APPLE (AAPL) STOCK PRICE:
Jan. 20 = $78.20
July 20 = $152.91
Remember all of the platitudes about Apple being doomed since they are a consumer-centric company selling high end products in the worst economic cycle in decades?
Well, it was the mighty consumer that enabled the company to (once again) report its highest non-holiday quarter (in terms of revenue and earnings) in Apple’s history.
More on that in a minute. But first, some numbers.
In terms of GAAP, Apple generated $8.34B in sales in the June quarter, a 12% increase over last year’s June quarter, which is incredible considering the economic shift between last June and now.
No less, this growth did not come at a cost of margins and profitability. Instead, the company generated net income of $1.23B, or $1.35/share, on gross margins of 36.3%, which was 300 basis points better than they guided; so much for sacrificing margin to entice customers to buy.
More impressive is when you add in the full impact of iPhone revenue via the non-GAAP model that Apple now provides transparency on (it backs out the impact of subscription model accounting - i.e., two-year ratable revenue recognition).
Here, the sales mushroom to $9.7B and net income to $1.9B, a bump of $1.4B and $700M, respectively.
Oh, and cash, Apple has LOTS of it. They are now sitting on a “sick” $31.1B pile of it, an increase of $2.3B from the prior quarter.
Yowza! So, how did they do it? Well, that’s a story worth analyzing a bit, as it provides a framework for making sense of the durability of the company's performance over the next handful of quarters.
The Mac Business
Incredibly, the company has outgrown the market now for a staggering 18 of the last 19 quarters, and in the June quarter, they were up 4% versus 3-5% contraction for the industry (a 7-9 point outpacing of the market).
They did this by selling 2.6 million Macs, setting a new June quarter record. Clearly, this was aided by accelerated sales after the launch of new MacBooks in the June quarter, but interestingly, whereas institutional business, education and pro segments were down, the consumer segment was up.
Credit Apple’s execution here in taking down the average sales price of their products to remain compelling to cash strapped consumers – without sacrificing margins.
By contrast, the competition continues its assault on high volume, low margin, undifferentiated offerings, which predictably, has played into Apple’s hands.
The upside scenario in the Mac segment is that as K-12, higher ed and pro segments rebound, the company could see significant upside to this part of their business, further aided by federal stimulus inflows into the education segments, which in this quarter, had no impact (good or bad) for the company.
The counter is that now that the company has refreshed both its desktop and notebook lines, some of the call to action is muted in the coming quarter.
iPod,
iPod touch and iPhone
First off, this was the first time that I heard the company refer to the iPod, iPod touch and iPhone product lines as “Pocket" products.
My gut is that this is a precursor to the segmentation (and hardware/software matrix) that they will announce when they come out with the larger form-factor tablet device that is (expected) in the October time-frame (see my post on the iTablet here).
The bottom line is that the descent of the iPod is in full force (10.2M units sold, down 4%) versus the ascent of both the iPod touch (numbers not presented, but up 130%) and the iPhone, but this is more a product of the maturation of the market than Apple losing any market share (they have 70%+ of the MP3 player market).
By contrast, the iPhone sold 5.2M handsets in the quarter, nominally aided by the presence of a $99 3G after the June 19 launch of the 3GS (which sold 1M units in the first three days following its release).
I have written too much on the phenomenal success of the iPhone platform so the only things of note here are that the company:
- Has a dearth of 3GS supply, which suggests that they have achieved the right balance between low-end 3G buyers and high-end 3GS buyers. And unlike the Apple of years past, one gets the sense that the company has a good handle on its supply chain/demand planning.
- Is seeing growing interest from the enterprise in terms of iPhone 3.0 OS and iPhone 3GS due in part to hardware encryption and improved security. They are doing particularly good with small businesses and large orgs that allow people to purchase phones for personal use. In fact, 20% of the Fortune 100 have purchased 10,000 units each, with some orgs having purchased more than 25,000 units. This data, coupled with a highest overall satisfaction rating among business customers (according to JD Power), and being approved for purchase by over 300 higher ed institutions, leaves them confident that they are still at the tip of the iceberg of this market.
Apple
Retail Stores
I would, however, flag Apple retail as the “potential fly in the ointment” bucket, inasmuch as while the company still shows that over 50% of the Mac buyers in Apple stores are first time Mac buyers, and they saw an uptick of store visitors to 38.6M from 31.7M last year (up 22%), same store sales (versus the prior year) were down $5.9M (versus $6.8M), a drop of 13.2%.
