Apple Earnings Soar

By Peter Bernstein July 19, 2011

As expected, success in core products helps surpass expectations

Apple, whether captivating its cult-like followers with new products, stunning competitors with business concepts and aggressive stands on intellectual property acquisition and protection, or managing the release of its financial results, rarely disappoints. Today’s financials for the third quarter that ended June 30 was no exception.   

The basics were as follows.

Earnings were $7.31 billion in net profit on revenue of $28.57 billion, both quarterly records. Not surprisingly, Apple CEO Steve Jobs in the release accompanying the earnings said, "We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent." He added, "Right now, we’re very focused and excited about bringing iOS 5 and iCloud to our users this fall." Following a temporary halt in trading, Apple's stock soared 8 percent reaching $400 for the first time in its history.

The Apple earnings came on a day when IBM performance surprised on the upside. In fact, IBM’s news coupled with reported progress on the U.S. debt ceiling talks drove stocks higher. Not even the Cisco layoffs, Yahoo! missing conservative expectations or even rumors that Apple’s board is starting the process to find Steve Job’s successor (which he flatly denied almost immediately) could dampen enthusiasm in the tech sector.  

The tale of the tape

Apple blew well past all expectations hitting on all of it most critical cylinders (consensus numbers are from, with additional information via Piper Jaffray and CNNMoney provided for comparison):  

Revenue: $28.57 billion, $24.72 billion Street consensus, $26.69 billion "amateur" consensus, $26.72 billion "real" expectations (based on prior performance vs. guidance))

Earnings per share (EPS): $7.79, $5.71 Street consensus, $6.72 "amateur" consensus, $7.09 "real" expectations

iPhone shipments 20.3 million, 16.5 million Street consensus, 7.85 million "amateur" consensus,

iPad shipments 9.25 million, 7.8 million Street consensus, 8.4 million "amateur" consensus

Mac shipments: 3.95 million, 4.2 million Street consensus, 4.3 million "amateur" consensus

iPod shipments: 7.54 million, 8.4 million Street consensus, 8.4 million "amateur" consensus

Revenue guidance for next quarter: $25 billion, $27.69 billion Street consensus, $28.36 billion Piper Jaffray expectations

EPS guidance for next quarter: $5.50, $6.36 Street consensus, $6.42 Piper Jaffray expectations

Cash, long term and short term securities, $76 billion

The guidance for the next quarter according to Apple CFO Peter Oppenheimer was as being conservative, as was a fall in the closely watched gross margin area as a result of a change in product mix, heavy back-to-school promotions and some cost of goods factors.  The Mac numbers while falling below estimates were still robust (see below), and iPod shipments were not a surprise given the amount of music being downloaded to iPhones.

There is more to come

As pointed out in our ahead of the results article there is a lot still to come before the end of the year including:

--A new MacBook Air laptop

--The updated version of the Mac operating system OS X 10.7 called Lion, being released July 20.

--Significant enhancements to iOS (over 200 new features expected this Fall in iOS5) enabling consolidation of the synergies created by the iOS ecosystem. 

--Opening of 30 new Apple stores, 28 overseas  in the September quarter.

--A possible iPad3 waiting in the wings. 

--Expected continued growth in Asia Pacific (particularly China), Latin American and the Middle East markets where Apple has not been traditionally strong, and the addition of new carrier partners (they added 42 in 15 countries).

--An anticipated September release of a new iPhone5 with a faster chip to improve overall performance especially for its camera and for improving real-time and streamed video experiences was not even mentioned.

The iOS point is significant. Building up the iOS enabled synergies not only creates stronger brand loyalty amongst the Apple faithful, but is likely to drive those contemplating smartphone upgrades or are newbies to smartphone and tablet ownership in Apple’s direction, and not incidentally to the Apple App Store with 15 billion downloads and counting.  

Things analysts were watching

iPhone sales. Representing 50 percent of Apple sales, the fears were that Apple was overhanging the market by pushing back iPhone5 introduction. The fears were clearly unfounded.

iPad unit and Mac sales. The issue was could them build them fast enough. Executives said they were selling them as fast as they could build them, but that supply and demand in most parts of the world were becoming more in balance, and waiting times are being reduced. CFO Peter Oppenheimer and COO Tim Cook both addressed the fact that yes iPads are eating into Mac sales, but are being more than made up for by the penetration of the Windows PC replacement market. They also said the Mac sales increase, which were half the unit sales of iPads for the quarter, were still up 14 percent while the overall global market was growing at only 2.6 percent.   

Earnings per share. Without speaking to the usual game where Apple promises low and delivers high, they did acknowledge that last year’s September quarter was roughly $20B so given the promotional and product mix changes they foresaw, $25 billion as guidance still representing substantial growth.

Gross margin: Held firm despite concerns, and as stated above Apple got in front of what it believes will be a drop down to 38 percent in the next quarter. This was attributed to what Peter Oppenheimer said were, “a different product mix, loss of leverage, back to school promotions, and future product transitions.”

Some interesting insights and factoids to emerge from analyst Q&A were:

--iTunes with 225 million accounts, people have downloaded over 15 billion songs

--The 20.3 million iPhone units represented $13.3 billion in sales from iPhone and accessories

-iPhone in Asia Pac quadrupled y/y

-There were 228 carriers handling the product compared to 196 at end of March.

-5.9 million iPhones in channel inventory. In target range of 4-6 weeks of inventory

-55 percent of Fortune 500 companies testing iPhone driven by app demand

--Apple has now achieved over 222 million iOS device sales

-425,000 apps

-Over 15 billion downloads

-Over $2.5 billion paid to iOS developers

--Retail: $3.5 billion up 36%. Driven by higher volume of iPads iPhones Macs with 1/2 of the Macs sold to people that never owned one

-Currently 327 retail stores with average revenues of $10.8 mill per store

-$828 million margin

-Store traffic 73.7 million comp to 60.5 mill, up 22%

-Customers love personal setup with over 2 million Macs, iPads, iPhones, and iPods

--Tax rate will be 23.5%

--Tim Cook reiterated that, "We do believe some customers" bought iPad over a Mac. We think more people bought a Mac over the PC. More PC to cannibalize than the Mac

--Update on China? Tim Cook: China very key to our results. For a reminder: China, Taiwan, Hong Kong, y/y up over 6X. Revenue $3.8 billion in the quarter. YTD around $8.8 billion. I believe scratching the service.

And finally, on the all important matter of intellectual property and patents Cook stated, “We have a simple view… we love competition, think it's great, but we want people to invent their own stuff. We make sure we defend our portfolio fervently." 

This was certainly a sunny take on the company’s growing number of IP battles with HTC, Eastman Kodak Co.and Samsung, the recent settlement with Nokia, and prospects that unfavorable verdicts in cases at the International Trade Commission (ITC) could make a dent in Apple’s cash balance. The latter is cause for concern because of the prospect of both fines for infringement and possible payment of hefty licensing fees for key IP in core products.

All in all, Apple certainly has a lot to be proud of. Its orchard seems well-stocked going forward with fruit that consumers and a growing number of businesses want to take a bite of.  

Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest brands, including Avaya, Alcatel-Lucent, Telcordia, HP, Siemens, Nortel, France Telecom, and others, and having served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.

Edited by Juliana Kenny
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