The Cupertino company has just released its fiscal Q2 2013 earnings — it reported $43.6 billion in revenue (up from $39.2 billion in the year-ago quarter) along with $9.5 billion in quarterly net profit, which works out to earnings of $10.09 per share.
That means that the rumblings were true — Apple posted EPS of $12.30 back in Q2 2012, which makes this the company’s first year-over-year quarterly earnings decline in nearly a decade. Naturally, the bigger question is whether or not this ignominious milestone will mean anything for Apple going forward and there’s no clear answer to that just yet. Financially speaking, it was bound to happen sooner or later, but Apple’s recently cultivated image as a computing juggernaut could take a very prominent hit. Apple has $145 billion in cash in its coffers, so we can all lay off the doomsday scenarios, but CEO Tim Cook admits that the company’s growth has slowed. Cook also noted during Apple’s customary earnings call that the company would kick off an effort to buy back Apple shares to raise the value of its stock.
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These past few days have been surprisingly turbulent ones for Apple (the company’s share price tumbled below the $400 mark just last week to a new 16-month low), so it’s no surprise to see that analysts weren’t quite as bullish on Apple as they usually tend to be. According to Bloomberg Businessweek, the analyst consensus was for Apple to announce earnings of $10.02 per share on $42.4 billion in revenue, which the company managed to beat. On the other hand, Apple’s own (once notoriously conservative) guidance from its last earnings release forecasted revenues between $41 and $43 billion. And Apple’s guidance for next quarter? The company expects to pull in between $33.5 billion and $35.5 billion in revenue and gross margin between 36 percent and 37 percent.
Apple CEO Tim Cook noted in the release.
“We are pleased to report record March quarter revenue thanks to continued strong performance of iPhone and iPad,. Our teams are hard at work on some amazing new hardware, software and services, and we are very excited about the products in our pipeline.”
Despite the fact that Apple didn’t release or unveil any new hardware in Q2 (as some eagerly suggested it would), device sales were still nothing to sneeze at. As always, we’ve got more detailed breakdowns of how Apple did in terms of hardware this quarter courtesy of Jordan and Darrell, but here’s how the company did during Q2 2013 in a nutshell:
- iPhones - 37.4 million iPhones sold during the quarter.
- iPads - 19.5 million iPads sold during the quarter
- Macs - 3.9 million Macs sold during the quarter.
- iPods - Apple did not provide any figures for the number of iPods sold during the quarter.
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Not too shabby considering that iDevice sales are up across the board compared to the year-ago quarter (and in the iPad’s case, dramatically so likely thanks to the iPad mini), but the lack of any new standout products has weighed heavily on some people’s minds over the days and weeks that have led up to today’s release. Apple hasn’t pulled back the curtain on a new product since the iPad mini was unveiled back in October 2012. There’s nothing intrinsically wrong with that — the company likes to stick to its timetables after all — but the release of impressive new smartphones from Samsung and HTC could mean that Apple could be facing even stiffer competition as it works to dominate the mobile market. That could all change very shortly too, as rumblings of a new iPhone to be unveiled sometime this summer (along with a possibly cheaper model to follow) continue to circulate.
While Wall Street may have had concerns about Apple prior to the release, Apple’s stock price is up roughly 4 percent in after-hours trading.
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COMMENTARY:
The Apple App Ecosystem
Apple took time to update investors on the status of its ecosystem during Tuesday's earnings call conference, revealing that it had crossed the 45 billion total app download mark, just over four months after it crossed the 40 billion download mark back in January 2013. Apps are being downloaded at a rate of 800 per second, from a total pool of 850,000 iOS apps in total, with 350,000 apps designed for iPad alone.
That 350,000 is the same as the number of total iOS apps reported by Apple as of January 2011, just a year after the launch of the iPad. At the time, Apple had only 60,000 iPad apps, which means iPad-specific titles have seen a 483 percent increase in the intervening years.
Apple also revealed that it has App Stores in 155 countries, covering 90 percent of the total iOS user population, and that it has so far paid out more than $9 billion to developers. That’s a $1 billion increase from the total it reported it had paid out to developers as of mid-February.
Apple now pays out $1 billion per quarter to devs, Oppenheimer said at the close of the call, and $4.5 billion or half of the grand total has been paid out during the past four quarters alone.
