Apple Reports Fourth Quarter Results
apple.comNo way to hide this:
2013: Revenue $37.5B, Profit $7.5B (20%)
2012: Revenue $36.0B, Profit $8.2B (22%)
There are several things at play here. First, the iPad mini didn't exist last year, and it is a lower margin product by design.
Second, is this is really key, is that they started deferring more revenue because they are starting to give software away for free.
They guided for 36.5-37.5% margin in the next quarter and the stock tanked $30 after hours because the street wanted 37-38%. They then explained that they are going to defer an extra 900Mil of revenue on Mac and iOS because of moving the software to free. Without that, the revenue range would have been higher and the margin guide would have been closer to 38.5%. So they beat expectations for revenue, margin, and profit both this quarter and in guidance for next quarter, yet the stock tanked on release.
Once they mentioned this in the conference call, the stock regained all the losses and actually was up after hours for a bit. Now it's back down, but only slightly. I suspect just because more people are looking at the headlines and not reading or listening to the whole call.
Now, overall the margins are still lower this quarter than they were last quarter, but I don't see that as a huge problem. They changed the product mix. They had higher total revenue, large growth in total iPhone sales, and guided to revenue and profit growth for next quarter. They are still in pretty good shape. Oh and they have 150 bil in cash.
I think this is excellent analysis but note that this : "Now, overall the margins are still lower this quarter than they were last quarter, but I don't see that as a huge problem. They changed the product mix." sounds like you're dismissing the margin change.
Overall gross margin is a blend of all your products, that gross margin is where you get the money for everything you do, pay salaries, buy capital equipment, etc. So it really doesn't matter if your margin is lower because you are shipping more inexpensive product (the mix), all that matters is that its lower. That changes the amount of revenue you must have to run the business and increases downside risk if you are close to the edge (as Dan Warmenhoven is famous for saying, you have much more control over margin than you do over revenue).
In the case of the iPad Mini it says that additional growth in the Tablet market is in the lower margin segment. That is accretive if you're holding on to your existing market share at the high end, and dilutive if you're losing high end share to the mid-range or bargain products. Same with phones, lets say the 5C turns out to be "good enough" and sales of the 5S plummet because it's extra cost (and margin) isn't "valuable" enough to the consumer to pay the extra money. Now you have to sell a lot more units to get the same profit, but that requires more "business" (and by that I mean more assemblers, more sales people, more trucks driving around, more logistics, etc.) You lower the price (which increases sales rate, but that also reduces margin, so you have to sell more to make the same amount.
Now I don't think Apple is anywhere near any of that, they are a very strong company with a solid brand. My observation is that the reduction in overall gross margin will come out of the business, whether it fewer product managers for more products, or lower salaries for retail staff, or what, the numbers have to balance.
Let's remember that everyone was anticipating the iPhone 5s for all but 10 days of the third quarter, which naturally slowed iPhone 5 sales. Then Apple almost instantly ran into supply constraints after its release. Because of these two factors, these results aren't that meaningful. 4th quarter results will give a far more meaningful picture of iOS's place in the current market.
Aren't those pretty much the exact same conditions as last year's quarter? iPhone 5 release: September 21, 2012. iPhone 5s/5c: September 20, 2013. And both had supply issues at launch. It seems fair to compare the quarters and draw some tentative conclusions.
However Apple's product release schedule being as rigorous as it is tends to make quarters more comparable. Perhaps a better indication here is the drop from 40% gross margins to 37% gross margins. That comes right out of the business.
Generally lower revenues but same margins is a sign so constraints in the supply chain. Higher revenue but lower profits is a sign of margin erosion. Lower revenue and lower profits and lower margins is perhaps one of the most alarming situation.
It is good to push back on folks who thought he tablet was just a fad? You know the ones who said "There isn't a 'tablet' market so much as their is an 'iPad' market." Well those folks have been shown to be mistaken.
I don't own any Apple stock (well I might in my blind 401k but I wouldn't know if I did :-) I've been tempted to pick some up after it dropped from the 700's into the 400's. But the thing that I keep wondering about is their ability to execute in a contested market by a competent opponent. This coming quarter will be an interesting one for everyone I expect.
