Apple returned to its old forecast-busting ways on Wednesday, reporting better-than-expected revenue and iPhone growth. Even though iPad sales underwhelmed, Wall Street cheered the second-quarter results with an 8 per cent spike in after-hours trading. Apple also added $30bn in new dividends and share buybacks to its existing $100bn capital return programme, alongside a seven-for-one stock split.
Tim Bradshaw and Sarah Mishkin bring live commentary from Apple’s conference call and reactions from the market.
Boosted by sales through new partner China Mobile, the iPhone returned to double-digit unit growth, up 17 per cent to 43.7m units compared with the same quarter a year ago. Wall Street had expected around 38m iPhones. That also helped to improve gross margins to 39.3 per cent, also ahead of forecasts.
However, iPad sales volumes tumbled 16 per cent to 16m in the quarter, 3m below analysts’ expectations.
Apple’s overall revenues grew 5 per cent to $45.6bn, with net profit of $10.2bn and earnings of $11.62
Carl Icahn is happy, tweeting:
“Agree completely with $AAPL’s increased buyback and extremely pleased with results. Believe we’ll also be happy when we see new products.”
Tim Cook begins the conference call.
Some interesting background as we go into the call — smartphone marketshare in the US. Apple vs. Samsung is an ongoing fight, and not clear who’s winning. (Outside of the US, of course, Android is even bigger.)
Nielsen reports that Apple has 42% market share, Android has 52%.
Revenue was ahead of expectations and represents a new March quarter record.
Apple’s underlying business was “even stronger” than the results implied, given inventory and foreign exchange rates. Without those headwinds, revenue growth would be close to double digits.
Its earnings growth rate was its highest in the last six quarter.
“These strong results were broad based, both from a product point of view… and a geographic standpoint,” he says. it set a new record for iPhone sales in the BRIC countries, and all three iPhone models sold better overall than last year.
After iPhone, the first thing that Mr Cook turns to is iTunes rather than the iPad.
He says that it’s a “very important” part of Apple’s business in the US and abroad.
A big new number: nearly 800m iTunes accounts, most tied to credit cards.
He then takes head-on the iPad shortfall, acknowledging it missed analysts’ forecasts even though it was better than Apple internally had expected. He puts that down to an inventory issue, and says that Apple is still a believer that tablets will overtake PCs.
Mr Cook has some big headline stats on Apple in Asia. $10bn quarterly revenue from China, and sales in Japan up 26% after accounting for yen’s weakening.
Apple’s new retail chief Angela Ahrendts, formerly at Burberry, will join next week, Mr Cook said. That’s been a long gardening leave.
Mr Cook says that tens of millions of people buying iPhones and iPads in the last few months have been first time customers, which he says bodes well for future growth thanks to its “halo” effect of going on to buy extra devices in the iFamily.
In discussing Apple’s future investments Mr Cook has a frustrating teaser: “We’re expanding Apple’s products and services into new categories.” #iWatch
Now we are talking about the $30bn dividend and buyback increase.
As Apple expands into new product categories, he says “we are not going to under invest in this business.”
Apple has acquired 24 companies in the last 18 months. “We need to maintain financial flexibility.”
But now, Apple will re-evaluate its capital allocation at this time of year each year. Clearly he hopes this will avoid future clashes with activists such as Carl Icahn.
Apple still believes the stock price does not reflect the value of the company, he says, which is why it’s focusing on buybacks. But the second increase in dividend in two years will appeal to income investors and Apple says it now plans for annual dividend increases.
Mr Cook sounded energised and confident.
Now over to Luca Maestri, who was appointed as Apple’s new CFO last month, taking over from retiring Peter Oppenheimer later this year.
We knew China was big for Apple. Now they’re giving some colour. The partnership with China Mobile and popularity of its cheaper phone (the multi-coloured one) drove them to an “all-time quarterly record for iPhone sales in greater China,” Mr Maestri says. (Greater China includes Hong Kong, a popular shopping destination for Chinese consumers because retail tax there is lower than in mainland China.)
For China Mobile, however, it’s not been such a great deal. Its results out recently showed net profit down 9.5% in the first quarter as it’s pushing out its faster TD-LTE network.
Apple is putting lot of emphasis on its digital revenues. Total revenue from iTunes software and services was up 11 per cent, $4.57bn. iTunes billings were up 24 per cent.
Says analyst @jandawson on Twitter:
iTunes, especially App Store, continues to be Apple’s fastest growing business. New records for iTunes gross billing and revenues.
