Wednesday, October 26, 2011

Apple Quarterly Earnings Call (Review) "We will continue with relentless focus" AAPL

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Apple reported calendar Q3 2011 financial results on October 18, 2011
Reviewed at the Apple Financial Performance page

Apple Earnings Stumble on Drop in iPhone Sales!: Revenues, net income, EPS down

Apple Financial Summary Calendar Q3 2011 Apple financial performance declined QoQ, even though improving significantly YoY, for one reason: a drop in iPhone sales. The most significant decrease was in the Americas region. CEO Tim Cook and CFO Peter Oppenheimer attributed this to a significant decline in sales in the latter part of the quarter as consumers waited in anticipation of the new iPhone 4S launched in early October (the next quarter). Holiday Q4 is the annual cyclical peak for Apple and with the introduction of the iPhone 4S in the same quarter, a huge rebound in iPhone sales is projected. CFO Oppenheimer is projecting next quarter revenues at $37 billion and earning per share of $9.30. Total revenues, net income, earnings per share, cash flow per share, gross margin, operating margin, and net margin all decreased in calendar Q3 2011. Financial position continues as legendary; total assets are now $116.37 billion, including $81.57 billion in cash and investments.

Apple Income Statement Calendar Q3 2011 Apple reported total revenues of $28.27 billion, net income of $6.62 billion, and earnings per share of $7.05. All 3 were down QoQ and up YoY. From the prior calendar Q2 2011, total revenues were down -1.05%, net income down -9.37%, and earnings per share down -9.50%. From the prior calendar year Q3 2010, these were up +38.97%, +53.74%, and +51.94%, respectively. Margins also decreased QoQ. For calendar Q3 2011, gross, operating, and net margins were 40.25%, 30.81%, and 23.43%, respectively. Cash flow from operations per share decreased QoQ to $11.10 from $11.84. Apple generated a very strong $10.43 billion in cash for the quarter, but slightly down QoQ from $11.11 billion. The operating expense ratio increased slightly QoQ to 9.44% from 8.90%, but is incredibly low for both the technology sector and corporations in general.

Apple Balance Sheet Calendar Q3 2011 Total assets increased a strong +9.00% QoQ to a record $116.37 billion from the prior calendar Q2 2011 of $106.76 billion and prior year Q3 2010 of a "mere" $75.18 billion. The capital to assets ratio (total stockholders' equity divided by total assets) is a rock solid 65.84%. The current ratio (current assets divided by total assets) dipped QoQ to 38.66%, which continues liquid. More current investment assets have been allocated to long-term marketable securities, a noncurrent asset. Apple is very liquid with strong capital. Apple has over $25.95 billion in cash, cash equivalents, and marketable securities. Add long-term marketable securities of $55.62 billion and Apple's cash and investment reserves are a mind-boggling $81.57 billion! Return on assets decreased QoQ to 23.75%, which is historically below average but still very strong.

Press Release
“We are thrilled with the very strong finish of an outstanding fiscal 2011, growing annual revenue to $108 billion and growing earnings to $26 billion,” said Tim Cook, Apple’s CEO. “Customer response to iPhone 4S has been fantastic, we have strong momentum going into the holiday season, and we remain really enthusiastic about our product pipeline.”

“We are extremely pleased with our record September quarter revenue and earnings and with cash generation of $5.4 billion during the quarter,” said Peter Oppenheimer, Apple’s CFO. “Looking ahead to the first fiscal quarter of 2012, which will span 14 weeks rather than 13, we expect revenue of about $37 billion and we expect diluted earnings per share of about $9.30.”

Apple Q3 2011 Earnings Conference Call

Apple Management Present at the earnings conference call were Tim Cook, Chief Executive Officer and Peter Oppenheimer, Senior Vice President and Chief Financial Officer.

"The World Has Lost A Visionary" CEO Tim Cook began the conference call, "This is our first earnings call since the passing of Steve Jobs. The world has lost a visionary, a creative genius and an amazing human being. Steve was a great leader and mentor and inspired everyone at Apple to do extraordinary things. His spirit will forever be the foundation of Apple, and we are dedicated to continuing the amazing work that he loved so much. Only Apple brings together software, hardware and services into such a powerful and integrated experience for our customers. As we move forward, we will continue doing that with relentless focus. I'd like to take this opportunity to express our gratitude for all of the condolences and expressions of support that we have received following Steve's passing."

