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

A 10% decline in iPhone sales sounds like a problem for An applegiven that the company relies on the devices for half of its revenue.

But investors didn’t seem to mind Thursday when Apple revealed the year-over-year decline in its fiscal second-quarter earnings report. Shares rose more than 6% after the market closed, a rise that would be the steepest since November 2022 if it continued in regular trading on Friday.

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

Apple also signaled that overall revenue growth in the current quarter would be in the low single digits, following a 4% decline in the second period. Analysts had expected growth of 1.3% for 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 expected it to be flat, some investors said it would be down a couple of percent in June,” Munster told CNBC’s “Fast Money” after the report. “I think that was a big part of that move higher.”

But perhaps the biggest catalyst for the boom was Apple’s announcement that it had approved a $110 billion share buyback, the most ever for a public company. Over the past three years, Apple has approved $90 billion worth of buybacks annually.

The after-hours spike shows how much investors value Apple’s massive cash flow and the company’s desire 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 hit-driven gadget business to 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, illustrating the vast reach of its customer base as the company rolls out new subscription services. Despite the 4% drop in revenue, Apple still posted nearly $24 billion in profit, down just over 2% from a year earlier.

Apple said iPhone sales suffered from a tough comparison to last year, when sales rose after previous deficits. Still, investors are looking to future growth for the iPhone, and many analysts say a potential iPhone with AI features could do the trick and help the company lure customers away from Android. Annual iPhone revenue peaked in Apple’s 2022 fiscal year.

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

That’s a change, even for a company that has been giving less advance guidance since the pandemic. Maestri usually provides trends in iPhone sales and is for the last four quarters.

There is 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 draw down its massive cash pile, which stood at $162 billion at the end of the quarter. When its debt roughly equals its cash balance — meaning the company is net cash neutral — Apple will assess 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.

“The last couple of years we were doing $90 billion and now we’re doing $110 billion,” Maestri said on the call.

In terms of what happens when Apple reaches net cash neutrality, Maestri said, “Let’s get there first. It will take some more time.”

“And then when we’re there,” he said, “we’ll reassess and see what the optimal capital structure is for the company at this point.”

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