BTIG analst Walter Piecyk on Twitter @WaltBTIG:
Strong iPhone sales were not helped by inventory build which only rose 100k vs 1 mil last Q and 3.7 mil in Q4. $AAPL
We are now hearing about how companies like FedEx and Eli Lilly are using iPads. The iPad continues to be the top-selling tablet, Mr Maestri says, with a particularly strong share in education markets.
Some commentary from elsewhere — US public radio show Marketplace has a bit of a harsh comparison for Apple. Is it old enough now to be the next Microsoft?
Results today suggest the answer is “no, not yet,” but it’s a reminder of the market perception, and skepticism, Apple has to challenge.
Almost $21bn was spent on capital allocation in the last quarter. Apple ended the quarter with $150.6bn in cash, down about $8bn on the prior quarter as share buybacks accelerated. “We have acted aggressively and opportunistically,” he says.
This is becoming a bit of a mantra for the executives on the call. Mr Maestri says: “Our current stock price does not reflect the full value of the company.”
“All our capital return activities must be funded by domestic cash,” says Mr Maestri which is about $18bn down from $39bn in the quarter it paid its first dividend.
Repatriating offshore cash balances would incur “significant” tax consequences, he says. Apple will campaign for tax reform and in the meantime, Apple will tap the debt markets again – in both domestic and international bond markets. The breakdown of markets and currencies will be determined later in the year.
“We are continuing to invest heavily in R&D” in both current and future products and services, says Mr Maestri.
Back to Mr Cook for the stock split, which is designed to make Apple stock more accessible to a larger number of shareholders. Each shareholder on the record at close of business on June 2 will receive another six shares, and trading will begin on a split-adjusted basis on June 9.
Mr Cook is paying tribute to Peter Oppenheimer, Apple’s outgoing CFO, “from the very bottom of my heart”. “He has never missed guidance in the 10 years as CFO which must be an all time record for CFOs,” he says.
(That said, Apple low-balled its guidance for most of those years, only moving to a more realistic outlook a few quarters ago.)
Mr Cook makes a bit of a jab at Mr Maestri’s accent. He’s born in Italy.
Katy Huberty of Morgan Stanley is first analyst to ask a question, as always. How can Apple monetise its install base better, she asks.
Mr Cook says that he believes Apple can monetise more than we are from a services point of view, in “existing areas and new areas”. App Store grew in triple digits in China, he notes.
Next she asks whether there’s scope to raise iPhone prices, after the iPhone 5s sold better than expected.
Mr Cook says he makes pricing decisions on “each thing as it gets closer” to launch.
That’s not a “no” to a more expensive iPhone, as has been rolling through the rumour mill lately.
Goldman analyst asks about revenue breakdown. Mr Maestri says March quarter was “very good…we had better volume…we had better costs than anticipated and we had some favourable mix of both products and services.”
Next quarter, further away from product launch, revenue will be weaker sequentially but the company will have “cost improvements.”
Apple’s stock price is holding up 8 per cent in after hours trading.
And lest you think that the iPhone is a flash in the pan, falling off in popularity, or that sales will suffer as US carriers make it less likely Americans will upgrade their phones every two years, Mr Cook points out that it’s selling well everywhere. He says: “The strength of iPhone was very broad based, and we gained share in a whole host of market from developed markets like the US, UK, France, Germany to more of emerging markets like China, Vietnam and had the largest total sale of iPhones in the BRIC countries that we’ve ever seen in our history.”
Bernstein analyst asks about iPhone average selling price, down about $40. “I think that’s the largest sequential decline we’ve seen in history,” the analyst says, and wants to know why.
Mr Maestri says about half of the decline was driven by Apple’s continued strong sales in emerging markets with the iPhone 4S. “Then the rest was primarily the fact that as we move away from the quarter when we launched the product, we tend to have lower [memory] capacity mix in our numbers.”
A very long question next on iPhone replacement cycles – US carriers have introduced plans that might encourage people to keep their phone for longer, the analyst says. Where do replacement cycles go and why, and how does Apple address the dilemma that making a great phone is more expensive, hitting margins?
Tim Cook says that some carriers’ programmes could increase the upgrade cycle, because customers can pay a bit more at the beginning and then essentially upgrade every year. “How these balance are very difficult currently to conclude,” he says. The bigger opportunity is that the smartphone market is still “only” 1bn units and will eventually be the entire mobile phone market. Apple saw first-time customers make up in the 80 per cent range of the iPhone 4S sales in certain “large” regions, he says. Apple can then sell those people more new products down the line – this is the bigger opportunity. Different American mobile carrier plans are “noise”, he adds, and not happening much outside the US – which is just around a third of the business.
(He also says that Apple sold very low single digit percentage number of iPhone 4, related to the earlier question.)
