The Apple Financials Report: Not Meeting Inflated Expectations

January 24th, 2013

All right, folks, Apple doesn’t walk on water. Sure, nobody believes they do, except for certain members of the tech media and the financial community. Unfortunately, that meme has played out in the media in ways that appear to have hurt Apple’s stock price big time. Even though the price had risen considerably Wednesday ahead of Apple’s quarterly financial announcement, I suppose you could almost feel the skittishness on the part of investors.

In the end, Apple’s numbers were a mixed bag. Analysts expected fiscal first quarter sales — the December quarter — at $54.98 billion, with earnings per share of $13.48. In the end, Apple tallied revenue of $54.51 billion, with net profits of $13.1 billion, or $13.81 per diluted share. This compares to $46.3 billion and a net profit of $13.1 billion, or $13.87 per diluted share last year, in which the quarter ran 14 weeks, compared to 13 weeks this year.

One key concern is that this is the first time in a decade where Apple failed to achieve growth in profits compared to the previous year, which is but one factor that has the street freaked, even though Apple exceeded estimates in most respects. Perhaps more important, Apple ran into trouble building enough iPhones and iPad minis to meet demand. That’s a good problem to have.

In all, 47.8 million iPhones were sold, below recently inflated expectations in the 50 million range, and 22.9 million iPads, about what was expected. Gross margins were 38.6%, more than analyst expectations, but less than the 44.7% of the year-ago quarter. It’s easy to see where hopes for higher iPhone sales were once again responsible for Wall Street’s tepid response, considering the supplies if of the iPhone 5 were constrained only until the last few weeks. That clearly slowed sales somewhat, but that wasn’t the only factor. Surprisingly, the iPhone 4, today’s entry-level model, was constrained through the entire quarter. Apple evidently underestimated demand.

Mac sales weren’t too good, at 4.1 million units, very likely because of general PC sales trends, and the failure to deliver enough iMacs for the quarter. Both the 21.5-inch and 27-inch versions are still back ordered for several weeks. Last year, Apple moved some 5.2 million Macs during the same quarter, but again, there was an extra week to sell product.

In retrospect, you wonder whether Apple might have done better to keep the existing iMac in the lineup, and holding off on the new model until this quarter. The October introduction simply gutted sales of the existing model, which hardly helped total Mac sales. During the conference call with analysts, COO Peter Oppenheimer claims that inventory was still “significantly constrained,” while Cook asserted that sales would have been “considerably higher” had the inventory been available to ship. Indeed, Cook said that sales of Mac portables were in line with IDC estimates, so it was to some extent about the iMac. But don’t forget iPad cannibalization, something that may have been even higher had there been enough iPads available. Cook says the company “never fears cannibalization,” stating that the iPad is definitely hurting sales of PCs. But to Apple, cannibalization is a “huge opportunity.”

When it comes to the iPad, Cook said they could have sold even more had there been enough iPad minis available. When asked about the product mix, Oppenheimer said they were constrained every week, and couldn’t build more. A significant backlog still exists, he said, but he didn’t actually reveal a product breakdown among the various models.

Predictably the company’s stock still stumbled in after hours training. But, ever optimistic, Apple CEO Tim Cook claimed to be pleased with the results, saying in a press release ahead of the conference call, “We’re thrilled with record revenue of over $54 billion and sales of over 75 million iOS devices in a single quarter. We’re very confident in our product pipeline as we continue to focus on innovation and making the best products in the world.”

Apple’s guidance for the current quarter was typically conservative, between $41 billion and $43 billion, while analysts were expecting $45 billion. Oppenheimer says their new approach is to report guidance as a range rather than a single figure. In any case, Apple is still a cash cow with $137.2 billion on hand. The rest of the key numbers can be had at Apple’s site.

During the conference call, when asked about having more iPhone screen sizes to match the competition, Cook said “nobody comes close to matching the quality of the Retina display,” claiming that the larger size is the right one to allow for maximum ease of use. When it comes to rumors of severe component cuts, or build plans, Cook said that the supply chain is very complex, and you can’t use just one measure or single data point as an indication of what might be going on with sales and demand.

With Maps, Cook said a number of improvements have already been made, particularly when it comes to satellite imagery and local information. Map usage, he said, was “significantly higher” since iOS 6 was released, and promised that they would continue to make improvements until the service meets their standards.

When he comes to the Apple TV hobby, sales were over two million in the December quarter, up 60% over the previous year. What was a small niche, according to Cook, is now a “much larger number.” Other than saying the TV segment remains an item of “intense interest” and that there’s a “lot we can contribute in the space,” Cook declined to say any more. Whether that’s enough depends, I suppose, on what you expect to come this year or the next.

As for the rest of this year, Cook says that their pipeline is “chock full” of “incredible stuff,” adding that “The most important thing to Apple is to make the best products in the world that enrich customers’ lives,” that they are not interested in just building gadgets that make lots of money for the company.

The other question of the ages, whether there will be a lower cost iPhone this year, was typically deflected.

In any case, prepare to read loads of articles on how Apple must fix itself, including firing Tim Cook and introducing a revolutionary new product every single year. Or maybe everyone is in need of a reality check.

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