Apple's Earnings Report: Not a Hit, Not a Strikeout - More of a Sacrifice Fly

If you aren’t into baseball, that headline may be a bit of a head scratcher, but essentially it means that a fly ball was caught for an out but resulted in a run scoring in spite of the out. And that pretty much describes what actually happened with Apple’s earnings for its fiscal Q3 2012, which ended on June 30, 2012. The quarter was a sacrifice fly – some revenue was lost but the reasons for the lost revenue will, without a doubt, result in what some of us anticipate will be a solid fourth quarter and a spectacular fiscal 2013 Q1 – which encompasses the holiday buying season.

Here is what the basic numbers look like, per Apple:

• The company posted quarterly revenue of $35.0 Billion and quarterly net profit of $8.8 Billion, or $9.32 per diluted share. These results compare to revenue of $28.6 Billion and net profit of $7.3 Billion, or $7.79 per diluted share, in the year-ago quarter. Gross margin was 42.8 percent compared to 41.7 percent in the year-ago quarter. International sales accounted for 62 percent of the quarter’s revenue.
• Apple sold 26.0 million iPhones in the quarter, representing 28 percent unit growth over the year-ago quarter (sales of 28 million or more were forecast by many analysts). Apple sold 17.0 million iPads during the quarter, an 84 percent unit increase over the year-ago quarter. The Company sold 4.0 million Macs during the quarter, a two percent unit increase over the year-ago quarter. Apple sold 6.8 million iPods, a 10-percent unit decline from the year-ago quarter.
• Apple’s Board of Directors has declared a cash dividend of $2.65 per share of the Company’s common stock. The dividend is payable on August 16, 2012, to stockholders of record as of the close of business on August 13, 2012.

Those are pretty good numbers. The fly in the ointment from a financial markets perspective is that as good as those numbers are the company underperformed and did not meet analyst expectations. That by itself might not have been enough to cause a negative disturbance in the stock, but then Apple provided what most financial analysts believe are significantly disappointing guidance numbers for its fiscal Q4 2012: $7.65 a share for earnings on revenue of $34 billion.

Apple is famously conservative whenever it issues guidance numbers, but the feeling amongst financial analysts is that the numbers are infamously low even given Apple’s traditionally conservative stance on guidance. It is the combination of yesterday’s announcement of missed earnings and tomorrow’s guidance that has caused the 5 percent or so drop in Apple’s share price. We’re always amused when certain companies miss consensus analyst expectations – it is never the case that analysts missed the mark on setting expectations from their end and incorrectly failed to advise their clients about it.

Why the Sacrifice Fly?

What are some important causes for the earnings miss? Let’s look outside of the Unites States first. There is the generally negative economic climate in Europe. That was to be expected, but there is also China to consider. China's Q2 2012 (April 2012 – June 2012) economic growth slowed to only 7.6 percent, the slowest rate since the global financial crisis.

Apple appears to have not fully factored in China’s current or anticipated economic state relative to its Q3 earnings, though this may now be responsible for the extreme lowball guidance numbers for next quarter’s revenue. Apple’s revenue from China for fiscal Q3 2012 was up 48 percent to $5.7 Billion from a year earlier, but that actually marks a 28 percent decline from the $7.9 billion the company posted in fiscal Q2 2012.

From a revenue perspective, China is Apple's second largest market, and is trumped only by the U.S. In the future China may very well emerge as the single largest revenue producing country for Apple – it’s hard to avoid the fact that there are a billion mobile users in China – a great many of which have the financial resources to acquire a genuine Apple iPhone (it’s important to understand that in China a real iPhone is what is desired). Finally, the already hot-selling new iPad only debuted in China a week ago, so there is no revenue from it for Apple’s fiscal Q3 2012 – it is a key reason we believe Q4 will be a strong quarter for Apple, as significant new iPad revenue will emerge here.

Within the United States there are two basic and one probable market forces at work:

• The company only recently announced its newest crop of MacBooks, including the exceedingly cool new retina quality MacBook Pro – this no doubt resulted in many would be buyers putting their plans on hold.
• The iPhone 4S is already being upstaged by huge anticipation for the next iPhone.
• The Samsung Galaxy S III, which has sold over 10 million units since it was released in early June, probably stole some iPhone sales

None of these issues can be understated, but the next generation iPhone anticipation in particular is huge. For details on how great this anticipation is refer to The Samsung Galaxy S III as Apple Killer? Sort of Close, Definitely No Cigar. The huge number of consumers that are either going to hold off or are already holding off buying an iPhone until the next generation is released is clearly impacting current iPhone sales in a significant way, and will continue to do so in Apple’s Q4.

The timing of the MacBook announcements at Apple’s World Wide Developer Conference (WWDC) and the anticipated release of the new iPhone - most likely coming in October 2012 - are such that they necessarily were going to impact sales of both lines of hardware. Coupled with European exchange rate issues and China’s economic downturn (as well as China’s own anticipation for the next generation iPhone) conspired to hold earnings down this quarter. (We will note here as an aside that the new Mountain Lion OS (aka OS X v 10.8) that was announced at WWDC was in fact just released today, as we write – although this is immaterial to Apple’s earnings.)

The sacrifice fly comes into play relative to the WWDC announcements (which included details on iOS 6.0) and the anticipated next iPhone. Rumors on the new iPhone include a larger screen, much sleeker body, faster processor, more memory, better camera, 4G/LTE support – and whatever else Apple is likely to surprise us with – are more than enough to warrant holding off purchase if possible – and clearly many consumers can wait.

The bottom line is that Apple had to sacrifice a little strategically and tactically in order to ensure that holiday sales for fiscal Q1 2013 would be another astonishing financial period for the company – we certainly believe that will prove the case. Anyone lucky enough to be in a position to buy Apple at $572.63 (the price as we write, or as it may continue to drop for a while) will likely be rewarded when those fiscal Q1 2013 quarterly results are announced. Bet on it – we can’t say it’s a sure thing, but the word “likely” resonates quite nicely.

Want to learn more about today’s powerful mobile ecosystem? Then be sure to attend the Mobility Tech Conference & Expo, collocated with ITEXPO West 2012 taking place Oct. 2-5 2012, in Austin, TX. Co-sponsored by TMC Partner Crossfire Media the Mobility Tech Conference & Expo provides unmatched networking opportunities and a robust conference program representing the mobile ecosystem. The conference not only brings together the best and brightest in the wireless industry, it actually spans the communications and technology industry. For more information on registering for the Mobility Tech Conference & Expo click here.

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