Richard Waters Closed As it happened: Apple’s first quarter results

Forget the formal estimates: what Wall Street was really hoping for from Apple’s latest quarter was an acceleration in growth that would blow away the “official” forecasts.

The figures released on Monday failed to impress. At 51m, the number of iPhones sold in the quarter came up short. The news appeared to confirm reports that the colourful new 5c was not selling in big numbers – and that, while doing better than expected, the high-priced 5s was not doing enough to make up the difference.

Read below for our coverage of the the company’s analyst call as it happened.

Revenue of $57.6bn was a bit ahead of the Street’s forecasts, while earnings per share of $14.50 comfortably beat the official estimate of $14.09. But the thing that has really caught Wall Street’s eye is that iPhone number. Unofficially, some analysts had been hoping for sales of up to 60m, so 51m is well short.

The good news was in the gross profit margin, which climbed back to 37.9 per cent. That’s 70 basis points below where it was a year ago, but is still stronger than many had thought and points to the impact of the iPhone 5s and iPad Air

Analysts had been expecting a better performance in the US, where sales were down 1 per cent.

Ahead of Apple’s earnings, Counterpoint research put out its monthly estimate for the US smartphone market, suggesting that while Samsung led in November, Apple took back the lead in December thanks to a series of cut-price iPhone deals from the likes of BestBuy and Walmart. Apple’s 43 per cent US market share for December marks a high point for the iPhone in the run-up to Christmas, after hitting 32.6 per cent in December 2012 and 26.1 per cent in 2011. As well as “calculated aggression” in promotions, Counterpoint analyst Neil Shah puts this leap down to the ecosystem effect – a greater number of iOS customers upgrading to new devices; greater reach through all the major mobile carriers; and the shortening lifecycle of Samsung’s Galaxy S4.

Meanwhile eMarketer predicts both Android and Apple will continue to gain ground in the US:

“Apple’s share of US smartphone users will rise to 39.5 per cent in 2014, up from 38.3 per cent last year. Android, by comparison, will see its share of US smartphone users rise to 47.5 per cent in 2014, up from 45.9% last year.”

Are even the Apple faithful starting to lose hope that it can become a growth company again? This from the founder of well-respected blog 9to5Mac:

Apple’s low revenue guidance for the current quarter is guaranteed to make investors more nervous. With the latest iPhone going on sale in a bigger number of countries more quickly than previous models, there were already concerns sales would tail off in the first half of this year. But the revenue forecast of $42-44bn is below analysts’ estimates of $46bn. Maybe Apple is back to its bad old tricks low-balling again.

First indications are that earnings guidance implied for the March quarter is well below Wall Street’s forecasts:

We’re waiting for the analyst call to get underway – should be any moment.

Peter Oppenheimer, chief financial officer, gets things going. Apart from the overall numbers, he says Apple is “very pleased” with the performance in emerging markets. Had it now been for currency headwinds and falling iPod sales, revenues would have been up 10 per cent.

In Greater China, sales were up 29 per cent. 57 per cent of mobile web browsing in China is already done on iOS devices, says Oppenheimer. Not a bad start before the China Mobile partnership gets fired up.

iPads: Sales more than doubled in mainland China. iPhone and iPad inventory levels are within the company’s normal ranges, says Oppenheimer (there have been some worries that iPhone inventories might be building).

Fun fact: Most NFL football teams have replaced their 3-ring binder playbooks with iPads (yes, we’ll all be watching the touchlines carefully during the Superbowl on Sunday to make sure).

Macs: Sales were up 19 per cent. With PC sales falling again in the fourth quarter, Apple claims to have seen market share gains in personal computing in 30 of the last 31 quarters.

80 per cent of iOS devices are now running iOS 7 – that’s up from less than two thirds in October.

Little reassurance from the call so far. Apple stock is now down more than 8 per cent in after-hours trading.

Same store sales were up in the company’s retail 420 locations: average revenue per location when up $400,000 to $16.7m.

Many are blaming the cheaper, plastic iPhone 5c for the miss.

Now the Q&A

First question is about the downbeat forecast. Oppenheimer admits its a larger seasonal decline than normal, due to changes in channel inventory. The underlying business is “stronger than the guidance might imply”, he says

Four issues are behind this: 1. In the March quarter last year, Apple built up inventories of iPhone and iPad. This time, the company managed to get its inventory levels up in the final months of last year. For iPhones, Apple ended 2013 with supply and demand in balance.

