Closed As it happened: Apple’s third quarter earnings

Apple beat earnings expectations but disappointed investors with its revenue forecast for next quarter, scuppering hopes that the share price could rapidly return to its all-time high of $100. Shares have dipped 1 per cent in after hours trading in New York on the back of this lower-than-expected guidance. However, muted sales of the iPhone and iPad in Apple’s third quarter did not prevent it from beating analysts’ earnings forecasts. Earnings of $1.28 per share compared favourably with analysts’ consensus estimates of $1.23, with gross margins reaching 39.4 per cent, a sharp increase over the prior year.

Join the FT’s Tim Bradshaw and Hannah Kuchler as they live blog the earnings call of the world’s largest company by market capitalisation.

Kick off this afternoon of Apple news by reading Tim Bradshaw’s Fast FT post, summarising the company’s third quarter results:

Muted sales of the iPhone and iPad in Apple’s third quarter did not prevent it from beating analysts’ earnings forecasts, as investors eagerly anticipate new product launches later this year.

Apple’s outlook for the three months to September, a quarter which will likely see the release of the iPhone 6 in larger screen sizes, predicted revenues of $37bn to $40bn, a little below Wall Street’s forecast of around $40.7bn, reports Tim Bradshaw in San Francisco.

Expectations for a strong performance by Apple have been rising since it delivered better-than-forecast iPhone sales three months ago.

While Wall Street was hoping for iPhone sales of around 37m in the June quarter, Apple reported 35.2m, up 13 per cent on the same quarter a year ago.

iPad sales were also slightly below analysts’ more modest expectations at 13.3m, down from 14.6m last year.

However, earnings of $1.28 per share compared favourably with analysts’ consensus estimates of $1.23, with gross margins reaching 39.4 per cent, a sharp increase over the prior year.

The FT spoke to Luca Maestri, chief financial officer, as the results came out:

The call is starting with Tim Cook, Apple’s chief executive, due to speak first.

Cook says Apple hosted its “best ever” developer conference and has had a great response to Yosemite and iOS 8 (“the biggest release since the release of the app store”).

He’s diving in with praise for Swift, a new coding language that allows people to “dream big”. Pretty sure investors are not quite as excited by this.

Now Cook is reprising its HomeKit and HealthKit announcements at WWDC, plus the IBM partnership last week to target the enterprise. “We have a very large vision for what iOS can be,” he says.

Cook moves onto the earnings: up 20 per cent, the most in seven quarters. He said he’s “especially happy” about Apple’s progress in the BRIC countries where iPhone sales were up 55 per cent y-o-y.

Mac sales and the app store were also very strong this quarter. iTunes software and services have been the fastest growing part of Apple’s business in the first nine months of the year.

“iPad sales met our expectations but we realise they didn’t meet many of yours,” Mr Cook said. He quotes IDC figures saying the tablet market is declining.

Cook says Apple’s data shows more than half of customers buying an iPad are buying their very first. “We’re very bullish about the future of the tablet market and we’re confident we can continue to bring significant innovation,” he said.

Cook said he’s excited about the agreement with IBM announced last week which should help Apple get more iPads and iPhones in offices.

Now Cook is onto the Beats deal. “Music is part of Apple’s DNA. Beats provides Apple with a “fantastic subscription service, access to rare talent” and products it can “build on” (no specific mentioning of the Beats headphones business, but does that infer a wearable-tech opportunity there?).

Apple has made 29 acquisitions since the beginning of fiscal 2013 including five since the end of the last quarter.

“We have an incredible pipeline of new products and services that we can’t wait to show you,” he says, without specifying timelines. The revenue outlook suggests nothing extraordinary will be on sale before the end of September.

Lucas Maestri, chief financial officer, says the revenue was towards the “high end” of the guidance range, driven by strong sales of iPhones and Macs. Gross margin beat expectations. Sold 4m iPhones more in the quarter than the same quarter last year.