Retail Sales
Apple's retail arm reported a 19% year-over-year surge in sales.
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Revenue By Product Category
iPhone sales represented 53% of total Apple revenues during the quarter, but are down year-over-year compared to Q2 2012 when iPhone sales represented 58% of total revenues. iPad sales represented 20% of total Apple revenues during the quarer, but are up year-over-year compared to Q2 2012 when iPad sales represented 17% of total revenues.
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Cash On Hand
Meanwhile, the amount of Apple’s cash on hand has swelled to $145 billion — to put that in perspective, Facebook’s market cap is only about $62 billion.
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Where Is That $145 Billion Invested?
For the fiscal quarter ending March 31, 2013, Apple reported $39.1 billion in cash and short-term investments and $105.6 billion in long-term investments. So where is Apple investing all this money? Nobody has a clear answer. An article dated October 26, 2012, The Guardian, reported that Apple formed Braeburn Capital in 2006, a State of Nevada-based, privately-owned investment hedge fund, to manage and invest its cash. Braeburn Capital invests most of that $145 billion in cash into a variety of investments. According to The Guardian, Apple maybe one of the largest private holders of U.S. government securities.
Since Braeburn Capital works only for Apple, it is not required to file disclosure reports to the SEC or Investment Advisor Public Disclosure registrar. However, it is known that much of Apple's money is invested overseas, sheltered from U.S. taxes. If Apple repatriated that money back to the U.S. it woul be taxed at a rate of 35%. But it can be invested at home in the form of U.S.-backed government debt like treasuries and bonds.
The decision to locate Braeburn in Nevada rather than Apple's home state of California makes sense because Nevada does not collect corporation tax or capital gains tax. California, by contrast, has a corporate tax rate of 8.84%, a rate of contribution to the public coffers that has not been enough to prevent a school funding crisis in a state that houses some of the world's most valuable companies. Managing its money from Nevada also allows Apple to lower its tax bills in other states. Florida, New Jersey and New Mexico discount taxes when a company's financial management is in another jurisdiction.
Apple declined to comment on Braeburn's activities, but in the year its investment arm was established, an Apple spokesman explained that it would function as a regional treasury office, on a par with existing offices at its Cupertino headquarters, in Singapore and in Cork, Ireland.
The Nevada Annual Report, a register of companies located in the state, lists three Braeburn officers: Apple attorney Gene Levoff, Michael Shapiro and Gary Wipfler, who as Apple's treasurer is the person officially responsible for the management of the technology titan's billions.
What Wall Street Analysts Are Saying
The reactions of analysts who tuned into Apple's (AAPL) earnings call Tuesday, April 23, 2013, were all over the lot. According to CNN Money, there were things they liked, things they didn't and things they have to ponder some more.
I did a quick sampling and a clear majority of the stock analysts lowered Apple's price target considerably from the previous quarter. Many analysts described Apple shares as "Overweight," meaning that there was still room for further declines. Some analysts, in spite of lowering their price target, recommended Apple as a "Buy," while others still believe that Apple "Outperforms" the market meaning that for them Apple still has upside potential. Others mainted "Neutral" or "Hold" positons meaning that Apple share prices are nearing their bottom and the price is likely to rebound, and there is no need to sell at this time.
Here's what a few of them said:
Bernstein's Toni Sacconaghi: Debrief -- Several Puts and Takes; GM Erosion Worrisome, but the Fundamental Debate Remains the Same. Lowers price target to $600 from $725. Maintains Outperform.
"Overall, Apple's FY Q2 results were largely in-line with expectations, with revenues modestly higher and gross margins somewhat weaker. However, guidance was disappointing... On balance, we were pleased with the magnitude of the return, but would have preferred a higher dividend and lower buyback, and a cash return commitment that was expressed as a percentage of free cash flow"
Goldman Sach's Bill Shope: $100 bn capital allocation partly eases sting of big EPS cut. Lowers price target to $500 from $575. Maintains Buy.
"Apple reported better than expected March quarter results, but June quarter guidance was far worse than feared. The financials, however, were partly overshadowed by a remarkably large capital allocation program. Our sense is that the tepid guidance and increasingly depressed earnings trajectory will remain the key focus for investors, and concerns on this front are unlikely to completely subside until it becomes clear that Apple's next product and ecosystem refreshes can begin to form a bottom for earnings power. "
J.P. Morgan's Mark Moscowitz: Results Beat; Soft Outlook Might Weigh Momentarily; Boost to Dividend/Buyback Could Set the Floor. Lowers price target to $545 from $725. Maintains Overweight.
