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Apple’s $13.1 Billion Profit for Q1 2013 Dismays Analysts

by Jeff Carlson and Michael E. Cohen

Apple has reported huge profits and sales numbers yet again, this time for its first quarter 2013 financial period — disappointing analysts, of course. With revenues of $54.5 billion, the company’s highest quarterly revenue ever, and net profits of $13.1 billion ($13.81 per diluted share), the company’s profits nonetheless are down about 1 percent compared to the year-ago quarter.

The results that Apple reported had their ups and downs. Up were weekly revenue, iPhone sales, iPad sales, iTunes Store, and retail store revenues; down were Mac sales and iPod sales.

First, the upside. Weekly revenue was $4.2 billion during the quarter, versus $3.3 billion for the same quarter last year. Apple sold 47.8 million iPhones during the quarter compared with 37 million in the year-ago quarter. And sales of iPads eclipsed the sales from the year-ago quarter by more than 7 million units, with 22.9 million reaching the hands of customers against last year’s 15.4 million. The iTunes Store brought in a record $2.1 billion (with 2 billion apps downloaded), and the retail stores brought in an unprecedented $6.4 billion.

On the down side, only (!) 4.1 million Macs were sold last quarter, versus 5.2 million sold in the same quarter last year. Apple CEO Tim Cook pointed out that this drop was expected, and that he’d pointed this out during last quarter’s earnings call; in fact, the latest model iMacs reached customers only during the final month of the quarter. And, in line with the trend that we’ve seen over the last several years, iPod sales declined from 15.4 million in last year’s quarter to 12.7 million in the quarter this year. Nonetheless, iPod still has a 70 percent market share among MP3 music players, a figure that has held steady for years. The iPod touch now accounts for half of all iPods sold.

On a weekly basis, Apple sold 3.7 million iPhones, 1.7 million iPads, and 312,000 Macs (even with severely constrained supplies). For those who like mind-boggling statistics, Apple sold about 10 iOS devices every second during the quarter. (Another mind-boggling statistic unrelated to revenue: about 4 trillion notifications were sent to Apple devices via iCloud during the quarter.)

The Greater China operating segment, comprising mainland China, Taiwan, and Hong Kong, became Apple’s second largest region in terms of revenue, bringing in $7.3 billion. Sales of iPhones in that region have more than doubled.

Apple closed out the quarter with $137.1 billion in cash and securities, a $16 billion increase over the previous quarter’s total. Some of that money will end up back in the hands of shareholders on Valentine’s Day, when Apple will pay out a dividend of $2.65 per share.

The company currently has more than 80,000 employees, and operates over 400 retail stores worldwide.

Constraints and Cannibalization -- It’s important to remember that these results are remarkable and record breaking; as Cook stated at one point, “No technology company has ever reported these kinds of results.” And yet, those numbers were achieved while most of the company’s products faced component shortages and other constraints. Apple literally cannot build its devices fast enough to meet demand.

That extends throughout its product mix. Cook noted that production of the iPhone 5 was constrained for much of the quarter, ramping up toward the end, but production of both iPhone 4 models was also constrained for the entire quarter. The iPad mini was also constrained every week, and Apple ended the quarter with a significant backlog.

Although Apple didn’t break out iPad sales by model (so we don’t know just how many iPad minis were sold), Apple CFO Peter Oppenheimer did point out that the iPad mini gross margin is “significantly below the product average.” Apple traditionally builds a nice profit pad into the pricing of its products, and with the iPad mini they’re forgoing profit up front in order to keep the price down and increase adoption.

Responding to a question about iPhone screen supplies, which were recently reported by questionable news outlets to have been scaled back, Cook took the opportunity to refute the position. “I don’t want to comment on any specific rumor because then I’d have to spend my entire life doing that.”

Much of the question-and-answer session involved the subject of product cannibalization, with analysts wondering why Apple would allow sales of iPads, for example, to contribute to the lower sales of Macs compared to previous quarters. Product cannibalization isn’t a new phenomenon for Apple, and Cook sunk his teeth into the question. “Our philosophy is to never fear cannibalization,” he said. “If we do, somebody else will just cannibalize [a product].” He noted that the iPhone has cannibalized some iPod business, saying, “It doesn’t worry us. I see cannibalization as a huge opportunity.” Cook once again pointed out that the bulk of iPad cannibalization with regard to computers affects Windows PCs rather than Macs.

Fallout -- Apple is the poster child for failing to meet unreasonable expectations; its stock price fell 10 percent to $460 per share in after-hours trading following the earnings report. Analysts pull unrealistic numbers out of dark unmentionable regions, or complain that the company’s profits are growing but not fast enough. At this point we assume that most analysts are competing in their own financial reality show that emphasizes drama over actual reality.

What’s encouraging is that Apple, while a public company, doesn’t chase the stock price as its indicator of success. It also doesn’t heed analysts’ unreasonable calls to sacrifice profit at the expense of market share. “We want to make the best products,” said Cook in an oft-repeated mantra, citing the success of the iPod in the market as a happy consequence, but not a goal.

And despite many efforts to get Cook and Oppenheimer to reveal plans about the year’s product lineup (which are always rebuffed, such as Cook’s terse rebuttal to Piper Jaffray analyst Gene Munster’s questions about what an Apple television might be), Cook did say that the development pipeline is “chock full.”


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