On October 28, 2013, Apple (
) announced quarterly results for the period ended September 28,
2013. For the quarter, Apple announced revenue of $37.472 billion
and earnings per share of $8.26 on 909.131 million fully diluted
shares in the count. Net income was precisely 20% of reported
revenue in the period.
What surprised the market was Apple's very conservative guidance
for the December quarter. Although the quarter will most likely
represent the highest revenue, net income and earning per share
quarter in the company's history, management has guided to revenue
of between $55 billion and $58 billion and gross between 36.5% and
37.5%. The top end of revenue guidance suggests a 6.4%
year-over-year revenue gain and the gross margin guidance range
suggests a deterioration in the company's year-over-year gross
margin performance. In the year-ago quarter, Apple reported gross
margin of 38.63%.
In the challenging fiscal year ended in late September, Apple
reported revenue growth of 9.2% to nearly $171 billion. iPhone unit
sales in the fiscal year rose 20.16% to 150.257 million units and
iPad unit sales rose 21.82% to 71.033 million units. At this time,
there's little reason to expect the unit sales growth performance
from the company's two most popular product lines to fall below the
FY2013 rates of growth. But with all things Apple, there's much
more to the story.
iPhone and iPad Unit Sales
The graph below illustrates the combined unit sales of the
iPhone and iPad lines over the most recent sixteen fiscal quarters,
including iPhone unit sales in the quarters immediately preceding
the original iPad's release in the spring of 2010.
Click to enlarge images
(click to enlarge)
In each quarter of the sixteen quarters there has been
year-over-year unit sales growth of no less than the recent
September quarter's 6.47% rate of growth. In the December quarter
one year ago, combined iPhone and iPad unit sales rose 34.63% to
70.649 million units.
The graph below illustrates combined iPhone and iPad unit sales
by fiscal year.
(click to enlarge)
In the fiscal year ended in September, combined iPhone and iPad
unit sales reached 221.29 million units on a 20.90% rate of unit
sales growth. Still, Apple has guided to no more than 6.4% revenue
growth in the current December quarter.
Product Line ASPs
The graph below illustrates average selling prices for each of
Apple's major product lines since the first quarter of FY2011.
(click to enlarge)
The recent fall in Macintosh ASPs is due primarily to the
16-month period between MacBook Pro refreshes. The line was updated
in June 2012. This year, the update occurred in October. The recent
decline in iPhone ASPs can be attributed to a change in the sales
mix as Apple has become more aggressive on pricing in emerging
markets such as India. The often mentioned decline in iPad ASPs
since FQ4 2012 was caused by the emergence of the iPad mini.
Unit Sales Growth Rates
The graph below illustrates the year-over-year unit sales growth
rates of Apple's major product lines over this same 12-quarter
period. The extraordinarily high unit sales growth rates Apple
realized with the iPhone and iPad lines in the first half of FY2012
created very challenging prior-year comparisons by which to measure
growth in the fiscal year ended in September.
(click to enlarge)
As of September 28, 2013, Apple's balance sheet reflects
deferred revenue liabilities of $10.06 billion. This is inclusive
of the deferred revenue on sales of Macs and iOS devices. This
revenue is recognized over the two-year anticipated economic life
of each iOS device sold and over the 4-year anticipated economic
life of each Macintosh sold. The revenue is deferred due to the
implied right of the owners of Macs and iOS-based devices to
receive free software updates and services from Apple.
During the September quarter conference call with analysts,
Peter Oppenheimer, Apple's CFO, indicated the company is increasing
the deferred revenue on each iOS device sold to as much as $25 and
to $40 on each Macintosh sold. According to management, this will
result in a sequential increase in deferred revenue of about $900
million in the December quarter. The deferrals are a
dollar-for-dollar reduction to the recognized revenue on each
device sold and a dollar-for-dollar reduction in the recognized
revenue per device for the quarterly gross margin computation. The
reduction in recognized revenue on each iOS device and Mac sold is
partially offset by the straight line recognition of revenue
deferred in prior quarters. Still, while Apple picks up the cash on
the amounts deferred, revenue is reduced and a corresponding
liability established until the deferred revenue is recognized
according to the schedule previously mentioned.
In reviewing the unit sales trends for the iPhone, iPad and Mac
product lines, it's challenging to model a scenario in which
revenue for the December quarter will come within Apple's given
range. Simply put, I consider guidance on the quarter to be
Last year, Apple was unable to deliver the newly-styled iMac in
time for the holiday quarter. Combined with MacBook Pros that were
refreshed in June of that calendar year, Mac unit sales fell more
than 20% year-over-year. This year, the MacBook Pro line was
updated in October and Apple has resolved its manufacturing
problems with the new iMac's design. I expect single-digit unit
sales growth for the Mac line in the December quarter and a modest
increase in the line's ASP.
The iPad mini was released in November 2012. The popularity of
Apple's smaller and lower-priced iPad sparked unit sales growth,
but it also reduced average selling prices for the line. Consumers
have been waiting since last spring for the new iPad mini with
Retina display that will begin to ship next month. Although
management stated supplies of the new mini may be constrained
through the holiday quarter, the new 9.7" model in a lighter and
thinner enclosure will also boost unit sales. Even with a slight
increase in the deferral of revenue on each iPad sold, unit sales
will be strong in the December quarter and average selling prices
may see an improvement year-over-year. I expect double-digit unit
sales growth for the iPad line in the December quarter. Apple has
increased the price on the new iPad mini with Retina display over
the price of the original iPad mini. Pricing for the mini with
Retina display begins at $399.
Apple surprised the market when the company announced in
September the sale of 9 million iPhone handsets in the first
weekend of availability for the new 5c and 5s handsets. For the
September quarter, iPhone unit sales rose 25.9% to 33.797 million
units, inclusive of the rise in global channel supply of 3.3
million units or a total ending inventory of 14.3 million units.
Management stated the ending inventory was below the company's
target range on a look forward basis. I expect iPhone unit sales
growth in the December quarter to exceed 20%. The addition of
) as an authorized carrier will be a factor in the strong iPhone
unit sales results. DoCoMo is the largest carrier in what is now
Apple's fastest-growing revenue region.
Overall, based on unit sales trends and despite the increase in
deferred revenue per unit sold, I expect December quarter revenue
to reach or exceed $60 billion. Apple does "Think Different" in the
company's approach to quarterly math and the December quarter
outcome is apt to be a bit more impressive than management
The author is long Apple shares
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