Apple Inc. (
reported earnings of $13.81 per share that beat the Zacks
Consensus Estimate by approximately 37 cents in the first quarter
of 2013. However, shares plunged 9.8% ($50.52) in after hours
trading on the heels of lower-than-expected iPhone shipments in
Total revenue was up 17.7% year over year and 51.6%
sequentially to $54.51 billion and beat the company's forecast of
$52.00 billion. However, revenues fell shy of the Zacks Consensus
Estimate of $54.80 billion for the third consecutive quarter.
Apple made some changes in its reporting structure to provide
greater transparency. iPhone, iPad, iPod and Macintosh sales are
exclusive of related service and accessory revenue. The company
also established a new operating segment, Greater China that
includes Mainland China, Hong Kong and Taiwan.
Although iPhone unit sales surged 29.0% year over year and 78%
from the previous quarter to 47.79 million, it was significantly
lower than expectations. Revenues shot up 28.0% from the year-ago
quarter and 84.2% from the previous quarter to $30.66 billion in
Apple experienced strong iPhone sales in most of its markets.
The company launched iPhone 5 in China, South Korea and 50
additional countries in the first quarter. In Greater
China, iPhone sales more than doubled on a year-over-year
iPhone growth continues to be driven by strong adoption from a
number of U.S. government agencies as well as companies around
the world. This healthy adoption rate is particularly beneficial
for Apple as the iPhone continues to face significant competition
Android based smartphones from Korean handset maker Samsung.
iPad growth was strong as unit sales jumped 48.0% year over
year and 63% sequentially to 22.86 million. iPad revenues were up
21.7% year over year and 49.6% quarter over quarter to $10.67
billion in the quarter.
During the quarter, Apple launched iPad mini and iPad 4, which
received overwhelming response. Global companies such as Barclays
Plc, Nomura Securities and Bank of Beijing continued to deploy
iPad, which further drove growth in the quarter.
Apple shipped 4.06 million Macintosh in the reported quarter,
down 22.0% from the year-ago quarter and 18.0% on a sequential
basis. Revenues plunged 16.4% year over year and 16.6% quarter
over quarter to $5.52 billion.
iPod units and sales on a year-over-year basis continued to
decline in the quarter. Apple sold 12.68 million iPods (down
18.0% year over year) and earned $2.14 billion (down 15.2% year
over year) in the quarter. On a sequential basis, iPod unit
shipment and revenues jumped 161.3% and 131.0%, respectively.
Revenues from iTunes/ Software/ Services improved 22.1% year
over year and 5.5% sequentially to $3.69 billion. Accessories
surged 24.6% from the year-ago quarter and 45.7% from the
previous quarter to $1.83 billion.
Retail revenues in the quarter increased 5.3% year over year
and 52.3% sequentially to $6.44 billion. During the quarter,
Apple opened 11 new retail stores, including 4 in Greater China.
At quarter end, Apple operated 401 stores worldwide, of which 150
are located outside the U.S.
Region wise, Greater China reported strongest growth, with
revenues surging 67.4% year over year and 25.9% sequentially in
the reported quarter. The launch of iPhone 5 was the primary
reason behind this strong growth. Rest of Asia-Pacific and Japan
grew 10.4% and 25.2% year over year, respectively. Americas grew
14.8% year over year while Europe increased 10.7% from the
Gross profit increased a modest 1.7% year over year and 46.2%
sequentially to $21.06 billion in the first quarter. However,
gross margin contracted 610 basis points (bps) year over year to
38.6%, but remained slightly above management's forecast of
38.5%. On a sequential basis, gross margin declined 140 bps in
In the first quarter of 2013, Apple started allocating certain
manufacturing cost and variances including cost related to
product tuning and manufacturing process equipment to operating
segments. Earlier, these were included in corporate expenses.
Operating expenses spiked 14.5% year over year to $3.85
billion lower than management's expectation of $4.05 billion.
Operating expenses, as a percentage of revenues, declined 20 bps
year over year and 250 bps from the previous quarter to 7.1%.
The improvement was due to lower selling, general &
administrative expense (down 40 bps year over year and 190 bps
sequentially) in the first quarter.
Operating profit decreased 1.0% year over year but increased
57.3% sequentially to $17.21 million. Operating margin decreased
580 bps from the year-ago quarter to 31.6%, reflecting lower
gross margin base. On a sequential basis, operating margin
improved 120 bps to 31.6% owing to significantly lower operating
Net income remained flat on a year-over-year basis but jumped
59.0% sequentially to $13.08 billion. Earnings per share (EPS)
also remained flat year over year but surged 59.3% sequentially
to $13.81 in the reported quarter.
Balance Sheet and Cash Flow
Apple's balance sheet remains strong with cash and investments
of $137.1 billion at the end of the first quarter compared with
$121.3 billion in the previous quarter. Cash flow from operating
activities was $23.4 billion in the reported quarter.
Second Quarter Guidance
For second quarter 2013, Apple forecasts revenues to be in the
range of $41.0 billion to $43.0 billion (approximately 5.0% to
10.0% year-over-year growth). Gross margin is expected to be in
the range of 37.5% to 38.5%, while operating expenses are
projected to be within $3.8 to $3.9 billion range. Other income/
(expense) are forecasted to be $350.0 million while the tax rate
is likely to be 26%.
Apple's after hour sell-off primarily reflects excessively
high investor expectation as well as declining confidence in its
ability to sustain supernormal growth rate. Nonetheless, we
believe that Apple's three consecutive revenue misses reflect
fundamental challenges it currently faces in the market.
Of late, Apple has been criticized for lack of innovation in
its product pipeline. Although Apple continues to update its
devices frequently and has launched new products on a regular
basis, these have not been successful enough to boost investor
confidence. Moreover, the problems with voice application Siri
and failed initiative with Apple Maps also did not go well with
investors as well as customers.
Additionally, Apple continues to face significant competition
from Samsung not only in the U.S. but also in Greater China. We
believe that Samsung's diversified portfolio that caters to
almost every income segment will continue to hurt Apple's market
share, particularly in Greater China where pricing is often an
Moreover, Finnish handset maker
is refocusing on the smartphone segment through its Lumia range
of mobiles. Nokia still has a significant customer base in the
Asia-Pacific markets. Another smartphone maker,
Research In Motion's (
upcoming BlackBerry 10 also poses significant threat in the near
Nevertheless, 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 dividend
payment and share buyback are expected to drive the stock going
Currently, Apple has a Zacks Rank #3 (Hold).
APPLE INC (AAPL): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis
NOKIA CP-ADR A (NOK): Free Stock Analysis
RESEARCH IN MOT (RIMM): Free Stock Analysis
To read this article on Zacks.com click here.