Apple announces Q3 2014 earnings

Apple announced their Q3 2014 financial results today and the big numbers included 35.2m iPhones, 13.3m iPads, 4.4m Macs sold, $7.7 billion in in profit made. With no new product launches and no big holiday sales driving earnings, Apple still managed to improve year over year in almost all of their results. Apple's CEO, Tim Cook, had this to say:

Our record June quarter revenue was fueled by strong sales of iPhone and Mac and the continued growth of revenue from the Apple ecosystem, driving our highest EPS growth rate in seven quarters. We are incredibly excited about the upcoming releases of iOS 8 and OS X Yosemite, as well as other new products and services that we can't wait to introduce

Apple will be holding their usual follow-up conference call at 2pm PT, 5pm ET. We'll be updating this post with highlight from the call, as well as posting color, commentary, and analysis throughout the evening and tomorrow.

Apple Q3 2014 conference call highlights

  • Call starts with Tim Cook intro
  • Hosted best ever WWDC, 20 million people watching keynote. New record.
  • iOS 8, Yosemite, and developer highlights, including Swift.
  • Huge leap forward for Apple ecosystem.
  • Putting a huge effort into making iOS great for customers no matter where they want to use it. Including CarPlay in the car, HealthKit in collaboration from Mayo Clinic. HomeKit, control through Siri. New security, productivity, MDM for enterprise. New partnership with IBM. Using Swift, over 100 apps/services to enterprise.
  • Very large vision of what iOS can be. Very excited.
  • Earnings per share up highest rate in 7 quarters.
  • iPhone record, up 55% in BRIC.
  • Mac up in a shrinking market. Portables in particular, great response for MBA.
  • App Store, other services. First 9 months of fiscal year, iTunes Software and Services has been fastest growing part of business. All time quarterly high thanks to App Store.
  • iPad sales met Apple expectations, realize didn't meet analysts. Gated by inventory and softness in some parts of the world. Decline in North American and Western European markets. But what's most important is customers are enjoying them. 98% cust sat for iPad air, 100% for retina iPad mini. 63% plan to buy iPad. More than 50% iPad customers are buying first iPad. Accounts for 80% of all US based commerce purchases. Partnership with IBM and new generation of apps will be a catalyst for future growth.
  • Excited about agreement to purchase Beats. Music is part of Apple DNA. Provides fantastic music service, rare talent, products that can be built on. 29 acquisitions, including 4 in the last month. Great technology and talent.
  • Incredible pipeline, can't wait to show us.
  • Luca Maestri takes over.
  • Record quarter. Driven by strong sales of iPhones, Macs, iTunes software and services. Above guidance.
  • 35.2 million iPhones. Up 4 million, 13% growth from last year. Grew well over entry, mid-tier, lead. US is 41.9% of subscriber base, up. iPhone earned 97% cust sat rate. At high end of product expectations despite new product rumors. Regulatory in Japan affected iPhone in one of their best growth market, boosts confidence. Inventory in target range 4-6 weeks.
  • Medtronics, Nestle, NASA all heavy users.
  • 13.3 million iPads. Grew overall in developing markets, strong in middle east up 64%, China 51%, India 41%. Lower sales in more mature markets. Within target range of 4-6 weeks.
  • In enterprise, iPad is standard in Airlines. Quantus a heavy user. Governments deploying thousands, including Sweden. Education remains tablet of choice, 85% share of US tablet market. 13 million iPads sold to iPads globally.
  • 4.4 million Macs sold. Up 18%. New June quarter record. Driven by portables, MBA. Double digit growth in US, Canada, Mexico, UK, Germany, France, China, India, Middle East. Overall PC market contracted. Grown 32 of last 33 quarters.
  • Double digit growth in US eduction market.
  • Inventor slightly below average.
  • $4.5 billion up for iTunes Software and services. Up 25% driven by App Store sales.
  • App downloads top 75 billion.
  • $164 billion in cash. Up $13 billion. $26.8 billion domestic. $137 billion offshore.
  • $8.3 billion returned to investor, spent $5 billion in shares, over $2 billion in dividends. $51 billion in share repurchases to date.
  • Next quarter projections, $37-40 billion in revenue expectation, 37-38% gross margin.
  • Expect Beats transaction to finish this quarter.
  • Q&A time
  • Margins?
  • Surprise to us. Loss in leverage from sequential decline, less favorable mix as they move away from launch quarter. Cost improvements came in stronger than expected. Components favorable. Came together at same time. Looking forward, mix is normal mix as they move through product cycle. Some transition costs. Very busy fall. Very excited about pipeline.
  • New product excitement? Do you embed assumptions? Conservative?
  • Put out numbers they believe they're going to land. Take into account purchase delays, trends in geographies, guidance range is 3 billion as opposed to 2 billion in Q3.
  • How are you thinking about tablets longer term? Competitive landscape? Next driver?