Maestri says customers have been delaying purchases because of “new product rumours” but Apple seems pleased by survey data that shows people do intend to buy new iPhones and iPads.

iPad sales grew overall in developing markets, up 64 per cent in the Middle East, 51 per cent in China and 45 per cent in India. This growth was offset by declines in developed markets, Maestri said – despite all the corporate users that Apple usually reels off at this point in the earnings calls. iPads are popular with Qantas pilots, he says (hopefully when autopilot is on).

Macs sales were up 18 per cent year-on-year, thanks to very strong growth in the macbook air. “This growth is particularly impressive given the overall contraction of the PC market,” he said. Mac sales have grown for 32 out of 33 quarters.

The iTunes store generated all time record billings, translated to quarterly iTunes revenue of almost $2.6bn.

Developers have now earned over $20bn from apps, nearly half in the last 12 months.

Apple ended the quarter with $164.5bn in cash, 84% of which is offshore.

Apple returned $8.3bn of capital to shareholders in the quarter. The board declared a dividend of 47 cents per common share.

Maestri moves on to the outlook, which has come in lower than analysts had expected.

Apple’s outlook of $37bn to $40bn compares with Wall Street’s estimate of $40.8bn. The Beats deal will close this quarter and be accretive to earnings in fiscal 2015.

Now over to questions, with Morgan Stanley first as always.

Gross margin was better than Apple expected, as iPhone sales are typically unfavourable (later adopters buy smartphones with smaller memory or older models than the folks who line up on launch day).

Cost improvements came in stronger than Apple anticipated. “Commodity markets continued to be favourable, our teams executed really well. It was a very nice surprise for us.”

When pressed on how he compiled the guidance, Maestri said he uses the information available to him so it is based on some purchase delays we have already seen in the third quarter. But he doesn’t say clearly what assumptions he’s making about sales of products expected to be announced this fall.

Apple’s guidance range for the current quarter is $3bn as opposed to $2bn in the last quarter, taking into account that Apple has “many moving pieces”, according to Mr Maestri. Is the iWatch one of those moving pieces? There have also been rumours that one of the two new iPhone models may not launch until October or November, instead of the usual late-September debut.

Cook says that Apple feels the tablet market is still in its “early days” and is excited that people are still buying their first iPads. He thinks there is a “substantial upside” in business which is why Apple are partnering with IBM, to get a better “go-to-market” and more enterprise apps.

Though our market share in the US in the commercial sector is good, 76 per cent in IDC, penetration in business is low, it is only 20 per cent. I honestly believe the opportunity is huge

iPad sales are very strong in the developing markets, but not in developed market. The Macbook sales may be an indication people are still choosing laptops for higher education, he said.

On Twitter, Walt Piecyk of BTIG Research notes that Apple’s R&D spending was over 4 per cent of revenue. “It hasn’t been that high since 2006, before the first iPhone launched.”

Cook says Apple is seeing “substantial strength” in China. ITunes software and services are almost doubling year-over-year, iPhone growth of 48 per cent, two times the market and Macs up 39 per cent. He said the partnership with China Mobile to roll out TD-LTE was “still in the process” and he understands that other operators may be granted licences for FDD LTE which he said will be “another big opportunity in China”.

An analyst is asking why the gross margin guidance is lower than last year (as though there hadn’t been any rumours of new product category launches for more than a year). Maestri responds with some mutterings about foreign exchange but underlines that this year’s new product launches will be a bit different:

“When you think about our product cycle, we don’t get into the specifics but you know this is not exactly the same cycle that we had a year ago.”

Japanese sales were flat due to a VAT increase there early in the quarter, plus a regulatory clampdown against incentives by operators for customers to switch from a rival. “These two things dampened the whole smartphone market in Japan,” says Cook. “My expectation is we are not going to see very much of a share change and we are beginning to see some coming back of that market as we step into this quarter.” This tax increase may have contributed to the rush of iPhone sales in Japan in the previous quarter, he adds.

A question about the cheaper iPhone 5c, which has been seen as a weak performer so far. No longer, says Tim Cook. When comparing the middle-of-the-range iPhones year over year (ie last year’s 4S to this year’s 5c), Cook says “the growth in that sector was the highest growth of the three tiers in the quarter we just finished. We are extremely happy with how it performed in the last quarter.”

