Apple Inc. (
surged approximately 4% ($16.39) in afterhours trading on the
heels of a better-than-expected third quarter result. Apple
reported earnings of $7.47 per share that comfortably surpassed
the Zacks Consensus Estimate by approximately 17 cents (2.33%).
However, earnings declined 19.9% year over year and 26.0%
sequentially, primarily due to lower top-line and margin growth.
Revenues increased 1.0% year over year but declined 19.0%
sequentially to $35.32 billion, within the company's guided range
of $33.5 billion to $35.5 billion. Revenues were slightly better
than the Zacks Consensus Estimate of $35.15 billion.
iPhone unit sales climbed 20.0% year over year but decreased
17.0% from the previous quarter to 3.24 million. iPhone revenues
climbed 15.0% from the year-ago quarter but plunged 21.0% from
the previous quarter to $18.15 billion in the quarter.
iPhone growth continues to be driven by strong adoption from a
number of U.S. government agencies as well as companies such as
General Electric (
. Apple experienced strong iPhone sales in most of its markets,
particularly in the U.S. (up 51.0% year over year), UK, Japan (up
66.0% from the year-ago quarter), Brazil, Russia, India, Thailand
iPad unit sales declined 14.0% year over year and 25.0%
sequentially to 14.62 million. iPad revenues were down 27.0% both
on a year-over-year and quarter-over-quarter basis to $6.37
billion in the quarter.
Apple shipped 3.75 million Macintosh in the reported quarter,
down 7.0% from the year-ago quarter and 5.0% on a sequential
basis. Revenues decreased 1.0% year over year and 5.0% quarter
over quarter to $4.89 billion.
In June this year, Apple launched two new versions of MacBook
Air, both of which have been well received. The company also
unveiled the next generation Mac Pro, which is set to release in
late 2013 and previewed OS Maverick, expected to be launched this
iPod unit sales and revenues continued to decline year over year.
Apple sold 4.57 million iPods (down 32.0% year over year) and
earned $0.7 million (down 31.0% year over year) in the quarter.
On a sequential basis, iPod shipments and revenues plunged 19.0%
and 24.0%, respectively.
Revenues from iTunes/ Software/ Services improved 25.0% year over
year but declined 3.0% sequentially to $3.99 billion. Accessories
plunged 4.0% from the year-ago quarter and 15.0% from the
previous quarter to $1.18 billion.
Retail revenues in the quarter remained flat on a year-over-year
basis but declined 22.0% sequentially to $4.07 billion. At
quarter end, Apple operated 408 stores worldwide, of which 156
are located outside the U.S.
Greater China revenues decreased 14.0% year over year and 43.0%
sequentially in the reported quarter. Rest of Asia-Pacific
decreased 18.0% year over year, while Japan increased 27.0% for
the same period. On a sequential basis, Rest of Asia-Pacific and
Japan declined 35.0% and 19.0%, respectively.
Americas grew 12.0% year over year and 3.0% sequentially. Europe
decreased 8.0% from the year-ago quarter and 22.0% quarter over
Gross margin contracted to 36.9% from 42.8% in the year-ago
quarter and met the higher end of management's guided range of
36.0% to 37.0%. On a sequential basis, gross margin declined 60
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 100
bps year over year and 210 bps from the previous quarter to
10.8%. The rise was due to higher research & development
expense (up 80 bps year over year and 70 bps sequentially) in the
Operating margin plunged to 26.0% from 33.0% reported in the
year-ago quarter, reflecting lower gross margin base. On a
sequential basis, operating margin contracted 280 bps.
Net income as a percentage of revenues was 19.5% compared with
25.2% in the year-ago quarter and 21.9% in the previous quarter.
Balance Sheet and Cash Flow
Apple's balance sheet remains strong with cash and investments of
$146.6 billion ($106.0 billion in offshore) at the end of the
third quarter compared with $144.7 billion in the previous
quarter. Cash flow from operating activities was $7.8 billion in
the reported quarter.
Apple issued debt worth $17.0 billion during the quarter to fund
its share repurchase activity and dividend payments. The company
completed its $1.95 billion accelerated share repurchase program
in April and utilized $16.0 billion for share buyback. The
company paid dividend worth $2.8 billion during the quarter.
Fourth Quarter Guidance
For fourth quarter 2013, Apple forecasts revenues to be in the
range of $34.0 billion to $37.0 billion. Gross margin is expected
to be in the range of 36.0% to 37.0%, while operating expenses
are projected to be within $3.9 to $3.95 billion. Other
income/(expense) is forecast to be $200.0 million while the tax
rate is likely to be 26.5%.
Management expects component costs to decline in the fourth
quarter. However, negative foreign exchange due to the
strengthening of the dollar against yen will hurt top-line growth
in the forthcoming quarter.
Apple expects to open approximately 27 new stores and remodel 23
stores by the end of fiscal 2013. Apple expects to open 11 new
stores in Greater China (currently 11 stores) over the next two
Although Apple reported a better-than-expected third quarter
result, it failed to impress us. A higher-than-expected revenue
decline in China, falling margins and the lack of new innovations
make us cautious on the stock in the near term.
Apple reported strong revenue growth in the U.S. in the third
quarter. However, we believe that it will be difficult for the
company to sustain this growth rate due to a maturing smartphone
market and increasing competition from Asian handset makers such
as Samsung and HTC.
Besides the U.S., Apple's iOS continues to face significant
Android operating system in most of the other markets. The
significant decline in revenues in China and Rest of Asia
suggests market share loss to low cost smartphones produced by
Samsung, HTC, LG and Huawei.
Nevertheless, we believe that Apple's strength lies in its
ability to innovate. We believe that the company is working on a
new (as reflected by the recent executive hiring) gadget.
Moreover, the upcoming refreshes of iPhone and iPad will boost
top-line growth. Additionally, the 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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