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April 24, 2013

Holy Smokes! Apple Reports Record Fiscal Q2 2013 Revenue; Fiscal Q4 2013 Likely to be Next Blowout Quarter

Apple CEO Tim Cook delivered generally good news today for Apple's current quarter during the company's earnings call. We'll get to the core numbers in a minute, but the essential message from Cook is that Apple remains fully committed to delivering innovation and maintaining a strong focus on long term growth and product development. Cook also made reference a number of times to looking forward to new product categories, new hardware and new services that Apple will introduce this year. Cook later added that he meant "potential new products" but we are sure of what we really heard.

What is very interesting about these "very" upbeat comments are Apple's projections and guidance for revenue, margins and earnings per share for its fiscal Q3 2013. Apple is trying to move away from its past approach to guidance where it would offer low ball estimates. Analysts began to get wise to the lowball game and began to move their estimates outside of the Apple guidance ranges, meaning that Apple was in fact losing control of its own next quarter guidance and financial storyline.

Based on this emerging conundrum, in Q1 2013 Apple changed its ways and began to offer more realistic guidance "ranges" rather than lowball absolutes. What this means is that Apple's guidance for fiscal Q3 2013 is likely very realistic, giving Apple back control of its guidance storyline. With this in mind, let's take a look at Apple's Q3 2013 guidance:

  • Revenue is anticipated to fall between $33.5 billion and $35.5 billion.
  • Gross margin will come in between 36 and 37 percent.
  • Operating expenses will be between $3.85 billion and $3.95 billion.
  • Apple anticipates a tax rate of 26 percent tax rate.

Keep these numbers and Cook's very optimistic comments about new products in hand; we'll return to them in a bit.

Apple's Fiscal Q2 2013 Numbers

Apple's fiscal Q2 2013 quarter ended March 30, 2013. For the quarter Apple exceeded consensus analyst revenue estimates, reporting record fiscal Q2 revenue of $43.6 billion, $1.3 billion better than analyst estimates of $42.3 billion. Granted, for the sorts of numbers we're talking about here $1.3 billion is a slim margin of victory, but we all know that a walk is as good as a hit, and it is a hit. No, it isn't a homerun, but it is a hit. We are going to give Apple that.

Quarterly net profit came in at $9.5 billion, or $10.09 per share. This is exactly in line with consensus analyst estimates and it is a number that many analysts were convinced Apple would not attain it. Let's call it a small victory for Apple here as well. Considering the doom and gloom we've heard about a major market downturn for the company; well, it was anything but. Gross margin for Q2 2013 was 37.5 percent.

Year-over-year in comparison with Q2 2012, the numbers noted above for this year compared to revenue of $39.2 billion and net profit of $11.6 billion, or $12.30 per share last year. That does represent an 18 percent drop in net profit, as well as Apple's first year over year profit decline in over a decade. Lower revenue and greater net profit of course means that Q2 2012 margins were much better -- and so they were, coming in at 47.4 percent for Q2 2012.

International sales accounted for 66 percent of the quarter’s revenue. Cook noted during the earnings call that revenue from China reached $8.8 billion -- record revenue to date for the country. Cook also made clear that he believes Apple's China futures are still in their infancy.

Apple sold 37.4 million iPhones in the quarter, compared to 35.1 million in Q2 2012. Apple also sold 19.5 million iPads during the quarter, compared to 11.8 million for the same period last year. Not to be forgotten, Apple also managed to sell just under 4 million Macs compared to 4 million last year.

Finally, cash generation remains very strong, with $12.5 billion in cash flow from operations during the quarter. Apple therefore ended the quarter with yet another increase in cash on hand, hitting a total of $145 billion, compared to $137 billion in fiscal Q1 2013. Cook made it exceedingly clear that Apple would be returning a lot of that cash back to shareholders, increasing the quarterly dividend by 15 percent. Altogether Cook noted that the company was adding another $55 billion to the $45 billion it had said it would return, bringing the total up to $100 billion by the end of 2015. Stock buybacks will be increased substantially and dividend payouts will total about $11 billion a year to the end of 2015.

Q3 2013 Looks Slow…Then What?

Cook tossed out a few market numbers from IDC and Gartner. He noted that IDC claims that the world is on target to reach 1.4 billion smartphone units annually and that Gartner anticipates tablet sales to grow from 125 million in 2013 to 375 million by 2015. For Cook, these numbers represent huge possibilities that he strongly believes Apple will tap for substantial future growth.

With no newly announced products in the pipeline for Q3 2013 to take advantage of, anticipating flat growth for the quarter is certainly not an unusual position for Apple to stake out for itself. It does appear to us that there were enough hints to anticipate that Apple will put some new devices into play either towards the end of Q3 (which ends on or about June 30, 2013), or perhaps more likely at the very beginning of its fiscal Q4 2013 (which ends on or about September 2013). That would suggest that Apple's upcoming worldwide developers' conference is going to be hugely important to Apple.

We've noted numerous times in other coverage that Apple must deliver a truly new level of innovation during this exact time frame. We're encouraged by what we've heard today; we believe Apple will deliver on that innovation at the 2013 WWDC. That leaves Q4 2013 as the next real Apple quarter to watch. In fact we anticipate that we are likely to also see additional announcements towards the end of the quarter, just in time to kick off the 2013 holiday buying season.

No, we're not sure that there is a $1,000 per share Apple lurking in the second half of 2013, but we're pretty damn sure it won't be a $100 Apple. Anyone who picked up some Apple shares at $392 a few days ago (and yes, we know Henry Blodgett did, though how many he picked up isn't known to us -- maybe it’s a single share!) should be happy today. Following the earnings call the stock has bumped up to just over $406. We sincerely doubt Apple is going to miss any numbers when it next reports, and any analysts who work hard to put Apple n a bad light between now and then should simply be ignored.

Finally, anyone who believes that Apple has a serious problem with the high end of the smartphone market becoming saturated or that believes it already is saturated -- well, there are lots of idiots around. Apple itself is not among them. Not by a long shot.

Look for stellar Q4 2013 numbers.




Edited by Rich Steeves


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