Can Apple Generate Enough Cash To Reward Its Investors?

Technology giant Apple's (AAPL) reported a better-than-expected second quarter 2014 results on April 23, following which shares jumped 7.89% in the after-hours. Surprisingly, Apple was successful in maintaining the trend for higher iPhone sales amid tough competition from Samsung (SSNLF) and the Android platform. Sales of Apple's set-top boxes have reached 20 million by the quarter-end since its launch. However, its iPad sales were hit hard, and iPod sales continued to drop sharply.

But Apple made some great announcements for its shareholders. It has approved an additional $30 billion for share buyback and increased quarterly cash dividend per share by 8%. This will require huge amount of cash. True that Apple is a cash rich company, but it's also facing competitive pressure and a slump in sales of its flagship products. Let's zero in on some of the factors that could affect Apple's cash position either ways, going forward.

iPhone Momentum Looks Good

Apple sold roughly 44 million iPhones during the second quarter, showing nice double digit growth year over year. The unit sales also surpassed the Street's expectations and the improvement was mostly driven by higher demand from emerging markets, especially China. Demand was also witnessed from developed economies. Analysts are optimistic about iPhone 6, which is expected to hit stores by this year end. If Apple succeeds in a planned price hike (~$100) for iPhone 6, it can raise gross margins.

Sales of Mac Are Growing

Mac unit sales grew 5% year over year. The growth, although small, is interesting as it surpassed the worldwide industry rate. Global PC shipments have dropped 1.7% in the first quarter of 2014. Though the PC market has been declining for eight consecutive quarters, the rate of decline has eased. Also, it is important to note that most of the PC market growth has come from the Europe, Middle East and Africa (EMEA) regions, particularly due to the rebound in Western Europe. This could benefit Apple's redesigned Mac Pro. After the sales of earlier versions of Mac Pro got banned in Europe due to some regulatory issues, Apple has started shipping the latest Mac Pros from last December. Apple could see further sales growth for its Mac products in the coming quarters.

New Product Launches

Apple has created innovative wonders like iPod, iPhone and iPad. But with the loss of Steve Jobs, the trend of wooing customers seems to have halted. Apple is planning to launch some innovative products this year. This would include iTV, iWatch and a hearing aid that can be connected to iPhones, iPads and iPods. Apple's product launches are known for pushing sales up enormously. So, all eyes will be on the success of these products to generate sufficient revenues that could secure the company's cash position.

Poor iPad Performance

In the past quarter, sales of iPad dropped 16% year over year. According to management, the decline was driven by channel inventory changes. Though the obvious reasons could be -- cheaper offerings from Amazon (AMZN), Google (GOOG) and Samsung, and higher preference for a phone upgrade than a tablet upgrade. iPad is Apple's second largest revenue contributor, and if the company fails to boost sales total revenue will be severely hit.

Debt Could Go Up

Apple plans to gather more funds from both domestic and international public debt markets, mainly to pay off the hiked dividend and buyback shares. This will push the current debt level. At the end of the quarter, Apple's long-term debt balance stands at $17 billion. It is not clear how much more debt the company will raise, but it will surely not be a trivial amount. This will further add to the debt burden of the company as a whole, and cost of debt will also go up, limiting profitability.

Huge Acquisitions

Within the past 15 months to 16 months, the tech giant has acquired 23 odd companies and plans to take up another one shortly. Total investments in acquisitions during this period were $11.12 billion. It also spent $1.02 billion in cash-based acquisitions. It's worth noting that the total value of Apple's acquisitions during the period outpaced Google's in 2013. Acquisitions are good for expanding geographic reach, enhancing capabilities and strengthening portfolio, but they are worth when properly and timely monetized.

Final Thoughts

The android platform is eating into Apple's share in both the smartphone and tablet markets. That is why launching innovative products becomes that much more important to regain the sales momentum. Apple has a huge cash pile compared with its debt level and hence servicing debt wouldn't be a problem. But positive synergies from the acquired units will be necessary to support Apple's long-term growth.

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Subscribe via Email Subscribe RSS Comments Micintos - 14 hours ago

Mr. Market will never understand Apple's success like its customers do. According to Patently Apple:

Chitika Insights latest web traffic stats for tablets in the US and Canadian markets has rolled out and Apple has crushed their Android competitors handily. Chitika notes that "the proverbial elephant in the room is iPad usage share, which still stands at over 77% of all U.S. and Canadian tablet-based Web traffic." http://www.patentlyapple.com/patently-apple/2014/04/apples-ipad-continues-to-crush-all-android-tablets-combined-with-77-of-web-traffic-in-the-us-and-canada.html

So which share of the tablet market is Adroid dominating? The ones in a drawer, perhaps?

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