IMO, supply constraints mattered....and this quarter is different because Apple threw a lower margin iPhone into the mix: the 5c. These have been consistently available, while the 5s has not. That means that for all but a couple of days during the quarter, all they had to sell was the lower margin 5c, while revenue from the higher margin 5s was waiting in the wings and won't be seen until next quarter.
That is certainly a fair point, we can come back to this discussion in 3 months :-)
Chuck,
If you really think that Apple will drop like that, you should short it.
I wouldn't short a stock for a single down quarter.
This argument would explain slower sales or lower revenues, but I'm not sure this has much validity in explaining the lower net profit or gross profit margins.
Lower gross profit margins are probably better explained by either downward pressure on prices or upward pressures on costs of manufacture. It can also be driven by changes in product mix (e.g., higher sales of the lower margin iPad Mini). It's not unreasonable to attribute this to greater competition from lower margin Android products.
I'm curious what portion of Apple's customers actually anticipate new versions of products and hold off on purchasing until they're released.
I imagine it's common among the Hacker News segment, but what about the average person?
My buddy has held off on a retina macbook pro waiting for the new one.
And I know some others that do similar, not because they need to but to see what the new version offers.
Same here. I waited a few months to see what was going to be announced in regards to MBP, wasn't disappointed (though I wasn't really surprised either).
I imagine the waiting pool is larger than the "act now" pool. Especially since we now have resources like MacRumors buyer's guide.
It could also be that FY2013 was just a dud for Apple product updates. Starting with the iPhone 5, that was released in FY2012 but primarily sold in FY2013, there were considerable supply issues along with some blowback on the new Lighting connector. Moving onto the iPad Mini we have a low resolution tablet with a -1 generation processor at a premium price. All indications are it sold well but I'm not sure it spoke well of Apple's reputation selling quality products. The display was simply not good and a quick glance could inform any non-technical people of that. We also got the iPad 4 which was merely a CPU upgrade with no reduction in weight or thickness.
Then we have the new iMac which also faced some supply problems and delays and offered customers something they probably didn't even care about -- a thinner desktop all-in-one PC. IIRC the Ivy Bridge update to the Mac Mini eliminated a SKU that offered a semi-decent GPU. Then Apple disappeared for a very long time and later in the year introduced Haswell updates to only the MacBook Airs leaving informed MacBook Pro would-be buyers facing old technology with a premium price tag.
Next we have the iPhone 5C which in most ways is a step backwards from the premium quality iPhone 4S (or would be iPhone 5) that occupied that price point. Contract free the device is totally non-competitive on pricing compared to better Android devices. The 5S was quite a good -S model upgrade however consumers are starting to get wise to the tick tock strategy and perhaps are choosing to wait for the iPhone 6 upgrade.
I've been watching Apple for quite a while now and FY2013 was not a great year for product upgrades. I'm actually kind of surprised they only took a 2% hit on profits.
That's surprising to me. I expected their margins to improve given that they always sell the year-old generation and the 5c is cheaper to produce than the 5. I wonder how terrible their margins would've been if they didn't do the 5c at all.
Good. I'd much rather see more sales and lower margins.
They explained that. It's a long-term play.
It actually beats analysts expectations.
Apple deferred nearly a billion dollars in revenue due to the switch to free software. http://techcrunch.com/2013/10/28/apple-says-future-versions-...
For a moment there I thought Apple was switching to FSF-endorsed free software and I was very confused. The cost of OS X is built into the hardware so it's not like future versions will be free as in freedom or free of cost.
Right. Free as in free-with-purchase.
Or free as in free OS X upgrade for anybody who bought a Mac in the last few years...
I know that accounting types like to use 'deferred', but to be clear Apple abandoned profit from software.
They did not defer it to a later date, they recategorised software development as a cost center.
And next quarter will defer almost a billion more than they did last year.
Interesting that iPad sales were flat year over year. I would have thought it would have contracted without new iPads launched.
Also the big increase in iPhone sales year over year jives with what Asymco has posted about Android peaking. The easy growth from feature phones being replaced by low-end Android devices is over.
I have a lot of Apple devices, and I am sure there are others out there like me who are stick using an original iPad 2. Those devices have not really needed an upgrade unless you wanted to move to the mini. My device is almost at its end, I have dropped it a bunch of times and the battery is struggling to last a 10 hour day at work (I dont use it a lot during the day, only really in meetings and on the run).
