Apple’s Q3 Earnings Report: Digging Through the Details

| MacOS KenDensed

Mac OS KenWho just made more money in a single quarter than ever before? Apple. Who is selling iPhone, iPads and Macs by the truckload? Apple. Who goes digging into the earnings report to sort out all of the numbers? Mac OS Ken’s Ken Ray.

Apple Sales: To Infinity & Beyond
What do the professional and unpaid analysts have in common? They all underestimated the third quarter of Apple’s fiscal year 2011.

Well, almost all…

Ahead of Tuesday’s conference call, Apple sent out a press release that was — seriously — jaw dropping. “The Company posted record quarterly revenue of $28.57 billion and record quarterly net profit of $7.31 billion, or $7.79 per diluted share.

Needless to say, that compares rather favorably against the revenue of $15.7 billion and net quarterly profit of $3.25 billion, or $3.51 a share in the same quarter a year ago.

Can I just point out that that happened without the benefit of a holiday? Without a full quarter of back-to-school shopping, and yet it happened.

Apple sold 20.34 million iPhones in the quarter, a record for any quarter, and up 142 percent from the same quarter a year ago.

Apple sold 9.25 million iPads during the quarter, a record for any quarter, and up 183 percent from the same quarter a year ago.

Apple sold 3.95 million Macs during the quarter, a record for a June quarter, and up 14 percent from the same quarter a year ago. Not as many as NPD and an aggregate of analysts had expected. More on that in a bit.

Apple sold 7.54 million iPods, more than that same aggregate of analysts expected, though still down 20 percent from the same quarter a year ago.

Wanna talk retail? Of course you do. Apple Retail saw a record June quarter, bringing in $3.5 billion in revenue, up from $2.6 billion last year. Apple CFO Peter Oppenheimer says that growth was driven by whopping sales of iPads, iPhones, and Macs.

Speaking of Macs, Apple’s stores sold 768,000 Macs in the quarter, up 13 percent from the same quarter a year ago. And surprise surprise: 50 percent of those in-store buyers were new to the Mac.

Who’d have thought?

Apple opened four new stores in the quarter: two in France, one in the UK, and one in Germany. All of Apple’s stores combined hosted 73.7 million guests in June quarter.

How is Apple looking as far as cash goes? It’s just getting stupid. Apple is sitting — now — on $76.2 Billion dollars in cash, up from $65.8 billion at the end of the March quarter.

“We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent,” said Apple CEO Steve Jobs. “In fact, I think I just wet myself a tiny bit.”

He didn’t actually say that last part, of course, rather he said, “Right now, we’re very focused and excited about bringing iOS 5 and iCloud to our users this fall.”

Then we’re gonna wet ourselves.

Who came close on those numbers? Almost no one.

Almost. All hail Traderhood’s Nicholae Mihalache who overshot on some numbers, but was closer than the next unpaid analyst who undershot by more than Mihalache overshot.

Apple reported revenue of $28.57 billion, and Mihalache expected $28.67. Apple reported earnings per share of $7.71-cents, and Mihalache expected $7.28. He underestimated iPhone sales by .09 million units, overestimated iPods by a boatload, overestimated Mac sales — as did almost everyone — and overshot iPad unit sales by a tiny little bit.

All in all, well done.

There was more to the conference call before the Q&A, including some whack accounting stuff with which I though we’d finished.

According to Apple CFO Peter Oppeneheimer, Apple will be recognizing revenue from software like iLife, iWork, and Mac OS X over three years, giving it the ability to offer free minor updates.

Because there’s a vaporous dollar amount tied to iCloud, Apple is deferring 22-bucks per Mac sold over a four year-period for iCloud, as well as deferring a total of 16 dollars for each iPhone and iPad and 11 bucks for each iPod touch over the next two years.

No, I don’t understand it, but they said it… So, there.

Adding sales of iPads, iPhones, and iPod touches in the June quarter, Apple has now sold a total of 222 million iOS devices, which — according to my calculations — is a lot.

Now onto the Q&A.

Shannon Cross of Cross Research wanted to know about iPad “sales and trends,” particularly as related to cannibalization of the Mac.

Apple COO Tim Cook did acknowledge that some people do seem to be picking iPad rather than a new Mac, though more seem to be choosing iPad over a new Windows PC. Meanwhile, Mac sales grew 14 percent versus the PC market’s growth of 2.6 percent, so that’s still cool.