This is the one clear asymmetry in their numbers, and in retail land (my first career was in retail real estate asset management), when same store sales drop, it is often an early warning sign that new stores are cannibalizing old ones, and the macro business is approaching a ceiling.
Plus, the shrinkage is a deviation from all of the aforementioned growth numbers in the macro business.
Finally, and purely anecdotal, is the fact that Apple’s former head of retail now works for Microsoft spearheading their (likely disastrous) foray into retail.
Know this. Retail real estate guys rarely jump off of gravy trains. They are either pushed or see the opportunity for real growth as behind them.
In any event, this is one to watch.
Other notes
of interest:
1. There was no cameo appearance by Steve
Jobs in the call, and no
one asked where he was, which is both a credit to Apple's performance and perception
management (i.e., perception is that the company is in good hands in terms of operational
performance).
2. Over 8 billion songs have now been downloaded from iTunes store. By contrast, 1.5 billion apps have been downloaded from App
Store in about a year. Not a one-to-one comparison, since many of the app
downloads are free, but gives some relativistic view into the potency of Apple’s media
and platform strategy.
3. Snow Leopard is coming
sometime in the next quarter, and as noted in past posts, it is being priced as a $29
upgrade from Leopard, which I believe is tied somehow to unannounced
functionality in the tablet and/or new ways that Apple will better bridge the
distinctions between MacOS and iPhoneOS computing models; the implication being
that we (Apple) want/hope/need everyone to upgrade to take advantage of something
unannounced, and are pricing the upgrade accordingly.
4. Tim Cook sidestepped
questions about an Apple tablet/netbook device. One of the questions asked by analysts was whether Apple had plans or saw a
market for netbooks. Cook's answer was a tell; namely, that the company saw no
viable $399-499 type of offering that would meet its goals, reminding the
audience that Apple isn’t about maximizing units (whither Nokia, Dell, etc.)
but rather, on delivering ease of use, value and innovation, suggesting that the netbook
buyer was replacing a full featured notebook with something underpowered,
cramped, small display, etc. When
asked by a different analyst if Apple saw a market for such devices at ANY price, Cook punted. Translation: a $700-900 device solving a different
problem than a shrunken down notebook, and presumably offering more than a bigger
screen version of an iPod touch is coming soon. I can hardly wait.
5. App Store differentiation. The question came up whether Apple could keep ahead of the competition, which is now building its own app store concepts and platform plays, and Cook basically noted Apple App Store's 65K apps versus 1-5K for Android, RIM, Palm and Nokia, respectively. All true, and the company has knocked the ball out of the park, and back again, which I blogged about here, but there has been serious developer backlash about a race to the bottom and Apple’s capricious, non-transparent approach to its developer constituency, so I would flag the health/happiness of the developer ecosystem as a category to watch over the coming quarter. The key challenge for the competition is to come up with the "desktop publishing differentiator" that changes the equation from a simple law of numbers to a metrics of success discussion (i.e., we are solving a different problem, and supporting the ecosystem accordingly). Yeah, I know. That as easy as "just add water," but the game is no longer about trying to meet Apple punch for punch. It's about changing the rules (again).
6. iPhone in China. The word I have heard is that
a deal is finally done, and we will see a stripped down iPhone in China later
this year. Cook went so far as to
say that it is Apple’s goal to have the iPhone in China within a year. I will leave the analysis on units and dollars to others.
Netting it out: Apple continues to be the sexiest company in tech by balancing a brilliant, gusty vision with a boring focus on the basics: strategic planning, execution, innovation, value, ease of use, diversity and leverage. And it has its (traditionally) two best quarters of the year upcoming. Wishing you owned this puppy at $78.20 when the sky looked like it was falling?
UPDATE 1: Chris Albrecht of NewTeeVee asks What the Heck is Going on with Apple TV, noting that Apple didn't evening mention the "hobby" in the earnings call, and analysts didn't ask. I know that I forgot, even though there is no way that I believe that Apple is doing little/nothing with the product.
UPDATE 2: China Unicom in 3-Year iPhone Sales Deal, Reuters reports. China Unicom Ltd. (CHU) has reached an agreement with Apple Inc. (AAPL) to be the sole supplier of the iPhone in China for three years, the Shanghai Securities News reported Tuesday, citing unnamed sources. The mainland's second-largest mobile operator by users after China Mobile Ltd. (CHL) will guarantee total iPhone sales of at least CNY5 billion by buying 1 million to 2 million phones from Apple annually, the report said. China Unicom could begin selling the iPhone in China around late September, the paper said.
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