There is probably a big fleet of iPad 2 users out there who are almost ready to upgrade when their device dies. I think Apple have done right by the consumer by making iOS 7 work on the iPad 2... they could have chased profits and limited iOS 7 to only the newer iPads...
IMO the retina screen is a big reason to upgrade from the 2 (and is the reason I waited for the 3rd gen model). I pretty much use my iPad exclusively for reading text of some format--web pages, text-based services like Facebook and Reddit, books, etc. (with the occasional YouTube or Netflix video thrown in)--and having that extra clarity as compared to the first two versions is crucial for me.
It's now that I don't really feel any compelling reason to upgrade -- even with iOS7 the interface is plenty fast enough, and I don't use it for games so any increases in performance wouldn't really matter to me.
Yeah I forgot that the retina was the big selling point. For me I didn't mind the screen the way it was - the battery life is great since the screen is average.
So for people like you who have moved to the iPad 3 (or whatever its stupid name was) - you have another year or two before needing a replacement...
I use mine for netflix primarily, no need for the retina.
"I would have thought it would have contracted without new iPads launched." Say what? That product line is only 3 or 4 years old and it's already flat? That was very surprising to me and very disappointing. Isn't the iPad now the new iPod? Only that I think took 7 years or more before it went flat. Apple's now a growth company only based on one single product that comes in two flavors and the entire rest of the tech world is gunning to take that away from them.
Damn net profit of 7.5billion is now lower than samsung's 8.13billion.
Keep in mind that Apple doesn't make aircraft carriers or nuclear power plants.
Samsung Electronics is only a subsidiary of Samsung Group which makes all those things. Samsung Electronics profits were $9.6 but that includes TVs and their semiconductor division. The actual mobile division had $6.3 in profits (about 20% growth from same time last year).
Samsung's profits are up mainly because of chips which makes sense when they're manufacturing Apple's chips (and Apple's iPhone sales are up significantly). Samsung's growth in high-end phone sales is slowing down.
http://www.bloomberg.com/news/2013-10-24/samsung-profit-surg...
No the $6.3B is from the mobile division alone. Their chip sales also saw profits of about $1.9B which is double than same time last year, but the phone sales are still their #1 business.
Yes I know, my comment doesn't dispute that. Phones are the biggest piece, but increasingly that's coming from low-end phones, the growth in high-end phones is slipping.
Neither does Samsung Electronics.
Also, a significant share of Apple's revenue (and profit) is in the Q4 holiday season. Far more so on a percentage basis than Samsung. So I'm not really sure what the OP was getting at? A more important comparison I think is margin.
Apple used to kick Samsung's ass every quarter so I'm rather shocked to find the tables turned already.
"Samsung has not 'dethroned' Apple in profits"
"...someone pointed out that Kovach was comparing Apple's after tax net income to Samsung Electronics pre-tax operational income..."
typical mistake...
http://tech.fortune.cnn.com/2013/07/28/apple-samsung-profits...
?
I'm using net income, Samsung has 9.6 operating profit. Why are you showing an article from last quarter?
Operating Profit = Also known as "earnings before interest and tax" (EBIT) or "operating income"
http://www.investopedia.com/terms/o/operating_profit.asp
OOOOPPS!! :)
What does that have to do with net income lol.
Wow do I have to explain it to you?
Samsung reports operating profit = Also known as "earnings BEFORE interest and tax" (EBIT) or "operating income"
Apple reports net income = AFTER TAX net income
No, Samsung reported operating profit not net profit which is before tax.
I wonder what percentage of HN is invested in apple, compared to the rest of investing community. I wonder what sort of biases, deeper understanding of technology, and/or hype trains cause that difference to arise. And above all, I wonder if Apple can finally solve 5S supply problems and deliver a hit Christmas quarter.
CNBC's summary explains the negative reaction to the earnings:
Apple posted better than expected earnings and revenue for its fourth-quarter on Monday, but shares still took a hit in after-hours trading.
The tech giant posted $8.26 a share on $37.5 billion in revenue. The street estimated the company would post $7.96 a share on revenue of $36.93 billion. But investors were disappointed with guidance for gross margins.