  • Category they created 4 years ago, sold 224 million iPads. Larger than anyone including Apple would have predicted. Still early days. Significant innovation that can be brought. Plan on doing that. Top level numbers are exciting. More than 50% of iPads are going to first time tablet buyer. Retail share was 59% in month of June, 70% in dollars. Education share 85%. 99% of Fortune 500, 93% global 500. Dig into business market deeper, US market share is good, 76%, penetration in business in low, only 20%. Penetration of notebooks would be over 60. Substantial upside in business. One of the thinking behind partnership with IBM. Better go-to-market. Opportunity is huge. $350 million in size. PC is about $315. Tablet market will eventually exceed PC market, just have to do more things to get business side moving in faster trajectory. Excited about plans on product side and go-to-market, particularly IBM.
  • One more point: Market very bifurcated on iPad. BRIC countries extremely well, growth very high. China, middle east. Developed countries, market is clearly weaker. US had a very strong Mac market. Probably a bit of higher-ed starting to play out. Still very notebook oriented. K12 is 2.5 iPads for every Mac. Starts graduation time frame, physical Q3 for Apple.
  • China demand?
  • China went past what Apple though. 26% revenue growth including retail. Unit growth, iPhone 48%, growing 2x market, iPad up as well, Mac up 39% in contracting PC market. iTunes software and services, including App Store, growing most. Almost doubling year-over-year. Rolling out TDLTE into more cities.
  • Gross margins? Why is this Q4 different than last Q4?
  • Last year was 37%, our range is about that level. Many things affect Apple in different ways year to year. Exchange. Yen, AUS $, CAN $ weaker. Product cycle. Not the same product cycle as last year.
  • Better to look at 2012 than 2013?
  • Not necessarily, think about very strong Q3, things came together very well. Range is very good. Where we are right now, several weeks in the quarter.
  • Impact of trade-in programs in mature markets? iPhone flat, up single digits in Europe. What impact?
  • Theory you have is not precisely correct. Look at Europe, operating segment for year to date vs. same period last year. iPhone up 10%. Is there cannibalization? In aggregate across the world, trade ins are hugely beneficial for ecosystem. More people can join the party when there's a trade in. Winds up being used by someone else within the family, trade-in to someone else who is price-sensitive or someone in different county. Good. Very hard to answer question with degree of preciseness. Gut is it's low. Line up attracting more price sensitive people. Products command higher resale value. Leads to large trade in. Larger ecosystem. More people get on iPhone. Get someone to try an Apple product likely they buy more products or upgrade is high. Net net views it as positive.
  • Japan was flat due to regs and taxes? Going forward?
  • VAT was increased from 5% to 8% at close to beginning of quarter. First planned increased. More planned in the future. Carriers received guidance from regulators to stop incenting people to transfer from other carriers at higher amount than retaining customers. Combination dampened whole market in Japan. No detailed data on share. Expectation is not much of a share change. Seeing some come back. Not to previous level, but see market growing again. Positive. In the past, such changes cause a huge rush to buy before increase, pause after, then market goes back to steady state. Gut is that's likely on VAT side. Other piece is harder to conclude.
  • Growth in three tiers of iPhones? iPhone 5c?
  • Look at growth rate year over year, comparing 5c to last year 4s, growth in sector was highest growth in quarter we just finished. Extremely happy.
  • Component was good, continue to be so? Installment plan in US would iPhone get renewed faster?
  • NAND and mobile DRAM and LCD declined in June declined, PCDRAM increased. September quarter NAND remains flat, DRAM and LCD continue to decline, PCDRAM has slight increase. Assumes others will decline at traditional rate.
  • Installment plans in US, there's a lot of different models being tried. Last quarter, subject to estimation error, less than 1 out of 4 sold on traditional subsidy plan. Different than 2 years ago. Faster upgrade plans will play to Apple customer base in large way. Incredibly bullish. Likely to upgrade when new product is announced.
  • Beats, IBM. What is changing at Apple? More to come?
  • Lot of really great people, have capability to acquire sizable company and manage it. Can only do so many partnerships well. Unusual but arguably companies are so complementary. importance of customer, mobile and enterprise enormous opportunity. Not competing with each other. Partnership is great. Do more of either? Always looking, but money not burning a hole in the pocket. Beats was a cultural match, music service, talent, products, great marriage. IBM great marriage as well. If more like that present themselves, Apple can manage them. Very strong exec team. Not Cook's goal though, goal is to make great products?
  • Apple do more in Big Data, cut of analytics?
  • Business model generally speaking each have revenue streams. Apple wins if Apple can drive penetration number. Walls would shake.
  • App market for enterprise? Bypass App Store, revenue share?
  • No plans to change the rules for enterprise. Some write proprietary apps, don't want to share. Have a way to distribute that to just the employees they want to. Not want to change that. Takes friction out of system, not add it. Getting penetration number up is key thing. Getting products into hands. Huge opportunity.
  • And we're done!