Does a big revolution in technology have to mean lower margins?
Tim Cook says that Apple just wants to make great new products, of course. “We have a way of working down the cost curve.”
Mr Cook a bit snappy about analysts pushing on whether US telecom changes will hurt the company. “The bulk of what you see in the US are not occurring in the other geos.”
A quick note what he might mean — while in the US, carriers subsidise heavily the costs of the phones, that’s unusual in emerging markets. In China, to cite one important market, subsidies aren’t as common. That headline price — Rmb 5,288 ($850) for an entry iPhone 5S — is what most people pay.
UBS asks about the iPad and whether Microsoft Office will make a different.
Mr Cook says that the iPad has “absolutely been the fastest growing product in Apple’s history”, and the only one that was instantly a hit in three key markets: consumer, business and education. More than 210m iPads have now been sold – almost twice as many iPhones as Apple sold in the comparable time. He’s particularly bullish about the iPad in education. Many enterprises are writing proprietary apps for their own business.
In the retail market, in the US, Apple had 46 per cent share according to NPD, he says. “Office I believe does help,” Mr Cook says, but unclear how much. “If it had been done earlier it would have been even better for Microsoft frankly”, given the competition that’s emerged since, including Apple’s own iWork suite. “I wholeheartedly welcome Microsoft to the App Store to sell Office. Our customers are clearly responding in a good way that it’s available… particularly in the enterprise area.”
Customer satisfaction remains high with iPads, he adds.
“When I back up from all of these, i feel great. that doesn’t mean that every quarter, every 90 days, is going to be a number that everybody is thrilled with. The trend over the arc of time, things look very, very good… The thing that drives us is the next iPads, the things that are in the pipeline that we can do to make it even better.”
Maybe relevant to Apple’s fondness for Microsoft right now is that Windows phones have less than 5% market share.
Mr Cook on Apple’s likelihood of future acquisitions: “We’re on the prowl I suppose you could say.” But he cautions that they have to make sense and help the company.
Question about the market. “Can you talk a bit about the competitive landscape for smartphones?”
A long answer from Tim Cook about what comes next, after an analyst notes that Amazon is doing a wider range of things now, including content production.
“The key thing for us is to stay focused on the things that we can do best. We feel comfortable expanding the things that we do… We are not ready to pull the string back on the curtain have some great things there that I’m very excited about.”
“When you care about the detail… it takes a bit longer to do that… We didn’t ship the first MP3 player, nor the first smartphone, nor the first tablet…. It means much more to us to get it right than to be first… You can see so many examples out in the market place where the objective is to be first.”
That last bit is a not-so-subtle dig at Samsung’s Galaxy Gear, which was not fabulously received when it first launched last year.
He also hints that some of the rumours of new products, which have included new TV box and an iWatch, are accurate by saying that some R&D projects “we can’t seem to keep quiet”.
Mr Cook dodges a bit the question about Samsung and Lenovo/Motorola with a bit of a snub in their direction. “The part of the market that we’re interested is the market of people who really want the best smartphones.”
With a smaller product line-up than most any of its competitors, Mr Cook again emphasises Apple’s growth into new markets. Non-US is the game. “This quarter if you were unsure hopefully this quarter demonstrates to you that we can do well in a number of geographics from emerging markets to developed markets.”
And Mr Cook doesn’t want people to think that China Mobile (the world’s largest carrier by subscribers, which only last year started to offer the iPhone to its customers) should get all the credit for their sales there. Apple, he says, is more than that. There are two other carriers, and they have retail stores, and sell tablets not just phones on contract.
“We literally did well in every single area in China. It wasn’t just because were able to come to an agreement with the world’s largest carrier that was certainly key but … there are other things going on.”
Surprise! Gene Munster of Piper Jaffray asks about Apple TV!
Mr Cook says that he “stripped off the hobby label” from Apple TV because the box and the content bought through it topped $1bn last year.
“It didn’t feel right to me to refer to something that’s over $1bn as a hobby. From an investment point of view, we continue to make the product better and better.”
Cook continues: Apple TV content compares “extremely favourably to the content on the Amazon box.
New stat alert!
“We’ve now sold about 20m Apple TVs. We’ve got a pretty large install base there. I’m feeling quite good about that business and where it can go.”
That’s up from 13m, as of May 2013.
That’s the end of the conference call, folks.
Apple investors seem roughly as cheerful as they were before the conference call started: the stock is still up almost 8 per cent in after-hours trading. Some nice new datapoints in there – particularly 800m iTunes accounts and 20m Apple TVs – but no great revelations about new products other than the reiteration that they’re coming.