All that you need to know about Apple’s Q3, 2010 earnings is that the iPad, a mere 90 days after it started shipping, almost outsold the Mac – and this was a quarter that was the best ever for the Mac (there were 3.27M iPads, and 3.47M Macs sold in the quarter).
Mind you that
going into the quarter, many thought that if the Company sold 1M iPads for the
year they’d be happy.
This fact led to an interesting exchange between Apple COO, Tim Cook, and one of the industry analysts, who was querying him about cannibalization of either the Mac or the iPod by the iPad.
“Cannibalization? The real answer is that it's too early to tell. If you look at the quarter we just finished, we’re thrilled that we recorded the best Mac quarter ever, at the same time we sold 3.3 million iPads. For us it's a jawdropper,” noted Cook.
Cook went on to note that, whereas everyone else seems to focus on the negatives and risks of having a diverse, nominally overlapping portfolio, within Apple, it’s the exact opposite.
They see having ‘Halo Effect’ as a bigger factor from both a technical and market perspective, a point further underscored when Tim rolled out a stat about how the growth of iPod facilitated a re-birth of the Mac, synergies that they see playing out again with iPad.
I have previously blogged in detail on the Halo Effect working in Apple’s favor, so suffice it to say, I am just happy to hear it expressed as a core thought process within Apple.
Strictly the Facts: Apple by the Numbers
Superlatives aside, the parade of numbers is just staggering. The Company posted record revenue of $15.7 billion, which is now its best ever, ahead of the last holiday quarter. This translated to $3.25 billion of profit (a 78% increase), and dropped another $4 billion to the coffers, meaning that they are now sitting on $45.8 billion in cash.
While logic dictates that the law of big numbers should be catching up with Apple, these results compare to revenue of $9.73 billion and net quarterly profit of $1.83 billion in the year-ago quarter, and in fact, Peter Oppenheimer, Apple’s CFO, is every bit as bullish in the quarter ahead.
“Looking ahead to the fourth fiscal quarter of 2010, we expect revenue of about $18 billion and we expect diluted earnings per share of about $3.44,” noted Oppenheimer.
While the Company has been quick to assert that they will not create price/margin gaps to enable low-priced competitors to outflank them, nonetheless, gross margins continued strong at 39.1 percent compared to 40.9 percent in the year-ago quarter.
This beat expectations, and is particularly impressive in light of the impact of the strengthening dollar against international currencies, and especially the Euro, since international sales accounted for 52 percent of the quarter’s revenue.
The Mac Business
As noted, Apple sold 3.47 million Macs during the quarter, representing a new quarterly record, and a 33 percent unit increase over the year-ago quarter (and 100K Macs over last quarter).
Not only is the Company growing its PC unit sales ahead of the rest of the market, with strong double-digit growth in each of the domestic and international regions, but in a number of Asia-Pacific segments they are simply crushing it, showing 73% year-over-year growth in AsiaPac, 144% in China, 184% in Korea and and almost doubling in Hong Kong.
The iPhone
On the iPhone front, the Company sold 8.4 million iPhones, representing 61 percent unit growth over the year-ago quarter – well ahead of the 38% growth rate of the overall global smart phone segment.
Beyond the basic impressiveness of these numbers is the fact that the Company seems pretty clear on how they are managing their carrier relationships on a country-by-country basis, so as to maximize the balance between market penetration and financial yield (the ASP on iPhone is an impressive $595).
Here, Cook gave the example of Spain, where the Company is toggling from an Exclusive Carrier model to Multi-Carrier in the quarter ahead (likely owing to the weakness of the Spanish economy). As expected, no commentary was provided on the Apple-AT&T relationship, and Cook deflected the one question that came his way.
Candidly, I expected indigestion around the fact that while 8.4 million units sold is magnificent (and ahead of The Street consensus of 8.35 million units), whisper numbers actually ran as high as 9.5 million units.
Thus, owing to the lazy logic of many analysts and the consumer investor, who equates Apple with iPhone, at least as a growth story, it would not have been shocking to see an analyst or two spin the story as disappointing and ding the stock, especially in light of the recent Antenna-Gate stories, and perceived increased competition with Google’s Android.