Full press release below:

Apple Reports Third Quarter Results

iPhone, Mac & Services Growth Drive Record June Quarter Revenue & 20% EPS Growth

Apple® today announced financial results for its fiscal 2014 third quarter ended June 28, 2014. The Company posted quarterly revenue of $37.4 billion and quarterly net profit of $7.7 billion, or $1.28 per diluted share. These results compare to revenue of $35.3 billion and net profit of $6.9 billion, or $1.07 per diluted share, in the year-ago quarter. Gross margin was 39.4 percent compared to 36.9 percent in the year-ago quarter. International sales accounted for 59 percent of the quarter's revenue.

Apple's board of directors has declared a cash dividend of $.47 per share of the Company's common stock. The dividend is payable on August 14, 2014, to shareholders of record as of the close of business on August 11, 2014.

"Our record June quarter revenue was fueled by strong sales of iPhone and Mac and the continued growth of revenue from the Apple ecosystem, driving our highest EPS growth rate in seven quarters," said Tim Cook, Apple's CEO. "We are incredibly excited about the upcoming releases of iOS 8 and OS X Yosemite, as well as other new products and services that we can't wait to introduce."

"We generated $10.3 billion in cash flow from operations and returned over $8 billion in cash to shareholders through dividends and share repurchases during the June quarter," said Luca Maestri, Apple's CFO. "We have now taken action on over $74 billion of our $130 billion capital return program with six quarters remaining to its completion."

Apple is providing the following guidance for its fiscal 2014 fourth quarter:

• revenue between $37 billion and $40 billion

• gross margin between 37 percent and 38 percent

• operating expenses between $4.75 billion and $4.85 billion

• other income/(expense) of $250 million

• tax rate of 26.1 percent

Apple will provide live streaming of its Q3 2014 financial results conference call beginning at 2:00 p.m. PDT on July 22, 2014 at This webcast will also be available for replay for approximately two weeks thereafter.