"We are ... removing Apple from the J.P. Morgan Analyst Focus List, as we think the soft Jun-Q outlook could weigh momentarily and our estimate revisions result in our price target declining 25%. Despite the reset, we think that a compelling part of the stock's risk-reward profile is that upside potential can return to the model moving toward C2014. The company signaled on its Mar-Q earnings call that new products/categories stand to be introduced this fall and in F2014, which could render the softer Jun-Q outlook as near-bottom, in our view."
Deutsche Bank's Chris Whitmore: These Apples won't harvest before fall. Lowers price target to $480 from $575. Maintains Buy.
"Apple more than doubled its capital return program from $45B to $100B by 2015 through a combination of: 1) share buyback authorization increased from $10B to 60B, 2) dividends increase and 3) RSU net share settlements of ~$1B per year. These shareholder friendly initiatives will certainly appeal to investors but does not hide the fact that Apple needs to introduce a 5 inch iPhone, a new 5S and a low cost iPhone for Emerging markets. We believe there is substantial appetite for a lower priced iPhone & believe AAPL would be well served to address the market with a 'good / better / best' segmentation strategy. Moreover, until investors get more visibility on new product launches, we expect AAPL to remain range-bound."
RBC Capital's Amit Daryanani: Awaiting Product Innovation... Now Till Fall. Lowers price target to $475 from $550. Maintains Outperform.
"There was plenty for both bulls and bears to hold onto during the March-qtr call. Bulls will point towards - better capital allocation and new product launches, while Bears will focus on declining gross-margins and delays in new launches. We believe the stock is stuck in a trading range ($375-425) till we witness the launches in "fall" time frame."
Morgan Stanley's Katy Huberty: New Products and Easier Comps Drive Growth in Dec. Lowers price target to $540 from $600. Maintains Overweight.
"The key to AAPL working from here is 1) consensus Sept Q estimates moving closer to our $35B Rev / $7 EPS, 2) iOS7 preview with hints of new services, like mobile payments, at June WWDC, 3) return to EPS growth in C4Q13 on the back of new product launches and annualizing iPad Mini introduction."
Piper Jaffray's Gene Munster: Soft Guidance Offset By Capital Allocation And Talk Of New Products. Maintains $688 price target and Overweight rating.
"Our thesis on AAPL remains intact as CEO Tim Cook stated during the company's March earnings call that the company is looking at new product categories and has exciting product launches planned for the fall and throughout 2014. The announced additional $50B in share repurchases (using debt) was at the high end of buy side expectations. Additionally, we expect many analysts on the Street to re-set forward expectations to adjust for lower core iPhone growth. As we approach these product launches, paired with re-set numbers, we continue to believe that AAPL shares can trade higher through the back half of 2013."
Merrill Lynch's Scott Craig: Later product launch(es) offset by capital allocation. Maintains $540 price target and Buy rating.
"1) Disappointing guidance means another negative revision... (2) New product launches later than expected. New iPhone(s) likely in late F4Q13/F1Q14, not F3Q13 as some expected. (3) Increased dividend (15%) and buyback by $50 billion through C2015, a clear positive, although dividend increase modest."
Citi's Glen Yeung: Buyback in Rearview Mirror, Weakening Fundamentals Now in Focus. Lowers price target to $430 from $480. Maintains Neutral rating.
"While bulls will laud Apple's substantial buyback increase, we note that its impact to EPS is more than nullified by Apple's below-consensus guidance. With capital allocation no longer a future catalyst, investor attention will likely revert back to fundamentals. Here we remain concerned about Apple share, noting that loss is clearly evident in F3Q13(Jun) guidance. Meanwhile, with iPhone mix already negatively impacting GM, our concerns about Apple's longer-term gross margin sustainability are supported. When then factoring in a relatively weak result from China (another area of concern for us), and the likelihood that iPhone5S is delayed, and we think the bear case outweighs the bull case. Although it is fair to say much has been built into the shares, in our view, we found little from Apple's results to warrant buying the shares: we remain in the minority by NOT recommending Apple shares."
