January 28, 2013 (1:30 pm)
We compared our estimates (Three28 Est.) to the actual results and management’s guidance. Apple’s management only provides guidance on a few figures. You can review the earnings preview we provided before the report here.
|Software & Other||$4,225||$5,516||–||N/M||–|
|Cash Per Share||$143.28||$144.75||–||1.0%||–|
Mac Business: We severely overestimated the potential impact of Apple’s mac business this quarter. Tim Cook explained that Apple sold every Mac it could produce this quarter. They were very constrained on the iMac side, which he hoped to have a better grasp of this quarter. Further, Cook also emphasized the cannibalization effect that the iPad is having on the mac business. While this may seem counter-intuitive, it’s a positive development. We’d rather have Apple cannibalize its own products than a competitor do it. On the upside, the average selling price was 1.4% higher than our expectations. It seems that consumers are choosing the higher-capacity, higher-priced models.
iPod Business: iPod sales were right in line with our expectations. While sales dropped from the year ago quarter, it was a more limited drop than many analysts had expected. While the total number of units dropped year-over-year, the average selling price actually rose. This is a sign that many users are choosing the more expensive iPod Touch than less expensive models. This brings more users into Apple’s iOS ecosystem, as the Touch uses the same basic software as the iPhone and iPad. Users will buy music, movies and other content on this device and feel compelled to stay within Apple’s “walled garden”.
iPhone Business: We were disappointed by Apple’s lackluster iPhone sales. We overestimated unit sales by 11.5% and expected the domestic market to take up a smaller portion of total sales. Since the company introduced and shipped the new iPhone to over 100 countries before the end of the year, we even saw significant upside to our 54 million unit estimate. We were proved wrong. While still speculation at this point, the anecdotal stories and rumors of Asian consumers preferring larger screens may prove accurate. We hope and expect Apple will not ignore this market. That said, the average selling price remains at the three-year average, assuring us that Apple has not discounted the price of its phones.
iPad Business: While we were initially disappointed by the number of iPads shipped this quarter, we need to give the company time to ramp up production of the iPad mini. We expect the smaller sibling of the iPad will quickly overtake the original. The fact that ASP dropped by the degree that it did leads us to believe that it may have overtaken the iPad this quarter, but we wouldn’t know since Apple doesn’t break out those figures. iPad mini’s were severely supply constrained this quarter. We know demand is enormous, especially overseas. This will be an extremely important product for Apple going forward. While the per unit profit is, of course, lower than that of its larger sibling, the iPad mini likely has very similar profit margins (as a percent of revenue). The sheer volume of its sales should limit any future impact on the dollar amount of profits.
Software and Other: Apple changed the way it reports software and accessories. Therefore, our estimates are not an apples-to-apples comparison with the actual figure. We suspect that Apple did this to prove to investors and analysts that recurring software sales is an important part of the story. It will prove the value of Apple’s ecosystem.
Revenues: We overestimated revenues by almost 10%, driven primarily by the disappointing iPhone sales and the production constraints of the iMac line. Had Apple been able to produce enough iMac’s or iPad mini’s this quarter, the company very likely would have reported a beat on the top to join its beat on the bottom line. It’s important to remember that this quarter was 13 weeks vs. last year’s 14 week December quarter. When viewed in the light, Apple earned $4.2 billion per week this year compared to $3.3 billion per week last year. That proves that there’s really no lack of growth in this story. 27% year-over-year growth is nothing to sneeze at.
EPS: Apple’s EPS came in $1.60 below our estimate. This was driven entirely by our high revenue expectations. We estimated gross margins to come in at 39.0% vs. Apple’s guidance of 36.0%. The actual gross margins came in at 38.6% – very close to our estimate.
Cash Per Share: Apple added almost $16 billion in cash to its balance sheet (even after it paid its last dividend). It reported $144.75 per share in cash, which was less than 1% from our estimate.