2. iPod sales declines. They fell 52 per cent in the December quarter, and will fall hard again. 3. Foreign exchange is still a headwind. 4. There are revenue deferrals due to the iPhone and iPad (more than $11bn of revenue is now deferred, with more than $8bn of that falling in the current quarter).

These factors combined cut some $2bn from the revenue forecast for this quarter, the Apple CFO says (which is about how far the forecast is short of what analysts had anticipated).

Add Apple to HTC, BlackBerry, Samsung and Nokia to the list of smartphone makers who have underperformed in the run up to Christmas.

On the new China Mobile and DoCoMo deals: Oppenheimer says these are starting off in a very promising way, but a number of factors make the comparison with last year’s second quarter less exciting than it would otherwise be.

Tim Cook makes his first appearance on the call, talking about the China Mobile opportunity:

“Last week was the best week for iPhone activations we’ve ever had in China. It’s been an incredible start. At this point we are just selling in 16 cities with China Mobile. This number is projected to be over 300 cities by the end of the year. We have quite the ramp in front of us… We really turned in a stellar quarter in Greater China overall and we are very proud of it.”

Asked about the opportunity for using the Touch ID fingerprint reader as part of a payment service, Mr Cook drops a pretty heavy hint:

“You can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it’s a big opportunity on the platform.”

Cook addresses the emerging markets: “We have to grow in these areas and grow at reasonal rates.” Latin America topped the league with 76 per cent growth. Japan was up 40 per cent.

Cook hints that while the iPhone 5s did better than expected in the US, the 5c was not so strong:

“In North America we did not do as well [as in emerging markets]. This weighed our results. Our North America business contracted somewhat year over year. If you look at the reason for this, one was that as we entered the quarter and forecasted our iPhone sales, where we achieved what we thought, we actually sold more iPhone 5ses than we projected. So the mix was stronger to the 5s. It took us some amount of time in order to build the mix that customers were demanding.”

Question: Are you still a growth company?

Cook: “The underlying sell-through… we’re very confident of growth year over year.” You have to leave out iPods, which are declining, and look at devices sold to end customers, and on that basis Apple is growing in double digits, he says.

Apple stock is now trading almost 9 per cent lower, after-hours.

Question: Why was the gross margin above the guidance range?

Answer: Favourable product mix and lower commodity prices. This will moderate a bit in the current quarter, with a forecast of 37-38 per cent.

Cook on the 5s: “There was growth in that portion of our line, despite adding an entirely new phone below it… I do believe that category of phone can grow in those markets” [he mentions the US, Western Europe and Japan]

Cook gives some credit to the 5c in bringing new customers to Apple: “We saw a significant new-to-iPhone number.” No more details on that, though, and it’s the 5c that seems to be behind the disappointment in the last quarter.

Cook does not take the bait when asked about the “cadence” of innovation at Apple by giving any timescale for new product category launches. On earlier calls he has referred to new categories “through 2014″ but today he says blandly that innovation has “never been stronger. We’re very confident with the work that’s been going on. Our customers are going to love what we’re going to do.”

On why the 5s is doing well, Cook says: “People are really intrigued with touch ID.”

Cook is asked directly if there are new “product categories” coming in 2014. His answer: “Yes, absolutely.” So that’s pretty definitive.

He says that there are no shortage of things in the world that could do with Apple’s magic touch to make them better, it’s just a question of what the company wants to focus its attention on. And with that, the call is over.

So, the highlights:

1. There was a pretty clear admission from Cook that Apple simply misjudged the scale of the demand for the iPhone 5s (and, by implication, the relative lack of demand for the 5c) in developed markets.
Result: a shortfall in unit sales, even as margins did well. And with inventory levels high, there won’t be a big pick-up coming this quarter.

2. Mobile payments. The Apple CEO is extremely cautious about raising expectations about future products or services he has in his sights, so it was very interesting to hear him talk about the large volume of commerce that is done on iOS and the big potential this creates for Apple in mobile payments. There had already been big hopes for Apple to announce a payments service at its developer conference in June, and this will only stoke them further.

3. The latest figures left the impression that growth in developed markets is tailing off – despite strenuous efforts by Cook to focus attention on a preferred measure of growth that excludes iPods and devices not sold to end customers. That makes the performance in China and other emerging markets in the coming months key to whether Apple can regain its status as a growth company.

One encouraging sign: sales in Greater China were up 29 per cent, even before the company’s landmark deal with China Mobile comes into effect.