But, Apple was very clear on the call that some of this was a by-product of coming into the quarter with ample iPhone 3GS inventory, then needing to sell it down to nil in advance of the iPhone 4, which did not actually ship until June 24, a process the translated to inventory scarcity and about 250K less units sold during the quarter.
And if there were any doubts about the popularity of iPhone 4, Cook put them to rest, stating that Antenna-Gate or no, Apple is selling every iPhone 4 they can make, and that returns on iPhone 4 are materially less than with 3GS, especially for antenna-related issues.
The fact that the analysts seemed to readily accept this, and have already updated their models to factor the impact of the transition to iPhone 4, tells me that whereas Apple has long been the most mis-analyzed (and thus, under-valued company in tech), within a quarter or two, they will probably be overvalued.
iPods, iPads, iTunes and App Store
Apple sold 9.41 million iPods during the quarter, representing an eight percent unit decline from the year-ago quarter, which is to be expected as they transition from standard MP3 devices, where they still have 70% of the market share, to multi-function iPods, like the iPod touch.
Also, of note is the fact that iTunes did over $1 billion, and is growing 25% year-over-year, in part fueled by the fact that there are now over 100M iOS based devices out there (includes: iPhone, iPod touch and iPad).
Similarly, Tim Cook touted the App Store as generating 5 billion downloads and having 225K apps within its marketplace, of which 11K apps are specific to iPad, a distinction that I previously flagged as a precursor to platform fragmentation.
With respect to the iPad, the Company began selling them during the quarter (in 10 countries), with total sales of 3.27 million units, and a $640 ASP. Nine more countries are coming online on July 23.
But to really frame the incredible ramp of iPad, consider Cook’s comment that it took 20 months for the one millionth iPod to be sold, but only one month to reach that same milestone on iPad.
Cook’s point, which he came back to more than once, is that iPad is moving well beyond an early adopter device and into the mainstream.
Apple Retail Store Performance
In Q3, Apple Retail did $2.58 billion across an average of 287 stores, which is up 73% year-over-year, owing in part to the fact that average revenue per store increased from $5.9M to $9M. Nobody asked the question about same-store numbers relative to year-over-year, but it’s clear that their retail model is thriving.
Moreover, relative to the earlier mentioned Halo Effect, Apple Retail sold 677K Macs vs. 492K a year ago, and about half of these were to customers who had never owned a Mac before.
Corporate Market Penetration
This remains an area where Apple’s strategy feels more opportunistic than strategic, inasmuch as large enterprises have never been the Company’s strong suit, nor is it apparent that the Company has a sales, marketing, support and professional services organization focused here.
Nonetheless, Tim Cook cited 80% of the Fortune 100 being in pilot or deployment on iPhone, 60% of the Fortune 500 and another 400 higher education institutions that have approved for iPhone for faculty and students.
Similarly, in the first three months that iPad has been available, 50% of the Fortune 500 is testing or deploying that device.
iPad and iOS in general lend themselves very naturally to a vertical segmentation strategy should the Company ever get religion about cultivating an indirect ISV and VAR channel.
Netting It Out: This is a company that had two game-changing product launches in the last quarter alone (i.e., iPad and iPhone 4); that is very confident in its product pipeline (an iOS-based Apple TV, anyone?) and is at an all-time high on its “legacy” Mac business.
Plus, this is like 22 out of 23 quarters in a row where they have simply left their own projections in the rear-view mirror, and of course, $46 billion of cash reserves is a crap-load of money for a rainy day fund.
For the first time, though, I felt that the analysts in the call were treating Apple with the respect of a industry 'Gorilla,' a point made even clearer watching Cook and Oppenheimer effortlessly flick off the analysts' questions, just as King Kong did to tiny airplanes standing at the apex of the Empire State Building.
Whether it occurs this quarter or next, when Apple passes Microsoft in revenue, that will be the seminal moment for those of us who have embraced Apple both in the dark days and the happier ones; i.e., times like right now.
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