Apple’s numbers are out!
And it’s a miss on the only thing that matters: iPhone sales.
The company reported that it sold 51 million units, which is lower than sell-side expectations of 54.7 million. The whisper number was 56-57 million.
The stock is down 6%, and falling as investors dig through the results.
On the earnings call with analysts, Apple said the drop was due to a contraction in North American iPhone sales. Apple CEO Tim Cook blamed changes in carrier policies for the North American sales drop.
Previously, customers could upgrade their iPhones after less than 24 months. Today, carriers are strictly enforcing a 24 month upgrade period. Cook thinks that in 3-6 months, this will wash out, and be less of a drag on iPhone sales growth.
Cook was asked if he was worried that Apple is only growing at a single digit rate compared to the overall smartphone market which is up double digits. He said that the important thing for Apple is to grow in emerging markets, and it is. He rattled off the following growth numbers:
- Latin America was up 76% year over year
- The Middle East/Africa was up 65%
- Central/Eastern Europe was up 115%
- China was up 20%
- Japan was up 40%.
In China, Apple just added China Mobile, the world’s biggest carrier, which should boost sales in the long run. Cook called the China Mobile deal a “watershed” in Apple’s history.
iPhone sales weren’t the only thing that were a let down. The company’s guidance was also well below expectations: A mid-point of $43 billion versus analysts expecting $45.74 billion for next quarter.
At $43 billion, Apple would have a year-over-year drop in revenue in the March quarter.
On the call, Apple attributed the guidance to four things:
- Channel inventory increases for the iPhone and iPad in the December quarter of 2013 versus 2013.
- iPod sales declined by 52% in the December quarter, and they’re expect to decline in March quarter.
- Foreign exchange issues against the dollar (especially Japan).
- Higher per-unit revenue deferral rates.
The good news is that Apple beat expectations on the top and bottom line, despite weak iPhone sales. Revenue was $57.6 billion, up 5.6% on a year-over-year basis. EPS was $14.08, up 2% year-over-year.
The other bright spot: Apple sold 26 million iPads, a 13.5% increase year-over year. That’s up 84.4% sequentially.
The iPad is the biggest growth opportunity in Apple’s line up right now. But that could change by the end of the year.
At the end of Apple’s earnings call, Piper Jaffray analyst Gene Munster asked Cook to confirm that Apple would release new products in new product categories by the end of 2014. Cook’s response: “Yes, absolutely.”
Cook wasn’t specific about any new category, but said that the world is filled with overly complex products that he thinks Apple can improve. There is no problem at Apple thinking about new products to release, says Cook. The challenge is focusing Apple’s energy on the right stuff, which he says Apple is doing.
So, while this may have been a disappointing quarter for Apple, the rest of the year promises to be exciting.
Here’s all the most important numbers versus expectations:
- Revenue: $57.6 billion versus $57.43 billion expected by sell-side and $58 billion expected by buy-side analysts
- EPS: $14.50 versus $14.08 expected by sell-side analysts and $14.35 expected by buy-side analysts
- iPhone units: 51 million versus 54.7 million expected by sell-side analysts and 56-57 million expected by buy-side analysts
- iPad units: 26 million versus 25 million expected by sell-side analysts and 24-25 million expected by buy-side analysts
- iPod units: 6 million versus 8 million expected by sell-side analysts
- Mac units: 4.8 million versus 4.6 million expected by buy-side analysts
- March quarter revenue: $42-$44 billion versus $45.74 billion expected by sell-side analysts
- iPhone ASP: $637, which is way up, sequentially. Last quarter, iPhone ASP was $577.
- iPad ASP: $441, about the same as last quarter when it was $439
- Cash: $159 billion, up from $147 billion last quarter. Carl Icahn won’t be happy about this.
Munster put out a quick note on the quarter. He called the quarter “disappointing” and said focus will shift to the iPhone 6:
The overriding theme from tonight’s results will be an increased debate about iPhone unit growth going into the iPhone 6 product cycle (likely Fall 2014). More specifically, we believe the debate will be centered around the trade-off between higher ASPs (exceeded expectations in Dec-13) vs lower unit growth (lower than expectations at 7% in Dec-13). The second key topic will likely center on clarity around new products and Apple’s growth outlook beyond 2014. We remain buyers of AAPL as we enter the iPhone 6 cycle and the potential for new products in the back half of 2014.
