On Tuesday, Apple reported underwhelming results for the
three-month period ended June 30, 2012. For the quarter, Apple
reported revenue of $35.023 billion and earnings of $9.32 per
share, representing 22.58% revenue growth and EPS growth of 19.57%.
The fiscal quarter's outcome, against expectations of much stronger
growth, represents Apple's melancholy moment and a slow-growth
period in a six-quarter era of exceptional growth that began with
the first quarter of the current fiscal year.
Guidance and The Economy
For the current quarter, management offered conservative
guidance of $34 billion in revenue and $7.65 in earnings per share.
In the June quarter, all of Apple's major product lines, including
the iPhone and the iPad, had unit sales results that were impacted
by a challenging global economy, particularly in Europe. The
iPhone's uninspiring 28% unit sales growth was also influenced by
consumer expectations of a pending refresh of the product line.
Apple's quarterly results represent a static snapshot of a
fast-moving company. As much as the June quarter results were a
disappointment, the outcome reveals both challenges and
opportunities in the fiscal quarters ahead.
In the first six months of the current fiscal year, revenue
growth zoomed forward at a 66% pace and earnings per share rose
104%. Apple's average gross margin during the six-month period was
45.9%. In the June quarter, gross margin dropped to 42.8% due to
the impact of currency fluctuations, the lower price on the iPad 2
and a change in model mix on iPhone sales. Apple's gross margin
moving forward may remain closer to the June quarter's outcome
rather than return to the very high gross margin reported in the
first two quarters of this fiscal year. Moderation in gross margin
will move the rate of earnings per share growth closer to the rate
of revenue growth in future quarters.
In the first six months of the current fiscal year, the iPhone
represented 55% of Apple's revenue total and the popular iPhone 4S
delivered very attractive gross margin. In the June quarter, the
iPhone represented just over 46% of revenue. The iPhone's smaller
percentage contribution to the quarter's revenue total and the
lower price on the iPad 2 lead to a sequential drop in gross margin
from 47.37% to 42.8%. Although the successor to the iPhone 4S will
generate industry leading gross margins, the change in the
company's overall revenue mix and anticipated higher costs for the
new flagship handset will influence gross margin figures throughout
Apple's next fiscal year.
Operating expenses, inclusive of stock-based compensation,
remained under 10% of revenue in the June quarter. Operating
expense discipline continues to positively impact the percentage of
revenue that flows to the company's net income line. In the June
quarter, about one-third of revenue flowed to the operating income
line and about one-quarter of every revenue dollar landed on the
net income line.
The iPhone Product Cycle
the conference call
with analysts, management repeatedly mentioned the impact of
consumer expectations of an imminent iPhone product line refresh on
unit sales in the quarter. Consumers will, by the millions,
postpone or delay iPhone purchases and iPhone handset upgrades in
favor of waiting on the release of new models.
There are a number of factors that determine or influence the
release dates for new iPhone handsets. These factors include
production capacity, component supplies, planned releases of iOS
updates and contracts with iPhone carriers. None of these factors
are changed by consumer expectations for the release of a new
At this time, all points lead to a fiscal first quarter (fourth
calendar quarter) release of the successor to the iPhone 4S. The
iPhone 4S will remain the company's flagship iPhone handset for
about 12 full months. Very high rates of revenue growth will be
realized in the first two quarters of next fiscal year due to the
release of a new flagship iPhone and the expected lower prices on
the iPhone 4 and iPhone 4S models. Between now and the release of a
new iPhone handset, overall revenue growth will be held in
moderation even with a strong September quarter for the Mac and
iPad product lines.
A Look At Apple's Global Numbers
Apple manages its business on a geographic basis. The table
below details Apple's revenue results by region with sequential and
year-over-year performance comparisons. Revenue is in millions of
Due to a number of factors including the fact that the new iPad was
not available for sale on China's mainland during the June quarter,
revenue growth in the Asia-Pacific region decelerated to 24.56%
from the 83.45% growth rate in the first six months of the current
fiscal year. Asia-Pacific has recently been Apple's fastest growing
revenue region and the dramatic slowdown in the rate of revenue
growth in the region had the biggest single impact on Apple's June
quarter revenue performance. The Asia-Pacific region will return to
a much faster rate of growth in the September quarter due primarily
to the release of the new iPad on China's mainland.
The release of the new iPhone handset and an eventual agreement
with China Mobile (
) to become an authorized iPhone carrier will deliver in the first
two quarters of next fiscal year rates of revenue growth in the
Asia-Pacific region that are similar to the rates of revenue growth
realized in the region during the first half of the current fiscal
It's no secret Europe is experiencing economic challenges that
took years to develop and will take years to resolve. For at least
the next four fiscal quarters, Europe's rate of revenue growth will
be below Apple's average rate of revenue growth for the company as
a whole. In the June quarter Europe represented about 24% of
Apple's recognized revenue total. Slower growth in Europe will
hamper the company's overall rates of growth. Revenue growth in
Europe came in at 16%.
The continuing popularity of the iPhone product line in the United
States and strong education channel sales of the iPad line of
products delivered 26% revenue growth in Apple's largest revenue
region. Although iPhone unit sales in the Americas were down
sequentially, the iPhone displayed competitive strength as the
iPhone 4S approaches the end of its one-year reign as Apple's
flagship smartphone product.
Apple had its highest education sector performance in the
company's history in the quarter and education channel sales
assisted in boosting Mac unit sales to a slight 2% year-over-year
gain against a backdrop of a global PC industry in economic
decline. The Mac's unit sales performance in the quarter was
impacted by a shortage of Retina displays for the MacBook Pro line.
Management expects the display shortage to be resolved in
The table below details Apple's unit sales performance in the
June quarter by product line with sequential and year-over-year
unit sales comparisons. Units are in thousands:
Despite Apple's "melancholy moment" in the June quarter, I
expect the share price to reach $700 by early November in response
to the release of a new flagship iPhone, a rebound in the rate of
revenue growth in the Asia-Pacific region in the September quarter
due to the release of the iPad on China's mainland and expectations
for a strong iPad performance in the holiday quarter. I also
anticipate a strong MacBook Pro performance during the September
quarter's back-to-school season.
The June quarter's outcome doesn't diminish Apple's growth
prospects over the next four to six quarters. However, the
quarter's performance highlights conditions and circumstances that
will moderate growth in certain quarters each fiscal year. Moderate
rates of growth will be the norm in quarters that do not include
major refreshes of the iPhone or iPad product lines.
I expect strong share price performances from component makers
), Cirrus Logic (
) and Qualcomm (
) through the March quarter of next year and the completion of the
global rollout of the next flagship iPhone model. I also expect the
availability of the iPhone 4 at a lower post-subsidy price to boost
overall iPhone unit sales next fiscal year.
: The author is long Apple, Broadcom, Cirrus Logic and Qualcomm
Decker's Second Quarter Results Were Strong Despite
The Headline Loss