Apple today announced their Q2 2014 financial results and highlights include 43.7 million iPhones, 16.3 million iPads, 4.1 million Macs sold. Quarterly revenue was $45.6 billion and quarterly net profit was $10.2 billion It's not the holiday quarter, which is Apple's typical powerhouse, and it's roughly half a year since the last big product announcements, so there's been nothing to jumpstart numbers. Tim Cook, Apple's CEO, had this to say:
We're very proud of our quarterly results, especially our strong iPhone sales and record revenue from services. We're eagerly looking forward to introducing more new products and services that only Apple could bring to market."
Some stock movers and media malcontents will no doubt once again start beating the broken Apple is doomed drum, but this is really Apple in a mature, iterative market. Even if Apple is pressured to push out an iWatch or Apple TV 4, none of those products will make iPhone-level money for Apple. In the hysterical search for what's next, Wall Street will keep missing what's next — a hugely profitable business that keeps increasing the overall value of their existing products.
We'll update with notes of interest from Apple's Q2 2014 conference call as they happen.
- Tim Cook is starting the call. Interesting!
- Almost 44 million iPhones, new record. Gained share in many developed and emerging markets, US, UK, Japan, Canada, Vietnam, Greater China.
- iTunes software and services continuing to grow at double digits. 800 million iTunes accounts, most with credit cards. Staggering.
- iPad sales high end of Apple's expectations but below analysts estimates. Why the difference? Can be explained by 1) March quarter last year significantly increased channel inventory, this year decreased it. 2) Ended December quarter with substantial iPad mini backlog. This year in balance.
- Strong results in Great China, new revenue record, $10 billion. Japan up 26% in spite of exchange.
- First stores in Brazil and Turkey.
- Angela Ahrendt joins next week.
- Halo is still in effect.
- Thanks employees and customers.
- Acquired 24 companies in the past 18 months.
- Believes current stock price doesn't reflect value of company. Confident in the future of Apple.
- Increasing dividend for the second time. Planning for annual increases going forward.
- Luca takes over.
- Gross margin was 33.9%. Operating Margin was 13.6 billion. Net income was 10.2 billion.
- 17% iPhone growth over last year. Addition of China Mobile, more affordable iPhone 4s led to record sales in China. Looking to expand with China Mobile.
- Japan up 50% for iPhone.
- 15.4 million iPhones in channel, increase of 100K. In target range of 4-6 weeks.
- Deutches Bank has 20K iPhones on network, 40 apps. Siemans has 15 internal apps.
- 4.6 billion for iTunes. Up 11%. Driven by strong growth in App Store sales.
- 70 billion downloads. 85% more global revenue than Google Play, according to App Annie.
- 4.1 million Macs. Strong MBP and MBP performance. 31 of 32 quarters grown share.
- Mac channel inventory below.
- iPad channel inventory down 1.1 million units. 5.1 million units of channel inventory, in target range of 4-6 weeks.
- FedEx use iPad, save millions. US Dept. of Veteran Affairs providing 11K iPads to transform how doctors and patients interact.
- $150.6 billion in the bank, down 8.3 billion. 132.2 billion is offshore.
- $21 billion in capital return.
- Program going from $100 billion to $130 billion.
- $60 billion to $90 billion in share repurchases.
- Dividend of $3.29 per common share. 8% increase.
- Will maintain sufficient domestic liquidity for program.
- Continue to advocate for reform to help repatriate offshore profits.
- Expectations: 36-38 billion in revenue. 37-38 in gross margins. 26.1% tax rate.
- Back to Tim.
- 7 for 1 stock split to make more accessible to investor. Will happen in June.
- Peter Oppenheimer will be leaving in June. Was CFO for 10 years. Accomplishments immense. 20x the size since he joined. Instrumental to Apple's success. Thanking him publicly. Wishing him the best. Retiring in September. Never missed guidance in 10 years. Much be a record.
- Fortunate to have someone with Luca's talent on board to replace Peter. Broad experience, background. Managing most functions since last year. Doing outstanding job.
- Q&A time.
- Q: 800 million accounts, staggering jump. View on monetizing install base?
- TC: Not App Store only. Believes Apple can monetize more from services point of view in existing and new areas. App Store strength is broad base. China growth in triple digits.
- Q: iPhone ASP, iPhone 5s success?
- TC: Price things to be fair for value delivered. Make decision as each thing comes to market.
- Q: Key drivers for growth margin guidance?
- L: March was good because of better volume, better costs, favorable mix. Q3 expecting loss of leverage, less favorable mix. Happens as they move further way from launch quarters. Partial offset, cost improvements.
- Q: iPhone in U.S., see pressure from carrier upgrade policies? Headwind behind us? Tailwind?
- TC: Look at iPhone, strength is broad based. Gained share in a host of markets, from US, UK, France, Germany, China, Vietnam.
- Q: iPhone ASP down, why?
- L: $41 in decline, half was driven by success in emerging markets with iPhone 4s. The rest was due to moving away from launch quarter, lower capacity mix.
- Q: Replacement cycles of longer term? Dilemma of good products vs. wanting upgrades? Good phones more expensive, margin pressure?
- TC: iPhone 4, sold a very low single digit percentage, low impact on quarter. General upgrade or install base, some programs carriers are running may increase upgrade cycle. Some areas where customers can pay more in the beginning, upgrade each year. Some work the other way. How they balance is difficult to conclude. Bigger opportunity for Apple is still only 1 billion units but will eventually take over market. Abilit to attract new users to iPhone very significant in emerging market. New to iPhone numbers for iPhone 4s in 80% in large geos. Gives Apple great comfort they can continue to grow. May not attract those buyers to top phone because of price point, but entry iPhone is great product at great value, gets them into ecosystem. Keep customers is very good.
