenue growth of 59%.

Revenue in More Personal Computing increased 3% to $11 billion on flat Windows OEM revenue, a 17% increase in Windows Commercial products and cloud services, a 1% increase in search advertising, a 2% increase in Xbox content and a 1% increase in Surface revenue.

COVID-19 had minimal net impact on the total company revenue during the quarter.

In the Productivity and Business Processes and Intelligent Cloud segments, cloud usage increased, particularly in Microsoft 365 including Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform, as customers shifted to work and learn from home. In the final weeks of the quarter, there was a slowdown in transactional licensing, particularly in small and medium businesses and a reduction in advertising spend in LinkedIn.

In the More Personal Computing segment, Windows OEM and Surface benefited from increased demand to support remote work and learn scenarios, offset in part by supply chain constraints in China that improved late in the quarter. Gaming benefited from increased engagement following stay-at-home guidelines. Search was negatively impacted by reductions in advertising spend, particularly in the industries most impacted by COVID-19.

Microsoft delayed some cloud infrastructure spend due to supply constraints that have since eased and management reduced discretionary spend in areas such as travel and marketing in response to COVID-19.

During the quarter, Microsoft generated $17.5 billion in operating cash flow, up 29% year-over-year, driven by strong cloud billings and collections.

Free cash flow increased 25% year-over-year to $13.7 billion, representing nearly 127% of reported net income signaling the high quality of Microsoft's reported earnings.

The company returned $9.9 billion to shareholders during the quarter, up 33% compared to last year’s third quarter.

Microsoft ended the quarter with over $137 billion in cash and short-term investments, $63 billion in long-term debt and $114 billion in shareholders’ equity on its fortress-like balance sheet.

Looking ahead to the fourth quarter revenues are expected in the $35.9 billion to $36.8 billion range, up nearly 8% from last year at the midpoint.

[TipRanks: Based on 22 analysts offering 12 month price targets for Microsoft in the last 3 months. The average price target for MSFT is $197.63 with a high forecast of $220.00 and a low forecast of $179.00.s 21 analysts rate MSFT a Buy and one a Hold.]

Facebook Reports First Quarter 2020 Results

Facebook (Nasdaq: FB) reported first quarter revenue rose 18% to $17.7 billion with both net income and EPS more than doubling to $4.9 billion and $1.71, respectively.

With people sheltered in place around the world, Facebook saw increased engagement, especially in messaging and video calls, as people relied on their products more than ever to connect with the people and organizations they care about.

Facebook daily active users were 1.73 billion on average for March, an increase of 11%. Facebook monthly active users were 2.6 billion, an increase of 10%. Family daily active people was 2.36 billion, an increase of 12% with family monthly active people of 2.99 billion, an increase of 11%.

Free cash flow increased 36% during the quarter to $7.4 billion with the company repurchasing $1.3 billion of its common stock.

Facebook ended the quarter with a fortress balance sheet with more than $60 billion in cash, $9.5 billion in operating lease liabilities and $105 billion in shareholders’ equity.

Subsequent to quarter end, Facebook announced a $5.7 billion investment in Jio Platforms in India and paid the previously announced $5 billion settlement with the FTC.

Over the last three weeks of March, Facebook experienced a significant reduction in the demand for advertising as well as a related decline in the pricing of their ads. After the initial steep decrease in advertising revenue in March, the company has seen signs of stability reflected in the first three weeks of April, where advertising revenue has been about flat with the prior year period.

The April trends reflect weakness across all geographies as most major countries have had some sort of shelter-in-place guidelines. Weakness in travel and auto ads is expected to persist, although gaming, technology and ecommerce advertising spending remains solid.

Facebook has committed over $300 million to date in investments to help the broader community during the crisis, including creating a $100 million grant program to help small businesses and investing $100 million to help the local news industry. Facebook is also donating $25 million to support healthcare workers and providing health organizations with free ads and tools to track the pandemic.

Given the great uncertainty related to the pandemic, Facebook is moderating operating expenses to a range of $52 billion to $56 billion and capital expenses to a range of $14 billion to $16 billion. Profit margins are expected to decline for the year. Management expects to maintain high profit margins over the long term.

Given the company’s financial strength, they still expect to hire 10,000 people this year. Facebook ended the quarter with a headcount of more than 48,000, an increase of 28% year over year.

[TipRanks: Based on 35 analysts offering 12 month price targets for Facebook in the last 3 months. The average price target for FB is $236.19 with a high forecast of $271.00 and a low forecast of $185.00. 32 analysts rate FB a Buy and 3 a Hold.]

Alphabet Reports First Quarter 2020 Results

Alphabet (Nasdaq: GOOGL) reported first quarter revenues rose 13%, or 15% on a constant currency basis, to $41.2 billion with net income up 3% to $6.8 billion and EPS up 4% to $9.87.

These results were led by Search, YouTube and Cloud. Search revenues rose 9% to $24.5 billion, YouTube revenues rose 33% to $4 billion, and Cloud revenues rose 52% to $2.8 billion.

Network revenues were up 5% to $5.2 billion with Other revenue up double-digits to $4.4 billion driven in part by 30% growth at Google Play. Performance was strong during the first two months of the quarter, but then in March, Alphabet experienced a significant slowdown in ad revenues as the economy went into lockdown due to the pandemic.

Management is seeing a few green shoots in advertising in April as the economy unfreezes, but it is still too early to be certain about the durability of the recovery.

Due to the pandemic, many companies will now seek to digitalize their operations. Alphabet expects to see an increase in online work, shopping, telemedicine, entertainment and learning with these changes expected to be long lasting. The company is adding 3 million users daily to its video chat app, Google Meet, in response to demand from all these areas. The company also now has 6 million paying G-suite customers to aid in remote working and also saw a 30% increase in Android game downloads in March.

Alphabet expects the second quarter will be a difficult quarter for advertising revenues but expects results to improve in the second half. Given the challenging environment, the company is curtailing costs by slowing its pace of hiring and reducing other discretionary costs.

Free cash flow declined 26% during the first quarter to $5.4 billion. The company repurchased $8.5 billion of its common stock during the first quarter and plans to continue to repurchase shares given its strong financial position.

Alphabet ended the quarter with $117 billion in cash and investments, $5 billion in long term debt and $203.7 billion in shareholders’ equity. Management remains confident about long-term opportunities for the business.

[TipRanks: Based on 35 analysts offering 12 month price targets for Alphabet in the last 3 months. The average price target for GOOGL is $1,496.62 with a high forecast of $1,800 and a low forecast of $1,250. 34 analysts rate GOOGL a Buy and 1 a Hold.]

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