LIVE BLOG OF THE EARNINGS CALL:
CFO Peter Oppenheimer starting the call…
5:01: He said it was the most revenue every generated by a tech company. He said there was FX headwinds, without them, revenue would have been higher.
On iPhone, he said there were 5S supply constraints.
5:06: iPad: Up 14%, represents a new all time record. iPad robuts in China where sales doubled. Customers loving iPad Air and Mini w. Retina. Response to iPad Mini has been strong. ChangeWave said 72% would buy an iPad. 90%+ satisfaction among iPad owners.
5:08: Oppenheimer talking about iPad being big in the enterprise. Nearly all NFL teams used iPads for playbooks. Schools choose iPads. Over 20,000 iPads at Ohio State, over 70 iTunes U apps.
5:10: Please iOS leads in user engagement. iOS was more than twice and more than 5X online sales compared to Android, per IBM. Latest reports from Chitikia, iPad 78% of traffic in the U.S., great than the share of our devices. Shows how important to the people that own them.
5:11: 80% of devices on iOS7. Most popular OS in the world.
5:12: On Mac … Mac sales grew in each operating segment. Up 19%. Pleased since the was a 6% y/y contraction. Happy to begin selling Mac Pro made in the U.S. Talking about 30th anniversary of the Mac. “Happy birthday Mac, imagine what we can accomplish in the next 30 years.”
5:13: $4.4 billion, up 19% y/y for iTunes and software/services. Strong growth in App Stores sales. Software and services was $2 billion, a new record despite giving away iWork. Deferred revenue was $11 billion.
5:15: In China, iOS app community. 130,000 apps in App Store to date.
5:16: Top developers continue to launch first or exclusively on App Store. Clumsy Ninja had 10 million 1st week. Plants v Zombie had 60 million in first 5 days alone, biggest launch for an EA game.
5:18: Apple retail stores… $7 billion, up 9%, a new record. iPhone and iPad sales drove it. Remodeled 6 stores, opened 4 new stores. 166 outside the US. Average revenue $16.7 million comp to $16.3 million year aago. 114 million visitors, 21,000 per store per week. Now talking about iBeacon…
5:19 Op Ex: $4.4 billion. Tax: 26.2%
5:20: Cash: $158.8 billion, up $12 billion q/q. $34.4 billion domestic, down 1.1 billion, 78% was off shore at end of quarter, cash flow from operations $27.2 billion. $5 billion share purcahses.
5:20: Outlook: Revenue $24-$44, compared to $43.6 billion.
5:21: Closing remarks … happy with record numbers, happy with engaged and happy customers.
Q&A WITH ANALYSTS
Katy Huberty: Revenue has a sequential decline that’s pretty big, talk about what is driving caution?
Peter Oppenheimer: Biggest reason, changes in channel inventory. Go thru some things on the guidance… Expect 4 factors to negatively impact revenue on y/y. Channel increases in year ago, lower iPod, strong dollar, higher per unit deferral.
1. Channel inventory: In March q last year, increased for iPhone and iPad. This year, did that in December quarter. For iPhone, iPhone supply was short for December quarter for iPhone 5, didnt get balance until March quarter. This year, executed fastest roll out, exit quarter in supply and demand balance. For ipad, we introduced Mini last year, didnt get supply/demand balance until March last year. In contrast, exited near supply/demand balance. Expect value to grow y/y.
2. iPod sales declined by 52%, expect to decline in March quarter.
3. FX headwinds against strengthening dollar, especially Japan.
Huberty: Follow up…
Oppeheimer: Let me let another person take you through guidance.
(Didnt catch name of new person on the call): Going through more details. Saying investing in R&D, investing in services that will help for the future.
Bill Shope from GS: Ramp of China Mobile would be a tailwind, no?
Oppenheimer: We’re thrilled to be working with China Mobile, and DoCoMo, also. Great launch with both. These will have a positive impact y/y. China Mobile 4G only in 16 cities. Will roll out more cities by year end. With DoCoMo, achieve 69% market share in Japan, which we’re thrilled with. However, benefit this quarter offset by late launch of iPhone 5 in China. Supply/demand for iPad Mini and Mac. We’re pleased with what we’re seeing from both carriers, but got some offsetting things.
Tim Cook: I would add, we’ve been selling with China Mobile for a week. Last week was best week we’ve ever had for activations in China. Incredible start. Only in 16 cities, projected to be 300 cities by end of the year. Comes after a new high water mark last q. Grew revenue by 31% last quarter. Strong sales on iPads, up 64% y/y, Mac up 28%, compares to tablet at 21% per IDC and a PC market contracting in greater China. We’re proud of quarter in China.