- Q: Margin pressure?
- TC: Most important thing is to make great products, excite users to want next one. Will always be the case. Where our attention is. BOM pressure exists but you've seen the way they have to work it down. Price at a level that's fair for value. Not stuck on certain price points.
- Q: iPad relatively flat, can Office on iPad accelerate?
- TC: iPad has been fastest growing product in Apple history, only product that was instantly a hit in consumer, business/enterprise, education. Just 4 years since they launched sold of 210 million. More than anyone thought possible. Almost twice as many as iPhones sold in comparable period of time, 7x iPod. By market, education in U.S. have 95% share. Focus is on getting more schools to buy. 98% of Fortune 500 using iPad, Good Technology activation 91% of tablet in enterprise were iPad. Many are writing apps for running their business, great for company. Focus on penetration, like education. Retail market 46% share but includes a lot of products Apple wouldn't include. Office for iPad helping, if done earlier would be even better for Microsoft. Lots of alternatives now, some Apple brought to the market. Still key franchise. Having it on iPad is good. Welcomes Microsoft to App Store.
- TC: iPad customer sat is 98%, 66% of people planning to buy iPad, usage number off the charts, 4x web usage compared to Android. Feels great. Every quarter won't be number that everybody's thrilled with but trend over time things look very good. iPad has great future. "Next iPads", things in pipeline, making products even better, no shortage of work, ideas. Extremely excited.
- Q: Google, Amazon, Facebook very diversified. Apple the opposite. Very focused. Management philosophies, or products prevent you from making TV shows or something else?
- TC: Key is to stay focused on things Apple can do best, really high level of quality. Comfortable on expanding things, doing that in the background, working on great things, proud of, excited about. Apple cares about every detail and getting it right. Takes a bit longer to do that. Always the case. Didn't ship the first MP3 player, smartphone, tablet. Tablets being shipped a decade before. Arguably Apple shipped the first successful modern MP3 player, phone, tablet. Means more to get it right than to be first. Customers don't care, not what they look for from Apple. They want insanely great.
- TC: Apple is on the prowl, looks for companies that have great people, technology, fits cultural. No rule saying they can't spend a lot. Spend what is a fair price. Important that strategically it makes sense. Not in a race to spend or acquire the most. You'll continue to see acquisitions, some kept quiet, some impossible to keep quiet.
- Q: Competitive landscape, cut prices, how are you seeing it?
- TC: Lots of moving parts. Lots of acquisitions, people giving up. See it much as they've always seen it. Part Apple is interested in is people who want the best smartphone. Doesn't mean the premium only, 4s is a great product. Hopefully this quarter shows Apple can do well in a number of geographies. Emerging markets way up. Catching on with a number of customers. Proud of results. Not historic strong points.
- Q: More color on China?
- TC: Growth, lots of it! Beat estimates! Did well in every single area. 69% of iPhone 5c buyers were first time iPhone buyers, heavy Android switches 62% of iPhone 4s, 60% of iPhone 5c buyers switched from Android. Plan to triple the number of Apple retail stores in next 2 years. 40K points of iPhone sale. Not where they need to be yet.
- Q: Apple TV no longer a hobby, HBO/Amazon what does it mean?
- TC: Stripped off hobby label, sales of Apple TV box + content bought directly off Apple TV, for 2013 was over 1 billion. Didn't feel right to refer to it as a hobby. Continue to make product better and better. Already have HBO Go on Apple TV. Have to authenticate to use it, have to do that with Amazon as well. Also got some older content. Haven't had a chance to evaluate. Don't have personal point of view. Look at content on Apple TV compares favorably to content on Amazon box. Sold now 20 million Apple TVs. Got a pretty large install base there. Feeling good about that business and where it can go.
- And that's it!
Here's the press release:
Apple Reports Second Quarter Results
Strong iPhone Sales Drive Record March Quarter Revenue and 15 Percent EPS Growth
CUPERTINO, California—April 23, 2014—Apple® today announced financial results for its fiscal 2014 second quarter ended March 29, 2014. The Company posted quarterly revenue of $45.6 billion and quarterly net profit of $10.2 billion, or $11.62 per diluted share. These results compare to revenue of $43.6 billion and net profit of $9.5 billion, or $10.09 per diluted share, in the year-ago quarter. Gross margin was 39.3 percent compared to 37.5 percent in the year-ago quarter. International sales accounted for 66 percent of the quarter's revenue.
"We're very proud of our quarterly results, especially our strong iPhone sales and record revenue from services," said Tim Cook, Apple's CEO. "We're eagerly looking forward to introducing more new products and services that only Apple could bring to market."
"We generated $13.5 billion in cash flow from operations and returned almost $21 billion in cash to shareholders through dividends and share repurchases during the March quarter," said Peter Oppenheimer, Apple's CFO. "That brings cumulative payments under our capital return program to $66 billion."
Apple is providing the following guidance for its fiscal 2014 third quarter:
- revenue between $36 billion and $38 billion
- gross margin between 37 percent and 38 percent
- operating expenses between $4.4 billion and $4.5 billion
- other income/(expense) of $200 million
- tax rate of 26.1 percent
Apple will provide live streaming of its Q2 2014 financial results conference call beginning at 2:00 p.m. PDT on April 23, 2014 at www.apple.com/quicktime/qtv/earningsq214. This webcast will also be available for replay for approximately two weeks thereafter.