CFO Peter Oppenheimer Peter Oppenheimer, Senior Vice President and Chief Financial Officer presented a product report and reviewed the quarterly financial results, which are also reviewed on the Apple Financial Performance page. "We are very pleased to report record September quarter revenues and earnings. We set a new all-time quarterly record for Mac and iPad sales, and we established a new September quarter record for iPhone sales. We're very proud of these results and with the momentum of our business."

Products Report Peter Oppenheimer reviewed the Apple product line:
Mac Products and Services Mac sales of 4.89 million units, which was 26% YoY growth, more than IDC’s 4% estimate for the (PC) market overall. 21st consecutive quarter Apple has outperformed the overall PC market. Sales were strong across all geographic regions, including 61% YoY growth Asia-Pacific. Portables were 74% of total Mac mix. We ended with 3-4 weeks of Mac channel inventory. Mac OS X Lion launched July 20 and 6 million downloads during quarter.
iPod Sold 6.6 million iPods, compared to 9.1 million in the year ago quarter. Lower YoY sales but ahead of expectations. iPod share of the USA market for mp3 players remains at over 70% and continues to be top selling mp3 player in most countries we track. Continue with 4-6 weeks of iPod inventory.
iTunes iTunes store generated record results with almost $1.5 billion quarterly revenues. Customers have downloaded over 16 billion songs and 650 million TV shows to-date.
iPhone Sold 17.1 million iPhones in the quarter, compared to 14.1 million in the prior year quarter, a 21% increase YoY. iPhone handsets and accessories sales were $11 billion during the quarter, which is 24% increase YoY. iPhone on 230 carriers in 105 countries. Adoption of iPhone within the enterprise continues to increase. Ended quarter with 4-6 weeks of iPhones inventory.
iPad “We continued to be thrilled with its incredible momentum”. Sold 11.1 million iPads, 166% YoY growth, and with distribution in 90 countries. iPad and iPad accessories sales were $6.9 billion or 146% YoY increase. Ending channel inventory of 4-6 weeks.
Cumulative iOS Devices Combining iPhone, iPad, iPod Touch, cumulative iOS device sales were just over 250 million for the quarter. Began delivering iOS 5 last week.
iCloud "We're excited to launch iCloud last week". Our set of free new services that work seamlessly with applications on the customer's iPhone, iPad, iPod touch, Mac or PC to automatically and wirelessly store content in the cloud, as well as push it to all the users' devices.
App Store Over 500,000 apps and well over 18 billion downloads to date. 123 countries.
Apple Retail Stores "Generated record results". Apple stores retail revenue $3.6 billion, a 1% increase QoQ. About 50% of store Mac sales were to customers who had never owned a Mac before. Opened 30 new stores, 21 outside USA, and ended quarter with 357 stores. Average of 336 stores open during quarter with average quarterly revenue of $10.7 million. Retail segment margin $679 million. Store traffic continues to be very strong. Record 77.5 million store visitors in quarter.

Gross Margin Oppenheimer concluded with gross margin was 40.3%,  which was a 230 basis points higher than guidance (38.0%). This difference was almost entirely due to lower component costs and other product costs. Operating expenses were $2.67 billion and included $253 million in stock based compensation expense. OI&E was $81 million and the tax rate for the quarter was 24.7%.

Outlook for Calendar Q4 2011 Oppenheimer stated the outlook for the next quarter: total revenues $37 billion, earnings per share $9.30, and gross profit margin 40%.

Conclusion Oppenheimer finished, "We're extremely pleased with the strong conclusion to our record-breaking fiscal 2011. Over the course of the year, we generated revenue of over $108 billion, an increase of $43 billion or 66% over our fiscal 2010 results. We blew past historical records by selling over 72 million iPhones, 32 million iPads and almost 17 million Macs in fiscal 2011. We expanded our reach by opening 40 new retail stores, adding scores of new carrier and leaseholder relationships and broadened our online presence through Apple stores and App Stores around the world. And last but not the least, we generated almost $26 billion in net income during the year, an increase of 85% year-over-year, which was even faster than our revenue growth. We're thrilled to begin selling iPhone 4S and to bring iOS 5 and iCloud to our customers this month, and we remain very enthusiastic about our new product pipeline."

