There weren’t many holes in
Apple beat both my March quarter estimates (as it did almost every analyst) and the weak guidance I was expecting didn’t materialize. When looking at the details I was pretty close on iPads and Macs but was way off on how well Apple did in overseas markets with the iPhone and its gross margin coming in much higher than expected (the 39.3% or 130 basis points above the high-end of guidance was by far the highest outperformance since the company went to providing ranges a year ago). There is a saying I learned a long time ago in an
iPhones generated the revenue upside
The Street was expecting about 38 million iPhones (I was at 37.4 million) and Apple was able to sell 43.7 million, up 20% year over year when adjusted for channel inventory (17% reported). There was strength across the board between models and countries with all-time records in the BRIC countries (Brazil, Russia, India which more than doubled and China).
The $596 average selling price (ASP) was down only 3% year over year and down 6% quarter over quarter. iPhones generated $26 billion in revenue (57% of total revenue), which was up 14% year over year, and compares to the $23 billion analysts and I were expecting.
It appears Apple is doing a great job of balancing selective price reductions in certain markets to increase the iPhone’s market share but doing it in such a way as to maintain its margins. Additionally all the speculation on the upcoming iPhone 6 did not seem to hurt sales to any significant degree.
iPads were about the only weakness in the quarter
While iPad unit sales of 16.35 million were down a reported 16% year over year when adjusted for channel inventory they only decreased 3% (actual sell through of 17.5 million). The Street was expecting unit sales of about 19.4 million while I was at 18 million. Another factor that created the negative unit growth is that last year there was a significant backlog of iPad Minis that were sold in the March 2013 quarter (19.5 million total unit sales) vs. this year there was none or very little backlog. Overall this was the fourth quarter in a row where the iPad’s unit growth has ranged from a negative 3% to a positive 5% so it does appear that iPad’s have hit a steady state level.
The $7.6 billion in revenue was down 13% year over year and was slightly below the $7.8 billion I was expecting. The iPad’s ASP of $465 increased nicely from $449 a year ago and $440 last quarter. Both of those quarter’s ASPs were negatively impacted by the iPad Mini.
While iPad unit growth is non-existent it is still the most heavily used tablet on the market. Chitika released a survey of North American tablet users and iPad usage was over 77% of the total with Samsung in second at 8.3%. Since Apple commands such a large share of the tablet market almost any way you look at it the company will need to find a way to increase their usage since there isn’t much market share to take from anyone.
Macs were in-line with Street expectations
There were just over 4.1 million Macs sold which was in-line with Street expectations but below my 4.4 million unit estimate. They generated $5.5 billion in revenue (12% of total) while units were down 14% quarter over quarter vs. last years 3% decline. Management said that channel inventory was slightly below their targeted 4 to 5 weeks so there was some demand left on the table which should be captured in the June quarter.
Gross margins were the other major star
Gross margin of 39.3% was above the Street’s and my 37.7% estimate and was clearly above guidance of 37% to 38%. Higher iPhone sales were probably the major driver along with better costs and a favorable mix of products and services.
In some previous quarters warranty accruals have had a negative impact on gross margin so it will be interesting to see if they were maintained at the higher levels of the past few quarters or if they moved back down.
It was like old times with EPS blowing past every analyst’s estimate
It hasn’t been since the December 2012 quarter, the last one where Apple gave single points for revenue and EPS guidance, and moved to ranges and dropped providing EPS guidance that the company’s results beat EPS expectations by so much.
The $11.62 was significantly above the Street’s $10.18 and my $10.30. It exceeded what would have been Apple’s high-end EPS guidance of $10.33 when you take all the data points that management provides. The $11.62 was 13% above the $10.33 vs. in the previous four quarters the most that Apple has beaten the high-end of EPS guidance was 2%.
The combination of strong iPhone sales, strong gross margins and the share count decreasing 7% year over year increased EPS 15% year over year.
June quarter guidance falls within Street expectations
While the Street’s projections for the June quarter are at the high-end of Apple’s guidance ranges they at least fall within them vs. the company’s forecast being below the analysts estimates. This is also positive since a number of analysts and myself were expecting guidance to be light.
When the $37 billion revenue guidance mid-point (up 5% year over year) is combined with the gross margin’s 37.5% mid-point the resulting EPS of $8.18 will be an increase of 10% year over year. The EPS growth is helped by the share count decreasing by a projected 6% year over year and operating income would increase by 2% year over year. Given that Apple almost always beats the mid-point and usually the high-end of its guidance metrics the company could turn in another very solid quarter before new products become available in the second half.
Increased share buybacks and dividend with a stock split rounds out a very solid quarter
Apple is increasing its share buyback program from $60 billion to $90 billion with it to be completed by the end of calendar 2015, the same date that the $60 billion was scheduled to be done. The company has already utilized $46 billion since the March 2013 quarter and has seen a decrease in its share count from 939 million to 875 million.
The dividend is being increased by about 8% from $3.05 per quarter ($12.20 per year) to $3.29 per quarter ($13.16 per year) for shareholders of record on May 12 and the company plans to increase it on a yearly basis.
Lastly the shares will be split 7 for 1 for shareholders of record on June 2. While this doesn’t increase the intrinsic value of the shares or company there is a psychological boost associated with it.
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