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Analysts Disappointed in Apple’s $8.2 Billion Q4 2012 Profit

Apple has reported record profits for nearly all of its products for its fourth quarter 2012 time period. With revenues of $36 billion and net profits of $8.2 billion ($8.67 per diluted share), the company’s profits are up 23.9 percent compared to the year-ago quarter (see “iPads, iPhones Propel Apple’s $8.8 billion Q3 2012 Profit,” 24 July 2012). Analysts, however, were disappointed that Apple fell short of their expectations of $8.75 per share profits, as well as with lower iPad sales than they expected, driving Apple’s stock down in after-hours trading.

One can take the analysts’ disappointment regarding iPads with this grain of salt: Apple sold 44 million iOS devices in the quarter, and says that 200 million iOS devices are currently running iOS 6. And another small salt grain: Apple reported that its online iCloud services currently have over 190 million users. In case anyone is still worried that Apple is going down the drain, the company reported that it has $123 billion in cash and securities on hand, an increase of $4 billion over the previous quarter.

To put the disappointment in even greater perspective, Apple somehow managed to sell a considerable number of their products: 4.9 million Macs (a 1 percent year-over-year growth in a market where sales were down around 8 percent), 26.9 million iPhones sold (with $17.1 billion in recognized revenue, up 56 percent year-over-year), and 14 million iPads (26 percent more than the number sold in the year-ago quarter). By the way, as an indication of where the Mac market is going, in the quarter that just ended portable Macs accounted for 80 percent of Mac sales.

The 390 Apple retail stores continue to earn their keep: the stores brought in $4.2 billion in revenue last quarter, averaging $11.2 million in revenue per store, up slightly from $10.7 million per store generated in the same quarter last year. In fact, the 1.1 million Macs sold last quarter through the retail stores set a new quarterly record. However, this time around, Apple didn’t mention what had become the traditional metric of 50 percent of Mac sales going to new customers. (Of course, the fact that it wasn’t mentioned in the earnings call isn’t significant — the stat may still apply — but it’s a figure that Apple has included in every quarterly call since the retail stores began.)

Even Apple TV sales were up. Although Apple TV still remains, according to CEO Tim Cook, a hobby, he called it “a beloved hobby”: the company sold 1.3 million of the shiny black boxes last quarter, and over 5 million of them over the course of the fiscal year, compared with 2.8 million sold during the previous year. With the increasing importance of AirPlay, the Apple TV may be more of a back door into the living room for Apple (see “Playing with AirPlay in Mountain Lion,” 22 October 2012).

The only product line that has experienced actual sales drop-offs was the iPod: 5.3 million of them were sold last quarter, a yearly decline of 19 percent. Of course, that number doesn’t reflect any demand for the newly redesigned iPod touch and iPod nano models that only began selling after the quarter ended. As has become commonplace, the iPod touch represented more than 50 percent of all iPods sold.

Stockholders can also assuage some of their disappointment by spending their next dividend check when it arrives on 15 November 2012: each share will bring them $2.65. Apple’s first quarterly dividend (not counting those granted early in the company’s history) of $2.65 was paid out on 16 August 2012.

iPad mini Focus — Perhaps because the iPad mini was introduced just two days before the call, analysts devoted a lot of time trying to suss out why Apple priced it starting at $329 and what sort of profit margins the company expects to reap. Apple Chief Financial Officer Peter Oppenheimer revealed that “we have been aggressive [about the margin] for iPad mini,” suggesting that the price isn’t padded with a high margin.

In an earnings call that was heavy on marketing messages at times, Apple found itself defending that price against several analysts’ questions. After noting many of the iPad mini’s features, such as dual cameras, a larger display than competitors, and other factors, Cook explained, “When we set out to build the iPad mini, we didn’t try to build a cheaper tablet, we wanted the full iPad experience. … iPad mini has higher cost, and gross margin is significantly below corporate average.”

“One of the things we try to do is to create a product people will try to use for months and years after purchasing. That’s what iPad mini has been designed to do,” Cook said. “Apple will not make a product that people feel good about, but when they get it home, they don’t use it.”

Cook also commented about whether the iPad mini would result in fewer sales of other devices, such as full-size iPads and iPod touches. “We’ve learned not to worry about cannibalization of our own products,” he said. “Better for us to do that than somebody else.” He then said that Apple is concentrated more on attracting the millions of people who would otherwise consider buying Windows PCs.

And Cook rebutted a question that hearkened back to Steve Jobs’s claim that Apple would never create a 7-inch iPad. (Don’t forget that Jobs often made public claims that he would later reverse when Apple’s products were ready.) Cook said, “Let me be clear, we would not make a 7-inch tablet. We don’t think they’re good products and we would never make one, for many reasons.” He then elaborated on the difference between the iPad mini’s 7.9-inch screen and how it compares favorably in screen real estate to competing products.

Speaking of the competition, when asked if he’d used a Microsoft Surface, which began shipping this week, Cook said he hadn’t, but from what he’s read (i.e., the first press reviews) the product is a “fairly compromised, confusing product.”

China — Since Apple began its serious push into the Chinese market, the results have been favorable for the company’s bottom line. This quarter marked the first full fiscal year in China, and resulted in $23.8 billion in revenues. That represents a 78 percent increase from the year-ago quarter, and an astonishing 15 percent of Apple’s income overall. And that figure doesn’t include any revenues from iPhone 5 sales: that device won’t become available in mainland China until later this quarter.

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