Credit Suisse's Kulbinder Garcha: Cash Today, Recovery to Follow. Lowers price target to $525 from $600. Maintains Outperform.
"We see the recent announcements as mixed. On the one hand, the June quarter guidance suggests that investors will need to wait until 2H13 for new products. On the other hand, the company is returning $100bn to shareholders which should prove to be a near term benefit. Fundamentally, with a structural advantage in the compute market, Apple could deliver [long-term] EPS power of $60."
Nomura's Stuart Jeffrey: Creaking Fundamentals Offset Cash Returns. Lowers price target to $420 from $490. Maintains Neutral.
"Falling ASPs, gross margins and market share might be a product-cycle issue, but it seems unlikely to us. Rising demand for iPhone 4 and lower storage versions all point to saturation of high end – at least for 4" screens – and point to further ASP and gross margin weakness. An evolutionary iPhone 5S will likely struggle to change this dynamic, while a mid-range iPhone could further pressure gross margins and ASPs... We had anticipated a late July to August launch of the iPhone 5S and mid- range iPhone, a date which component supply timings seem to support. Yet CEO Cook spoke of a Fall product release cycle, suggesting that the September quarter may see little benefit."
Barclay's Ben Reitzes: The Cash and the $7 Guide We Expected – Now What? Maintains $465 price target and Overweight rating.
"In line with our lowered estimates from last Friday, Apple issued guidance for $7 in EPS for the June quarter. While this guidance may provide a "jolt" to some investors, it does serve the purpose of reigning in outlandish predictions while maintaining margins above the key 36% level and helps make the stock investable into new product cycles that likely start in September (with builds hitting in June). The share repurchase also could help smooth the ongoing transition from growth to value holders. While the reception of the iPhone 5 and execution of late has tested our patience, the cash announcement, performance and guidance sets Apple up better into product cycles predicated on platform/service innovations."
Conclusion
I am of the belief that the only thing keeping Apple from truly going south is its huge army of loyal Apple evangelists who are willing to buy anything Apple produces, and are willing to pay premium prices on the belief that Apple products are superior to those of competitors.
However, in previous blog posts, I pointed out that Apple is facing serious competition from numerous fronts. Samsung is giving Apple its money's worth when it comes to smartphones, and is the clear global leader in all cellular phones, and a very, very close second behind Apple in smartphones. According to many mobile experts, the Samsung Galaxy S4 is clearly superior to the Apple iPhone 5, and I expect Samsung to jump ahead of Apple in smartphones when the S4 begins shipping later this month or early May.
In tablets, Amazon's Kindle Fire HD (7 and 9.7-in tablets), Google (Nexus 7 and 10-inch tablets) and the Microsoft Surface are giving the Apple iPad and iPad Mini strong competition. Many mobile device experts have called the Nexus the "best tablet" on the market, and you have to give Jeff Bezos credit for single-handedly expanding the market for 7-inch tablets with the Kindle Fire. Steve Jobs once called 7-inch tablets "dead on arrival," but Apple has quickly entered that market with the Mini, and this could end up canibalizing sales of the larger of the larger iPad 4.
Apple still has an advantage in mobile apps with well over 600,000 iOS apps listed in its iTunes store compared to only 450,000 Android apps listed in the Google Play store. Amazon now has about 50,000 Android apps in its online app store. The latter two wipeout any competitive ed Apple held in mobile apps, and in the coming years, that gap will narrow even more.
Apple has clearly become too dependant on consumer electroics mobile devices -- 73% of its revenues come via the iPhone (53%) and iPad (20%). If it is not careful, it could lose its market leadership in smartphones and tablets, as mobile devices become more commoditized due to a lack of innovation. Clearly, Apple must innovate much better, and think beyond the smartphone and tablet. When Steve Jobs was CEO, there was never any question that Apple could innovate. This is no longer the case under Tim Cook, the new Apple CEO.
Product life cycles are now measured in months for most new versions of a moble device, and the pressure to reduce costs, yet pack each device version with new product features, is becoming much more difficult, putting huge pressure to maintain profit margins.
The stock market has spoken, sending a clear message to Apple management -- innovate or die.
Courtesy of an article dated April 23, 2013 appearing in TechCrunch, an article dated April 23, 2013 appearing in TechCrunch, an article dated April 24, 2013 appearing in CNN Money and an article dated October 26, 2012 appearing in The Guardian
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