Richard Waters Closed As it happened: Apple’s earnings call

Apple may have beaten Wall Street’s revenue and profit expectations with its latest quarterly earnings on Monday, but the market’s skittishness about the durability of its profit margins was much in evidence. Earnings guidance, on the face of it, seemed to point to steady margin erosion in the coming months. But Apple was able to silence the doubters – for this quarter, at least.

Read on for details of the earnings and our coverage of the earnings call as it happened.

The numbers should be out any minute. Wall Street is expecting 32m iPhones and 14.5m iPads were sold in the quarter.

This is the final quarter of Apple’s financial year. The story of the first nine months: revenues up 11pc to $133bn, net income down 12 per cent to $29.5bn. Even if sales haven’t peaked, the stock market is concerned that profit margins are heading inexorably down.

The numbers are out and Apple’s stock is falling: revenues and earnings are slightly ahead of expectations but not by a lot.

It looks like the guidance is what’s causing some unease. Apple is predicting sales of $55-58bn in the all-important final months of this year. The mid-point of that range is above Wall Street’s expected $55.7bn. But it’s anticipating a gross margin of 36.5-37.5 per cent.

If investors are worried about Apple’s eroding profit margins, then this leaves plenty to get concerned about. The first-quarter gross margin was 38.6 per cent a year ago and 44.7 per cent the year before that. Cheaper (but not much cheaper) iPhone 5cs look like they’re going to do the damage.

The numbers: iPhone sales were 33.8m, which is a couple of million more than the Street had been expecting. But iPads came in a bit light, at 14.1m (the latest iPad models weren’t launched till after the quarter).

CEO Tim Cook and other Apple executives are due to talk at the top of the hour. Among the questions: Will they respond to Carl Icahn’s calls and say anything more about how they plan to use the company’s cash mountain, which now stands at nearly $147bn, up around $26bn from a year ago.

Here’s Apple’s breakdown of sales in the quarter: http://images.appl…/q4fy13datasum.pdf

The average selling price of the iPhone fell again, to a new low of $577. That’s down from $581 the previous quarter and $618 a year ago. Some analysts had been expecting that number to be higher, thanks to high demand for the more expensive 5s from early adopters. Seems they were wrong.

The call starts: Tim Cook gets things underway, calls it a “strong finish to an amazing year.”

“We’re winning in all the ways that are most important to us,” he says – in customer experience, for instance. An allusion there to continued fall in market share.

He’s running through the highlights. Including: doubled the amount of capital being given back to shareholders, with $36bn over the past five quarters. The board is “actively considering” capital allocation, has sought input from shareholders and will do so again. So, nothing specific there about increasing the buyback.

Smartphone and tablet markets are growing fast – tablets, from 225m to 400m next year.

Peter Oppenheimer, chief financial officer: Gross margin, at 37 per cent, was at the high end of the company’s guidance range (which is normally conservative).

iPhones: Unit sales were up sharply in developing countries like Latin America, Middle East, Russia, says Oppenheimer. Sales also remained robust in the US, with a 40 per cent market share. Channel inventory at the end of the quarter was at the low end of the company’s targeted range.

Now we’re getting the usual list of bragging rights. Highlight: iPhone users spend 56 per cent more minutes a day on their phones than Android users.

iPads: As the company prepared for introduction of launch of new products, sales were robust in Japan, Russia and the Middle East, as well as the back-to-school season in the US.

Commissions from sales in the App Store are starting to amount to serious money. Total sales of software and services rose 22 per cent, far outpacing the overall 4 per cent sales growth for the company as a whole, and now amounts to 11 per cent of total revenue. That’s not far short of the sales generated by the Mac.

Retail stores: average revenue per store fell to $10.9m, down from $11.2m the year before. On average, foot traffic per store was running at 8,500 people per week.

Apple’s deferred revenues are increasing as it gives away more software, as well as services like Siri and iCloud – that means deferred revenues will rise $900m in the final quarter, says Oppenheimer.

Now, on to questions. First up: What are the headwinds you see for gross margins? Oppenheimer says margins will benefit from the jump in revenue, offset by the higher deferred revenue; a richer mix of new iPads with higher cost structures and lower prices; foreign exchange headwinds, principally from the yen; and the higher costs of new Macs.

Interestingly, Apple seems to have changed the way it guides on profits margins. In the past, it has described the lower margins on new products as temporary, as it works to bring down its bill of materials and raise volumes. But Oppenheimer just attributed the lower margin outlook on the “cost structure” of the new iPad. The implication: this is a more permanent downward adjustment in margin.

Tim Cook on the iPhone’s average selling prices: Apple normally sees early adopters come into the market and buy the best product soon after an announcement. “That is what we would expect to see,” he adds, without being too precise about what happened with the latest iPhones.

Cook is pressed on why Apple hasn’t come up with any new product categories, despite appearing to hint that the company would do so this year. He denies this, suggests the company never made any specific promises about the timing of new categories, though Apple remains confident it has the skills and culture to find the next new things. Still no indication when there might be an iWatch, then – though as we reported in July, Apple was still at the early stages.…-00144feabdc0.html

China: it was a “pretty good quarter”, says Cook, confirming that Apple grew by about 6 per cent, at a time when most tech companies suffered a slump in sales. iPhone sales were up 25 per cent. For the full year, revenues from the greater China region were up 14 per cent, at $27bn.

More discussion of the deferred revenues: Apple defers part of the sales price of each iOS device and Mac to reflect the software provided free with the devices. With the recent announcement that Apple will give away more software with its devices, the amount of money at issue with each Mac has gone up from $20 to $40, and for each iOS device has risen by around $5 to between $15-20.

In other words: the margin hit was all about the deferred revenue. Gene Munster of Piper Jaffray asks the necessary follow-up question: If you add that back in, is it fair to say that the mid-point of the gross margin range of the present quarter would rise to 38.5 per cent? Oppenheimer confirms that, which he says sounds roughly right.

Like magic, Apple’s stock is back up. It’s now changing hands at more than 1 per cent above the closing price in after-market trading. As software and services become a bigger part of the value in Apple products, it looks like Wall Street will have to get used to a new way of measuring the company’s revenues and profits.

Cook justifies the decision to give software away: iWork had become the best-selling productivity app on mobile devices. “We really wanted to make it part of the experience… it’s just another reason everyone should buy Mac.” The stock was down more than 4 per cent until Apple just cleared up that little issue about the impact of deferred revenue on its gross margin forecast.

On iPad minis with Retina displays: It’s unclear if there will be enough to last until the end of the quarter, says Cook (but at least the devices will soon go on sale: there had been plenty of speculation that supply shortages would keep minis with the higher resolution screens off the market altogether.)

The questioning returns to iPhone ASPs. Oppenheimer: they fell due to lower priced entry-level devices, as well as foreign exchange headwinds. These are “likely to continue given where exchange rates are today,” he adds.

That’s it. It’s not often that sentiment turns so sharply in the middle of a company’s earnings call, but it certainly did here. All it took was for CFO Peter Oppenheimer to point out that a $900m chunk of Apple’s revenues in the current quarter that would normally fall straight to the profit line would be deferred to later periods, to reflect the value of free software that is now given away with devices. For a company that has always been judged on the strength of upfront sales, that represents a new consideration that will have the analysts scurrying back to revisit their financial models. But the good news for now, at least, is that the gross margin for the all-important holiday season should be very similar to the 38.6 per cent seen a year before, as sales advance again by around 4 per cent.