Apple Inc. (
reported earnings of $10.09 per share that missed the Zacks
Consensus Estimate by approximately 9 cents in the second quarter
of 2013. Earnings per share declined 18.0% year over year and
26.9% sequentially in the reported quarter.
Total revenue was up 11.3% year over year but declined 20.0%
sequentially to $43.60 billion, slightly ahead of the company's
guided range of $41.0 billion to $43.0 billion. However, revenues
fell shy of the Zacks Consensus Estimate of $44.30 billion for
the fourth consecutive quarter.
iPhone unit sales climbed 7.0% year over year but decreased 22.0%
from the previous quarter to 37.43 million. Revenues climbed 3.0%
from the year-ago quarter but plunged 25.1% from the previous
quarter to $22.96 billion in the reported quarter.
iPhone growth continues to be driven by strong adoption from a
number of U.S. government agencies as well as companies such as
iPad unit sales jumped 65.0% year over year but plunged 40%
sequentially to 19.48 million. iPad revenues were up 39.6% year
over year but declined 18.1% quarter over quarter to $8.75
billion in the quarter.
Apple experienced strong iPad sales in most of its markets,
particularly in Greater China (up 138.0% year over year) and
Japan where sales more than doubled on a year-over- year basis.
Apple shipped 3.95 million Macintosh in the reported quarter,
down 2.0% from the year-ago quarter and 3.0% on a sequential
basis. Revenues increased 7.0% year over year but declined 1.0%
quarter over quarter to $5.45 billion.
iPod units and sales on a year-over-year basis continued to
decline in the quarter. Apple sold 5.6 million iPods (down 27.0%
year over year) and earned $962.0 million (down 20.0% year over
year) in the quarter. On a sequential basis, iPod shipments and
revenues plunged 56.0% and 55.0%, respectively.
Revenues from iTunes/ Software/ Services improved 30.0% year over
year and 12.0% sequentially to $4.11 billion. Accessories surged
15.0% from the year-ago quarter but decreased 25.0% from the
previous quarter to $1.38 billion.
Retail revenues in the quarter increased 19.1% year over year but
declined 18.6% sequentially to $5.24 billion. At quarter end,
Apple operated 402 stores worldwide, of which 151 are located
outside the U.S.
Greater China revenues increased 7.5% year over year and 20.2%
sequentially in the reported quarter. Rest of Asia-Pacific and
Japan grew 25.7% and 18.5% year over year, respectively. On a
sequential basis, Rest of Asia-Pacific and Japan declined 20.8%
and 29.4%, respectively.
Americas grew 6.6% year over year while Europe increased 11.3%
from the year-ago quarter. However, sequentially Americas plunged
30.9% and Europe fell 21.4% in the reported quarter.
Gross margin contracted to 37.5% from 47.4% in the year-ago
quarter and met the lower end of management's guided range of
37.5% to 38.5%. On a sequential basis, gross margin declined 110
basis points ("bps") in the quarter.
The gross margin contraction primarily resulted from unfavorable
product mix due to higher sales of lower margin iPhone 4 and 4S
and iPad minis in the quarter
Operating expenses, as a percentage of revenues, increased 60 bps
year over year and 160 bps from the previous quarter to 8.7%. The
rise was due to higher research & development expense (up 50
bps year over year and 70 bps sequentially) in the second
Operating margin plunged to 28.8% from 39.3% reported in the
year-ago quarter, reflecting lower gross margin base. On a
sequential basis, operating margin contracted 280 bps to 28.8%.
Net income as a percentage of revenues was 21.9% compared with
29.7% in the year-ago quarter and 24.0% in the previous quarter.
Balance Sheet and Cash Flow
Apple's balance sheet remains strong with cash and investments of
$144.7 billion at the end of the second quarter compared with
$137.1 billion in the previous quarter. Cash flow from operating
activities was $12.5 billion in the reported quarter.
Third Quarter Guidance
For third quarter 2013, Apple forecasts revenues to be in the
range of $33.5 billion to $35.5 billion. Gross margin is expected
to be in the range of 36.0% to 37.0%, while operating expenses
are projected to be within $3.85 to $3.95 billion range. Other
income/(expense) is forecasted to be $300.0 million while the tax
rate is likely to be 26%.
Apple expects to open approximately 30 new stores and remodel at
least 20 stores by the end of fiscal 2013. Apple expects to open
11 new stores in Greater China (currently 11 stores) over the
next two years.
Capital Return Program Details
Apple announced significant expansion of its share repurchase
activity and dividend payout by allocating $100.0 billion (up
$55.0 billion from the program announced last year) for the
program. The company expects to buy back shares worth $60.0
billion (up from $10.0 billion of the last year program) by the
end of 2015.
Apple also raised the dividend payout by 15.0% to $3.05 (up from
$2.65) per share. Going forward, Apple expects to tap the U.S
debt market and has already secured debt ratings from S&P and
Apple's not so impressive second quarter results reflect the
fundamental challenges it currently faces in the market. Lack of
innovation in its product pipeline (Apple does not expect to
launch any new product over the next two quarters), declining
margins and significant competition in both domestic and
international markets will remain an overhang on the shares in
the near term.
Nonetheless, we believe that Apple's growth story is based on its
Apps, iCloud and loyal customer base. Apple is also well
positioned to gain from international expansion going forward.
Moreover, the recent shareholder friendly moves such as higher
dividend payment and expanded share buyback are expected to drive
the stock going forward.
Currently, Apple has a Zacks Rank #3 (Hold).
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