Shope: Cost curve comments?
Cook: Projected GM 37-38% going from holiday to non holiday, so one of hte primary things is cost. We’re happy with how we’re doing.
Shannon Cross at Cross Research: Mobile payment? What are you seeing with touch sensor?
Tim Cook: In general, seeing people love buy content from their iPhone using Touch ID, incredibly simple/easy/elegant. Mobile payments is one we’re intrigued with, one of the thoughts behind touch ID, not limiting ourselves to that. You can look at demo of our customers, commerce through iOS, it’s a big optty.
Toni at Sanfor Bernstein: iPhone market share… look at prior 4 quarters, iPhone up 20%, market in the 40s. iPhone will be fraction of the market. Why can’t you gain unit share even with “best product”? Will you do something different?
Cook: Our objective to make best, not the most. We’re doing that. Look at what we did this year. Two phones. Look at last quarter, entry phone, mid phone … all grew y/y versus prior year. Look at the emerging markets, which I think is key. In latin america up 76% y/y. Middle East/Africa up 65%, Central/Eastern Europe up 115%, in China up 20%, but as you know added China Mobile, Japan was up 40%. In North America not as well. North America contracted somewhat y/y. Reason for this: 1. As we entered the quarter, and forecasted our iPhone sales, we achieved what we thought, sold more iPhone 5Ss than projected. Took us some amount of time to build mix customers were demanding, as a result lost some units. Took all of quarter to get into 5S proper supply. Other thing in North America, some carriers changed upgrade policies, this affected last quarter, will have an affect on this quarter. Stretched to a hard and fast 24 months, a major factor for North America.
As i back up, one of hte most important things: Important in EM, best in that respect. Another to grow in Chian, cant be in the business we’re in and not have a good china business. Part of NA is a short term affect of policy changes, affects 3-6 months then it washes through. I feel good about where we are. Market numbers will be decreased as you hear what everyone is saying.
Shope: Long term measure of china mobile success?
Cook: Not going to give a forecast for it. But… China Mobile has more subs than anyone in the world. I see it as a watershed moment for Apple. Strong belief in the abilites of the two companies to work together.
Ben Reitzes: Are you still a growth company?
Cook: I think it’s important to listen to what Peter said about guidance. Underlying sell through, confident about growth. Some look at the numbers, but way I look at business, from a sell through, less iPod. All of us have known, IPod is declining. When you look at that, look at last quarter, comes up to a double digit growth.
Follow up: Buying back stock?
Cook: We’ve been buying back stock, progressing on that, big believer in that. Doesn’t change today if stock is up or down.
UBS: Steve Milunovich: GM was high, why?
Answer: Above guidance range, favorable product mix and favorable commodity pricing. For Q2, we guid 37-38%, some loss of leverage because of seasonal decline.
UBS: Follow up. Can you show a unit growth? 5C?
Cook: To your question about 5S, if I look at the sell-thru, there was growth in that portion of our line despite a new phone underneath it and I think that’s a good sign, and that’s with it in short supply all quarter. I do believe that category can grow in U.S. and western Europe. In Japan grew 40%, that’s fairly good.
We missed the question, but this is Cook’s answer …
Cook: Saw a significant new to iPhone number, particularly on the 5C. Not just upgraders. Upgraders in North America less than expected because of change in policy.
[Innovation] has never been stronger, customers going to love what we’re going to do.
Bank of Montreal: Tim, Growing iPhones 7%, market will be 14%. Are you happy with pricing umbrellas you have? In particular the 5C?
Cook: last quarter we did a tremendous job, mix. Demand percentage turned out to be different than we thought. If we decide it’s in our interest to make a change, then we make one. Not going to predict price changes on the call. Our line in the sand is making something that’s not fantastic.
Follow up: Question on inventory? Is December worse than expected if inventory is better?
Oppenheimer: 4 factors we expect to be over $2 billion. Inventory is the largest. Other 3 less than inventory. Not too terribly far apart.
Question about R&D…
Cook: Working on things you can’t see today.
JPM: Question, what is user data telling you on replacement cycle?
Cook: Don’t have answer.
JPM: Op Ex flat, optty in enterprise?
Cook: Clear enterprise has huge potential.
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