10 Things We Learned From Apple's Q2 Financials4:40 PM EST Wed. Apr. 24, 2013
In a closely watched earnings announcement, Apple Tuesday reported better-than-expected financial results for its fiscal 2013 second quarter, including sales of $43.6 billion and a profit of $9.5 billion. But there was more to Apple's second quarter than just revenue and earnings, and some of the figures and statements from Apple executives offer clues about what's to come for the technology giant.
Apple CEO Tim Cook (pictured) addressed the elephant in the room, which has been one of the biggest reasons for Apple's stock price decline -- the company's once-monstrous growth rate has begun to decline. But, Cook said Apple's historic 2012 performance will make comparisons to its current fiscal year "very difficult."
"Despite producing results that met or beat our guidance as we have done consistently, we know they didn't meet everyone's expectations, and though we've achieved incredible scale and financial success, we acknowledge that our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012," Cook said. "Our revenues grew about $13 billion in the first half of this fiscal year. Even though that's like adding the total first half revenue of five Fortune 500 companies, our average weekly growth slowed to 19 percent and our gross margins are closer to the levels of a few years ago."
Cook also discussed the company's stock price, which has plunged from a high of more than $700 in September to around $400 today. Apple's CEO seemed to place some of the blame for the drop on unfavorable economic factors.
"The decline in Apple's stock price over the last couple of quarters has been very frustrating to all of us," Cook said. "But Apple remains very strong and we will continue to do what we do best. We can't control items such as exchange rates and world economies and even certain cost pressures, but the most important objective for Apple will always be creating innovative products and that is directly within our control."
Apple's last big product launch was the iPad Mini and fourth-generation iPad last November. But Apple fans will have to wait a bit longer for the next innovation from the company, as Cook said new products will be introduced this fall and in 2014. "Our teams are hard at work on some amazing new hardware, software, and services that we can't wait to introduce this fall and throughout 2014," Cook said. "We continue to be very confident in our future product plans."
So that means no new iPhone or iWatch this summer.
One of the big worries from analysts was the iPhone's growth rate. Some predicted that iPhone sales for the quarter would experience a year-over-year decline, thanks to heated competition in the smartphone space and lower price points for rival devices.
But, Apple ended up reporting impressive iPhone sales for the second quarter, proving the device is still at the top of its game. Apple said it sold 37.4 million iPhones compared to 35.1 million, a 7 percent increase from the second quarter a year ago.
"We are pleased with our record March quarter revenue and record March quarter iPhone and iPad sales," Peter Oppenheimer, Apple's chief financial officer, said during the call.
Apple's iPad sales jumped 64 percent year-over-year to 19.5 million units for the quarter. The company said enterprise adoption of the iPad by business customers was a major contributor to that increase.
"I've seen more and more people developing more and more custom apps for their businesses on iOS to be used on iPad and we're very, very bullish on it," Cook said. "As a matter of fact, just to quote you some numbers, iPad now is being used in 95 percent of the Fortune 500. And what's even more impressive probably is that on the Global 500 companies, we're now in 89 percent."
Apple's Mac sales were down in Q2, falling 2 percent from the year-ago quarter to 4 million units. While Apple sold fewer Macs in the quarter, Cook was pleased with the results and compared them favorably to the recent PC numbers from IDC. He also said the iPad's growth negatively impacted the Mac market but maintained that Apple is committed to its computer business. "The market for PCs is incredibly weak. IDC said that the market for the March quarter was down 14 percent year-on-year, which is the largest decline that I remember from being in this industry for a long time," Cook said. "At the same time, we sold almost 20 million iPads and it's certainly true that some of those iPads cannibalized some Macs. I personally don't think it was a huge number, but do I think it's some. And I think probably the larger thing at least for the, maybe not so much on the Macs side, but on the PC side, [the iPad] is cheaper and probably extending their upgrade cycles.
"That said, I don't think this market is a dead market or bad market by any means. I think it has a lot of life to it. We are going to continue to innovate in it."
While many of Apple's numbers exceeded the company's guidance -- as well as analyst forecasts -- one number that didn't was gross margins, which dropped significantly to 37.5 percent from 47.4 percent a year ago. That figure was the low end of Apple's guidance, which had predicted margins anywhere between 37.5 percent and 38.5 percent.
"We had a few items that on balance resulted in us reporting at the low end," said Oppenheimer. "They included mix, in particular, selling more iPads than we had planned, including getting iPad mini into our four- to six-week channel inventory range, some changes in our service policies that required us to make provisions for prior quarter sales, and we had some unfavorable adjustments."
Meanwhile, Cook said Apple expects a slight sequential decline in gross margins for its third quarter.
When asked during the Q&A session about the competitive landscape in the smartphone market, Cook paid particular attention to one rival and offered some historical perspective on how the smartphone market has evolved.
"I think the smartphone market has always been competitive," Cook said. "The names of competitors have changed. In the beginning, RIM was the very strongest player because the smartphone as you know really got going into the enterprise area. And of course, today, our tough competitor from a hardware point of view would be Samsung, married to Google on the operating system side.
"They are obviously tough competitors, but we feel that we have the best products by far. And we are continuing to invest in innovative products and feel really, really confident about our product pipeline in both hardware, software and also our services. We have the best ecosystem by far, and we're just going to keep augmenting it, and making it better and better."
Despite stiff competition in the smartphone market from local companies like Lenovo, ZTE and Huawei, Apple enjoyed a strong quarter in China, thanks to the iPhone and iPad. Apple reported record revenue of $8.8 billion in the country.
"We actually had our best quarter ever in Greater China," Cook said. "The highlights for the quarter in China were that iPads grew 138 percent year-on-year, and we set new records for sell-through both for iPhone and iPad during the quarter."
Apple currently has 11 retail stores in China, and Cook said that number is expected to double in less than two years.
With its enormous cash reserves, Apple announced "an aggressive plan" that more than doubles the size of its capital return program to $100 billion by 2015. Part of the program includes another $60 billion in stock buyback on top of the $10 billion Apple announced last year, making it the single largest share repurchase authorization in history. While the plan is sure to make investors happy, Apple's CEO said the company will spend its money carefully in other areas of the business and continue to invest in research and development.
"We appreciate the input that so many of our shareholders have provided us on how best to deploy our cash," Cook said. "We will review our cash allocation strategy each year, and we will continue to invest confidently in the business to bring great new products to market, strategically deploy capital in our supply chain, our retail stores and our infrastructure, and make acquisitions to expand our capabilities. We will be disciplined in what we do, but we will not underinvest."