After the distractions of Antennagate it was back to business as usual as Apple reported its latest earnings on Tuesday.
iPhone sales in the company’s latest quarter jumped to 8.4m, belying concerns that inventory changes surrounding the switch to the latest model would hit sales. Profit margins also held up better than expected, pushing earnings well ahead of forecasts.
Those were the headlines as Apple released earnings for the period to the end of June, its third fiscal quarter. The numbers:
- Revenue rose 61 per cent to $15.7bn, ahead of Wall Street forecasts of $14.74bn.
- Earnings climbed to $3.51, above the consensus estimate of $3.10.
Our live blogging of Apple’s conference call to discuss the state of its business is after the jump.
Apple has a habit of blowing away financial forecasts – both its own famously conservative ones, as well as the higher ones set by analysts. With such a track record, though, it becomes harder to keep topping the more optimistic and unofficial “whisper” numbers. That explains why the stock is only edging up slightly, despite the strong results.
The main points from Apple’s earnings release:
iPhone: Despite all the noise about dropped calls, the iPhone 4 had a good start. Fears that sales for the quarter would come in at 7m or even lower due to inventory changes and supply constraints proved unfounded, with the number of units shipped reaching 8.4m. The real test will be the fourth quarter, as Apple catches up with orders and inventory builds as it reaches more new markets – another 17 countries are due to be added at the end of July. Wall Street is expecting iPhone sales to jump to 11.7m in the three months to the end of September.
Gross margin: The aggressive entry-level price of $499 for the iPad – and solid early demand for the device – had stirred up some uncertainty about Apple’s profit margins. The iPad was expected to eat into margins, though with a stronger mix elsewhere offsetting some of that. Most analysts had expected a gross profit margin of around 39 per cent, down from 41.7 per cent in the preceding quarter. In the event, Apple reported a gross margin of 39.1 per cent for the quarter, appearing to lay the immediate fears to rest.
iPad: Apple announced eight days before the end of the quarter that iPad sales had topped 3m, so there was not a lot of surprise in the 3.3 figure for the first quarter the device went on sale.
From the earnings call:
[after technical difficulties, picking up the call on the supply shortages that are making it hard to keep up with demand for the iPhone and iPad]:
Tim Cook, COO, is talking:
2.20 “In the scheme of things it’s a good problem to have.”
2.23 Peter Oppenheimer, CFO, concedes margins will come under pressure in the next quarter due to the iPad: “While the margin is attractive, we have been pretty aggressive with the pricing and it’s going to play through on the margin line.”
2.25 The shift to the iPhone 4 led to an inventory adjustment that dented sales, says Cook. Before June 7th, when Apple started the inventory change, sales growth for the quarter was running at 90 per cent.
2.27 If inventory had been flat, sales of iPhones would have been “a little over 250,000 more units” in the quarter, says Cook – though Apple would have liked to increase inventory, he adds, implying sales would have been even higher.
2.28 Cook discusses the shortages that have kept a lid on iPad sales: “It’s exactly the way we wanted to manage it. We do not create a shortage for buzz. We would like to fill every customer’s order as quickly as we can.”
2.30 Oppenheimer the number of iPhones being returned because of dropped calls is “extremely small.”
2.32 When will supply shortages of iPad end? Cook: “We honestly don’t know… It is not following a normal early-adopter curve and then crossing into the mainstream… We don’t know how high is high.”
2.33 Will iPad sales cannibalise other Apple products, particularly Mac? Cook says it’s a subject of intense debate inside Apple, but for now: “It’s too early to tell”. He calls the 3.47m Mac sales, up 33 per cent from the previous year, “a jaw-dropper”.
2.36 How did iPad influence the gross margin? Oppenheimer: Higher iPhone and accessory sales offset the effects of the iPad, producing an overall result that was better than the company had expected [Note: Apple's own gross margin forecast of 36 per cent considered highly conservative, and below Wall Street's.]
2.40 Did sales of iPads eat into sales of iPod touches? Cook: average selling prices of iPods fell 7 per cent, due to back-to-school promotions. But iPod touch sales were up year-on-year.
2.42 Another question about the outlook for margins on the iPad prompts Oppenheimer to say that Apple moved aggressively to seize “first-mover advantage”. He adds: “We are selling them as quickly as we can make them.” [Clearly there's no intention here to capture a higher margin from iPads in the short term.]
2.45 A question about what will happen when early-adopted purchases of iPads tail off draws a deep sigh from Cook. He repeats that, “anecdotally”, this does not look like the normal sales pattern of other technology products, it is already reaching a broader market. “Right now, we’re thrilled with our position.”
2.51 Question: why did Apple single out Europe and Asia as strong markets for the iPhone, does it mean the US is hitting the law of large numbers? Cook disputes this, says over time the phone market overall will move to smartphones.
2.52 He adds: in all products, “we’re growing faster internationally than we are domestically.” But Apple is still growing 40 per cent in the US so “this is not a low number, it’s absolutely killer.”
2.54 Cook says there is “huge” opportunity in some newer markets for Apple. Mac sales were up 73 per cent in Asia/Pacific region, with 144 per cent growth in China.
2.56 Question: rather than cannibalisation, might iPad sales eventually lead to higher sales of Macs? Cook: “We’ll see, I don’t want to predict it.” But he certainly lends credence to the “halo effect” theory.
2.59 The Verizon question: does Apple need more carrier partners to keep iPhone sales growing in the US? “I do not want to get into what we will or will not do.” AT&T has been “a very good partner.” And: “That’s all I have to say about that.”
