Feature Article

January 24, 2013

Apple's Fiscal Q1 2013 Quarter: Shattering Sales Records and Earnings, Disappointing Investors

Consensus analyst expectations: $54.98 billion in revenue; $13.48 per share in profit; gross margins of at least 36 percent (Apple's guidance) but hoping for better; 50 million iPhones sold.

Reality: Apple reported revenue of $54.51 billion, EPS of $13.81 per share, gross margins of 38.6 percent; 47.8 million iPhones sold (includes iPhone 5, 4S and 4 sales).

These are the numbers that really matter. Apple missed on total revenue expectations, though not by much, beat EPS expectations, which tempered revenue disappointment, and beat gross margin expectations - which the financial community cares about a great deal. If Apple had missed here, it would have been a much less rosy earnings call.

At the market's close at 4 p.m. ET, the stock was trading at $514.01, up $9.24 or 1.83 percent. In anticipation of Apple's earnings results announcement trading in Apple's stock was halted ahead of the call and press release, though shares - just ahead of the 5 p.m. ET call - were at $481.55, down $32.46 or 6.31 percent never the less. At the call's close and following resumption of after-hours trading, our last check-in on share price was $458.79, down $55.21 or 10.74 percent.

Apple's sales of 48.7 million iPhones within a 13 week quarter more than upended Q4 2011 sales of 37 million iPhones. Net earnings for the quarter were $13.1 billion, ahead of Q4 2011, but again keep in mind that Q4 2012 was a 13 week quarter. These results compare to revenue of $46.3 billion and net profit of $13.1 billion, or $13.87 per diluted share, in the 14-week year-ago quarter. In line with the rest of the PC industry - though almost an afterthought, Apple Mac sales were down 16 percent, with 4.1 million Macs sold compared to 5.2 million sold in the year-ago quarter. Average weekly revenue was $4.2 billion in the quarter compared to $3.3 billion in the year-ago quarter.

CEO Tim Cook underscored in his opening remarks that Apple set records in most categories, and referred to the numbers as "impressive," and that the company is steadfastly focused on innovation. Cook noted as well that over 500 million iOS devices have now been sold, with over 75 million of them sold in Q4 2012. For Q4 2012, Apple sold one iOS device every ten seconds in Q4 2012.

Peter Oppenheimer, Apple’s CFO, noted that, “We’re pleased to have generated over $23 billion in cash flow from operations during the quarter. We established new all-time quarterly records for iPhone and iPad sales, significantly broadened our ecosystem, and generated Apple’s highest quarterly revenue ever.”

During the call’s Q&A section, Cook commented on supply chain cuts and strongly suggested that relying on supply chain data points is not an accurate means of assessing sales. Cook did note that Apple was "constrained" in terms of getting as many iPhone 5 and iPhone 4S devices into the pipeline as possible in Q4 2012. Would it have been possible to sell more iPhones? The question isn't answerable, but the financial analysts were certainly expecting less "constraint."

Cook also pointed out that "revenue for revenue's sake and owning market share" is not what Apple is interested in, but rather Apple's goal is to deliver the largest market share of the best mobile device user experiences. Cook also noted that he sees the older Windows PC market as a huge iPad opportunity. He believes that as users look to upgrade from older Windows machines the iPad is well positioned to take over some share of that market.

The company now has $137.1 billion in cash and cash equivalents in hand, up from $121 billion in the previous quarter. That is simply an astounding - and in many ways a daunting - number of dollars. A key question for Apple is to figure out how to best leverage and put all of that cash to best use to maximize value. The Apple board did decide to declare a $2.65 quarterly dividend, and Apple anticipates a $35 billion outlay in share buyback over the next three years.

Finally, Apple provided guidance for fiscal Q2 2013, and followed its usual modest guidance parameters. The company noted that revenue will range between $41 billion and $43 billion - consensus analyst revenue estimates for the next quarter on the other hand are $45.38 billion. Apple also anticipates gross margin between 37.5 percent and 38.5 percent, so we can likely expect to see something over 40 percent. Operating expenses are anticipated to be between $3.8 billion and $3.9 billion.

Conclusions

Even for those of us very bullish on Apple, the reality that is sitting out in plain sight is that the company is now in real need of raising the innovation bar substantially. Delivering a better version of the existing iPhone and iPad family is not enough to drive Apple shares back to where they were a few months ago, toying with the $700 range.

It is also clear that Apple must take it’s "deliver the absolute best possible mobile user experience" to the other segments of the market. Apple doesn't need to violate its "we're not interested in revenue for revenue's sake" philosophy in order to move downstream and grab its share of revenue from the less expensive end of the smartphone market.

I've already explored what Apple needs to do in depth. It is absolutely critical for Apple to innovate, and it must deliver in the other growing segments of the smartphone market.

I believe the company will execute on both of these strategic fronts. Apple's share price today is an opportunity to get back into AAPL before its next generation of innovations hit. Tim Cook alluded to Apple's pipeline a number of times during today's call - I heard "innovation" and not "incremental improvements" in his comments. As has been noted previously, I view Apple's July World Wide Developers' Conference as the stage for showing us that innovation.

I look forward to that new moment in time.




Edited by Jamie Epstein


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