During the current quarter, the company expects gross margins of 36.5 percent to 37.5 percent, which missed forecasts of 37.9 percent.
I think a lot of this is expected no? The mobile market is maturing, and they are making less profitable versions of their products. Its interesting to see how investors react to Microsoft and Apple who are both hugely profitable, and then some start ups(ahem, twitter, pinterest, snapchat) with no proven business model get huge valuations. I know that investors are trying to predict the market, but the second a hugely profitable company seems unfashionable(for lack of a better word) any slight variation in performance is panned in the press and the stock gets sold off.
Sounds like the iPhone 5C slight of hand didn't work[1]. It makes sense to me, its last-years-model with cheaper materials. There's no reason it should be more popular than last-years-model usually are, except for the extra marketing which in this case didn't seem to help much.
http://www.valuewalk.com/2013/10/apple-inc-earnings-iphone-5...
As someone who has to buy Apple devices for work, I'm hoping they get some pressure to drop their prices, especially on MBPros. My next one will probably cost a bomb since the new ones don't let you stick in third party ram - though the SSD is replacable (with considerable effort)
Is replacing the SSD more effort now? It took maybe 10 minutes on my 2009 MBP to replace the stock HDD with an SSD & yank the optical drive for a second hdd.
Yes: take a look at the iFixit teardown, and the following Q&A on their site: http://www.ifixit.com/Answers/View/147466/Can+I+upgrade+flas...
I thought the history of Apples profit margins were interesting. What happened in Q3 2010 when it was last this low?
Next quarter should be very interesting. New iMacs are out, new iPads, and of course the new Mac Pro. So out of all quarters which tend to be Apple's weakest?
Perhaps getting more predictable in releases softens earnings in certain quarters?
Markets are hammering AAPL. Down $15 (about 3%) after-hours.
Is -3% really a "hammering"? I did 5 seconds of research and found Apple has closed with a >=2% loss 3x since July 25th.
Sept 16
Sept 10
Sept 20
EDIT "5 second" was to emphasize I could be wrong, not to be a dick.
I think it is human nature to over-editorialize a stocks movement immediately after an earnings report. We see Apple drops 3 percent and we think "Wall street is hammering them". Meanwhile another one of HN's favorite stocks, Tesla, has a larger percentage drop today with seemingly no major news and no one bats an eye. Such is the randomness of the stock market.
+/-3% is a common benchmark for the market's definition of "big swing". There's nothing really formal about it, and it's a more accurate measure when applied to the market as a whole rather than individual stocks. For a company like AAPL which is famous for not providing a lot of detailed information to investors, it might not be a big swing. For a different company, say P&G, it might be a huge swing.
Actually, there is a formal measurement of a stocks volitiliy called it's beta.
Beta is one of many measures of volatility. Since it's a normalized correlation between the stock's rate of return and that of the market, it only really has meaning in the context of a stock's performance over a long time or in relation to the market as a whole. A stock's performance post-earnings is about as market-independent as you can get, however.
The formal measurement of a stock's volatility is its volatility.
I'd add that it's colloquial. When a stock drops it's "getting hammered". Also, after hours is deceiving. NFLX was up 50pts after hours with their last earnings announcement. It dropped 80pts the next day.
Is -3% really a "hammering"
Doesn't sound like it when looking at the percentage. Apple had a market capitalization of $481,390,000,000 at the market close today. So 3% of that is $14,441,700,000. Seems more significant in whole numbers.
The real thing to consider is that every stock is much more thinly traded in after markets than it is during regular hours. For that reason, the few people trading during that time are typically not representative of the entire investment community.
After Hours trading is volatile and not terribly important. Just last week you saw Netflix soar in AH trading and plummet almost instantly on open.
A 3% price move is nothing noteworthy, especially in AH trading. IMO the only seasoned way to view this is that the judgement of the markets of this ER is still pending.
That's weird. Right now, yahoo is telling me AAPL is at $537, up $7. After hours is bullshit.
Buy on rumour sell on news. Have to contextualize the run up over last 30 days.
Well, that spaceship costs a lot.
Shares trading down 3% in AH.
Shares trading up 1% in AH.
AH trading is volatile and bollocks as a consistent market sentiment.