Question and Answer Session

Peter Oppenheimer (Senior Vice President and Chief Financial Officer) and Tim Cook (Chief Operating Officer) were present for the Q and A session.

iPhone 4S
(CEO Cook) We've gotten off to a great start with the 4S. We've sold over 4 million in just 3 days after launch, and so we're thrilled with the start that we have. We're confident that we will have a large supply, but I don't want to predict when supply and demand might balance because the demand is obviously extremely high right now. But I'm confident that we will set an all-time record for iPhone this quarter.
(CEO Cook) The reduction happened largely in the back half of the quarter as the speculation hit extreme highs. However, we're thrilled to be shipping the new iPhone 4S and iOS 5 and iCloud, and we're very confident that we will set an all-time record in the December quarter for iPhone sales. We in our wildest dreams, we couldn't have gotten off to a start as great as we have on the 4S.
Gross Margin Outlook 40%
(CFO Oppenheimer) We expect the gross margin to be relatively flat on a sequential basis. And we expect this because as you pointed out, we do think a favorable component cost environment will continue, and we certainly expect a very strong mix of iPhones, both of which are positive for gross margins. However, we expect both of these to be basically fully offset by the impact of higher cost structures and reduced price points for the recently introduced iPhones and iPads as well as the stronger U.S. dollar. It's really strengthened in the last couple of weeks from where we were across the summer.
China Market
(CEO Cook) The China progress has been amazing, if you look at our Greater China revenue, it represented just 2% of Apple in our fiscal year '09. And in the fiscal year we just ended, it accounted for 12%, and if you just look at the quarter that we just ended, it accounted for 16%. So it's our fastest growing major region by far and delivered $4.5 billion of our revenue for the current quarter, and that's up almost 4x or about 270% year-over-year. That brought the total revenue for the fiscal year to over $13 billion. And to further put that in context, a year ago in fiscal year '10, we were just right above $3 billion. So it is growing at a feverish pace.
(CEO Cook) We had an outstanding quarter last quarter with setting a record with doing over 11 million, and at the same time we were setting a Mac record, which is I think very phenomenal in and of itself. But we've seen several competitors come to market to try to compete with the iPad over time. They've had - some had different form factors, different price points. And I think it's reasonable to say that none of these have gained any traction thus far. And in fact, as all of those competitors were coming to market, our share actually went up such that in the June quarter IDC - according to IDC, we were responsible for 3 out of every 4 tablets sold.
Next Quarter Sales
(CFO Oppenheimer) We would expect to establish new company records for both the iPhone and the iPad in the December quarter. These are fantastic products, and the momentum here is tremendous. And for Macs, we would expect to outgrow the market on a year-over-year basis and report to you our 23rd consecutive quarter of outgrowing the market.
(CEO Cook) The number of people using it already is amazing, and the questions and so forth and the personality that it has is also incredible. And so we see this as a profound innovation. And I think over time, many, many people will use it in a substantial way. And what percentage of their input will be by that, I don't know. And what percentage of their searches, I don't know. But our guts have been since the beginning of this is that it is substantial and it's an incredible innovation, and that's the feedback that we're getting from customers.
Points of Sale
(CEO Cook) We are in 90 countries on iPad. We have about 40,000 points of sale around the world. To put that in some context, we have about 50,000 on iPod and about 120,000 on iPhone.
iPad Cannibalization
(CEO Cook) I do believe that we're seeing cannibalization. I think that it's showing up in 2 ways. I think that some people are electing to buy an iPad rather than a Mac. However, I believe a materially larger number of people are electing to buy an iPad instead of a Windows-based PC. And so I think we are overwhelmingly coming out very, very well in that cannibalization question. And I would point out that despite that, the Mac had its best quarter by far ever last quarter. And so even with having the best quarter on iPad with some cannibalizations in Mac, the Mac has its best quarter ever, which is almost unbelievable.

About Apple
Apple's Mission Statement and described in press releases, "Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and has recently introduced iPad 2 which is defining the future of mobile media and computing devices."

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