On commodity prices, Cook says NAND, mobile DRAM and LCD prices fell while PC DRAM increased despite the market for PCs contracting. The guidance is based on mobile DRAM and LCD’s continue to decline, NAND remains flat and PC DRAM has a slight price increase.

He then moves on to new installment plans in the US. “There’s a lot of different models being tried in the US and throughout the world,” he said. Last quarter, Apple estimates less than 1 in 4 iPhones sold on a traditional subsidy plan, a very different situation from two years ago. The plans that allow customers to upgrade fast will be good for Apple, he says. He is “incredibly bulllish” that customers on those plans will be “very likely” to upgrade when they announce a new product.

Barclays asks, with the Beats and the IBM deals, how is Apple changing? “These seem like big deals that change your direction a bit, something you wouldn’t have done in the past” – are more partnerships on the horizon?
Cook responds:

“We have the capability to buy a sizable company and manage it. You can only do so many partnerships well… In this particular case [IBM] the companies are so complementary. We see the importance of the customer in the same way, mobile in the enterprise is an enormous opportunity…”

“Would we do more of either of the thing we did? We are always looking in the acquisition space but we don’t let the money burn a hole in our pocket and we don’t do things that aren’t strategic.”

Beats’ value was in its subscription service, a “rare set of talent” and access to the fast-growing headphone business, Cook says.

“Culturally we felt there was a match… I think we can manage more things. We have a very strong executive team…. But it’s not my goal to acquire a certain number of companies or spend a certain amount of money.”

Great products are always the focus, he concludes. It doesn’t sound as though Apple is “on the prowl” quite so much right now, to use the phrase Cook used three months ago.

Cook says he has no plans to change the rules for enterprise apps. Some companies don’t want others to have their apps so Apple allows them to distribute their apps to their employees. “The big thing for us is getting the penetration number up and getting our iPhones and Macs in other people’s hands,” he said.

That’s it for the call folks! But stick with the live blog for a round-up of the reaction.

No direct questions about wearable tech, Apple TV or the smart home there, but some hints of what is to come in Apple’s spiking R&D spending, its looser revenue outlook and dip in gross margins compared with the same period last year.

Benedict Evans, a mobile analyst who works for VC firm Andreessen Horowitz, said Apple has gone a bit topsy turvy – he tweeted:

Apple was supposed to win in the USA, iPad, struggle to grow in iPhone, BRIC (esp China). It’s actually going exactly the opposite.

Meanwhile, the quarterly awe at Apple’s cash pile continues, celebrated, as usual, by bizarre comparisons.

Stefan Cheplick from Stock Twits tweets: “Apple has $164.5bn in cash. That’s more than the annual GDP of 138 recognised countries, including Vietnam and Luxemboug.”

Aaron Rakers, an analyst at Stifel, said his initial take on the earnings is positive, in a note he put out before the earnings call. He noted that Apple also guided gross margin to fall when it last saw a significant uptick in capital expenditure, in September 2012 just after the iPhone 5 launch. In the event, gross margin significantly beat its forecast.

Read the full earnings story here

Apple blamed the anticipation of new larger iPhone for causing some customers to hold off buying its smartphones in the three months to June for slightly weaker-than-expected sales growth.

Thanks to growth in emerging markets such as China, Apple beat earnings forecasts despite revenues that just missed Wall Street’s expectations for the third quarter as iPad sales continued to fall.

Fast FT has some great charts on device sales, iPad v iPhone and China:

The call doesn’t seem to have done anything to shift Apple’s share price, which is still down almost 1 per cent at $94 in after hours trading.

Here’s a summary as we sign off:

- Apple beat earnings expectations in the third quarter.
- Growth in China and other emerging markets boosted earnings.
- The company guided expectations lower for the fourth quarter.
- Apple missed revenue forecasts by about $500m.
- People put off buying new iPhones in the hope of larger iPhones reported to be coming in the autumn.
- iPad sales continued to fall.