Analyst Takes Deep Dive Into Apple's Q2 10-Q (Spoiler Alert - He Found Lots Of Cash)

Wells Fargo analyst Maynard Um recently took a close look at Apple Inc. AAPL’s 10-Q filing from fiscal second quarter and provided some analysis on what he found. According to Um, fiscal Q2 margins and fiscal Q3 margin guidance may be a bit weaker than it appears.

Warrant Accrual

“Our primary takeaways from our 10-Q analysis is that upside to June quarter gross margin guidance is unlikely, that the underlying gross margin in FQ2 was 100bps weaker Q/Q when excluding the large warranty accrual reversal, and that iPhone demand is generally soft (the latter should be unsurprising),” Um explained.

First, Um said lower warranty accrual boosted Apple’s fiscal Q2 gross margins by 2.4 percent. Even with the benefit of further accrual reduction in fiscal Q3, Wells Fargo estimates Apple’s gross margins will fall in the middle of its guided range between 37.5 percent and 38.5 percent.

In addition to benefits from lower warranty accruals, derivative losses also weighed on Apple’s fiscal Q2 gross margins. Um said sales of derivatives not designated as hedging instruments cost apple 0.6 percent in gross margin and $0.06 in EPS.

Um noted a decline in outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments from $24.0 billion in the prior quarter to only $21.7 billion this quarter. He said these commitments typically correlate with forward revenue for Apple.

Finally, Um found that only $17.2 billion of Apple’s $256.8 billion in cash is held domestically, suggesting Apple could be a major beneficiary of President Trump’s proposed repatriation holiday.

Wells Fargo maintains a Market Perform rating on Apple and values the stock in the $135-$145 range.

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