Last night Apple reported Q3 fiscal 2012 earnings. If you look at some of the headlines floating around, you’d think Apple was in some kind of trouble. Phrases like “iPhone slump” and “big earnings miss” are being tossed around as if the sky is falling on Cupertino.
What a joke. I think this just proves how short term Wall Street’s memory can be. And I’ll get to that in a bit. For now, let’s go through the basic numbers to understand what all the fuss is about.
Revenue was $35 billion for the quarter. While this beat Apple’s own guidance, stocks are measured against Wall Street analyst estimates. The average estimate (known as “consensus”) for revenue was $37.2 billion. So that’s a miss as far as any professional investor is concerned.
Earnings per share (EPS) was $9.32 and this was also higher than Apple’s guidance. But again, Wall Street expected $10.36. Another miss.
It’s worth pointing out that Apple’s own guidance is often viewed as ridiculously conservative. I can’t think of too many companies who have a track record of sandbagging their guidance so significantly and consistently.
So is Apple to blame? Not entirely. Let’s look at the breakdown.
iPhone shipments were 26 million, which is a healthy 28% year-over-year (YoY) growth, but lower growth than we’ve seen in the past from Apple. It was also lower than the 29 million units Wall Street thought Apple would sell. My opinion is that analysts didn’t adequately account for the inventory adjustments going on within Apple’s distribution channels. Recall that Apple was supply constrained for quite some time with the iPhone 4S, and delivered some outstanding numbers in the December and March quarters. This was the cool-off quarter where channel inventory declined.
iPad shipments, however, were incredibly strong. Apple sold 17 million tablets in the quarter. This is up from sales of 11.8 million iPads last quarter, and 9.25 million in the year-ago quarter. Talk about growth! iPad is on fire. Numbers were higher than Wall Street expected, and I think this is extremely important for the company. iPads are becoming PC replacements for many customers, and Apple has the killer product everyone wants.
Heck, they just sold over a million of the iPad 2 to the education market last quarter. Most tablet models from other vendors struggle to sell a million TOTAL. This market is growing like crazy, and Apple is dominant.
It’s not worth spending a ton of time on Mac and iPod, especially since these are much smaller contributors to Apple’s financials. But suffice to say that Mac growth of 2% (year over year) is outpacing the PC market, and the iPod is still by far the market leading MP3 player brand. Over 50% of iPod sales are the iPod touch, which runs iOS and helps edge new customers into the Apple ecosystem.
Now let’s talk about Apple’s guidance for the upcoming September quarter. Management’s outlook on the upcoming quarter is at least as important to the stock market’s reaction as the current quarterly numbers. And again, Apple provided a more somber outlook that Wall Street wanted.
Revenue is expected to be $34 billion, down only 4% sequentially. But EPS guidance is $7.65, down 18% sequentially. And gross margin? After seeing Apple report over 42% gross margin, analysts are now being told to expect the company to deliver 38.5% margin in September.
This has Wall Street freaking out, and explains why the stock was down more than 5% in after hours trading on Tuesday evening.
But come on ... do we have no ability to look back at last year and notice that we’re watching this play out all over again? Hey Wall Street ... Bill Murray called. He wants his movie role back.
Before I dive into the numbers to show you what I’m talking about, let’s talk about Apple’s September quarter. Two things usually happen during this quarter.
First, it’s the big “back to school” period. Apple gives discounts to students and teachers. Lots of Macs and iOS devices get sold. Margins are lower. That’s life. It happens ever year.
Second, and arguably more important, the September quarter represents the greatest period of iPhone anticipation by customers. Everyone knows the next model is about to be released. Sales slow down, only to hit a new explosive record in the December quarter.
Last year Apple’s CFO, Peter Oppenheimer, guided Wall Street to expect gross margin of 38% (down 370 basis points), which is even lower than they guided to this year. The explanation? Back to school promos, mix shifts, and the cost of a future product transition. Sound familiar? Thought so.
Of course the gross margin didn’t end up dropping that much. Apple ended up reporting 40.3% and said that the beat came from lower component costs. Easy excuse for Apple to make, right?
Also last year, Oppenheimer guided for EPS to drop a whopping 29% sequentially. That didn’t happen either. Instead of the $5.50 guidance, Apple ended up reporting $7.05 instead. Not so bad.
All of this said, I’m more inclined to believe Apple is guiding closer to the truth this year simply because of the expected rollout of an iPhone 5 which should incorporate many higher-priced components (LTE radio, in-cell display, better processors, bigger battery, etc). Last year’s iPhone 4S launch was not as big of a deal from a cost perspective.
Apple also gave us more reason (than normal) to believe that iPhone sales are slowing due to iPhone 5 anticipation. Oppenheimer specifically said, “Our weekly iPhone sales continue to be impacted by rumors and speculation regarding new products. “
Is this a reason to worry about the future of Apple’s stock price? I don’t think so. All it means is that your products are so popular and highly anticipated that they become much very seasonal. As a long term investor, this doesn’t bother me one bit. And it’s a whole lot better than having to worry if new products will be in demand.
I guess at this point pretty much everyone is expecting a smaller iPad ... and a smaller price tag. But just how small will the price tag be? Tim Cook gave an interesting answer in response to one of the analyst questions about “price umbrella”.
Here’s what he said:
“We re-priced the iPad 2 to $399, and it did very well in the quarter. The most popular iPad is the new iPad, but iPad 2 did very well. It was particularly a key in the K-12 area that Peter spoke about earlier where we sold about 1 million units for the quarter... and so, we’ve been very aggressive in the space, and I don’t see changing that in terms of competition. We’ve all seen, I think many different tablets, hundreds of them come to market over the last few year. And I have yet to see any of them really gain what I would call any level of traction at all.”
This answer is open to interpretation, isn’t it? Is he saying that Apple is already aggressive (and the only real winner) and doesn’t need to push the envelope any further? Or is he saying that he doesn’t see their aggressiveness waning?
Tell us what you think.
China is another big source of growth for Apple. The iPhone is clearly doing well there, but the new iPad has only hit China last week. It had no impact on the June quarter, as a result. Same goes for the new Macbook Pro with retina display. These are two major products that start helping Chinese growth right now.
However, this is also a source of risk given the macro-economic concerns that the market faces with respect to this Asian giant. The more China starts to represent to Apple, the more risk the company faces in the event of a major adjustment to the country’s economic growth.
Apple is firing on all cylinders, and we’re heading into another very normal major product transition. As an investor, I’m hanging onto this one.
DISCLOSURE: I like Apples, and I own shares.