Goldman Sachs analyst Bill Shoppe wanted news around the seemingly countless patent disputes in which Apple finds itself embroiled.

COO Cook says Apple loves competition. They think it’s great, but they want people to invent their own stuff, and will defend their own intellectual property appropriately.

Citigroup analyst Richard Gardner wanted to know What specifically drove iPhone strength in the quarter.

Cook says that in the June quarter Apple added 42 new carriers in 15 new countries, so that was something. And the company saw real improvement due to emerging and developing markets such as China, Brazil, Mexico, and the Middle East.

Piper Jaffray analyst Gene Munster wondered what Apple had to say about the huge growth in Android activations versus the comparatively decent growth for iOS. Think of this as a slow pitch, straight down the middle of the plate.

iPhone sales for the quarter were up 142 percent year-over-year — more than two times the growth of the smartphone market. Apple sold every iPad 2 it could make, and iPad is gaining traction in enterprise while other tablets aren’t really gaining traction anywhere. The iOS App store is the largest by far with 425,000 apps, and over 100-thousand for the iPad specifically.

They’ve paid $2.5 billion dollars out to iOS developers, and over 15 Billion apps have been downloaded. So, yeah… Apple’s confident in its products, in the app store, in customer satisfaction numbers, in its relationships with developers, and in its roadmap… touch ‘em all.

Apple's Big Ol' Pile of CashIs Gene Munster gonna pass up a chance to ask about the TV business? Does the Pope wear a sensible hat? Uncle Gene wanted to hear thoughts on Apple TV and the connected TV market.

Cook says Apple TV is still doing well, but it’s still a hobby. Not “another leg of the stool.”

“We love it,” he says. “Customers love it. We got it right when we went to new Apple TV last fall,” but it’s still a hobby in which they’re investing.

Gleacher and Company analyst Brian Marshall had a question that sort of tied in to Uncle Gene’s.AppleInsider has the Gleach asking why Apple doesn’t have more movies on iTunes, to which CFO Oppenheimer responded, “We have a very, very broad library of movies and TV shows, particularly here in the U.S. We add more content internationally in each quarter, and look for more content coming this quarter across the various stores. We have some neat stuff coming.”

Oh man, I hope it’s Beatles movies.

Bank of Montreal analyst Steve Bachman had questions, if not outright concerns, about Mac Growth. Specifically, Mac sales were only up 5 percent quarter over quarter, which is lower than in quarters past. Was this cannibalization of Macs by iPad, or people waiting for Lion or what?

COO Cook started by saying he doesn’t like doing the quarter-over-quarter thing, choosing instead to do year-over-year. That said, there were likely three things that had them beating the PC market to a pulp rather than to a bloody pulp. 1, there was some cannibalization of new Macs by iPad; 2, some people were likely waiting on Lion, which came out the day after the earnings report; and 3, last year in the June quarter Apple launched new MacBook Pros. This year they launched new iMacs, and they don’t sell as many desktops as they do laptops these days.

Still, Mac growth was five times greater than PC industry growth as a whole, making the 21st straight quarter in which the Mac beat the PC industry.

Band of America analyst Scott Craig got COO Cook to say that a supply and demand balance for iPad 2 is being approached, though he wouldn’t guess at exactly when that might be achieved.

Sanford Bernstein analyst Toni Sacconaghi brought the conversation back around to the iPhone versus Android thing, noting that some global regions show lost iPhone market share worldwide. Is gaining share strategically important to Apple longer term, and how should we look at share gains when sub $300 phones are expected to be the home of big growth?

Says COO Cook: Share gain is important. Apple plays at different price-points, intends to stay true to its philosophy of only making products they’re proud of, that they would want to win, and that are the best in the world. If they can do that at a lower price, cool, but “great” and “best” are first. In the meantime, they may need to convince people to pay more to get a better product or products — and that seems to be working.

Morgan Stanley analyst Katie Huberty asked CFO Oppenheimer why he was expecting a 12 percent revenue decline in the September quarter. Said the CFO, Apple has “a lot going on in the fall with iOS 5 and iCloud…” and a “future product transition that [they would] not talk about [yet].” But it’s gonna have a material impact on the September quarter.

And it might make phone calls.

Apple’s stellar numbers did a couple of things yesterday: First, Electronista says, they helped put some distance between the Cupertino-company and the boys from Waterloo. The 20.34 million iPhones shipped in the quarter stand in sharp contrast to the 13.2 million unit decline for BlackBerry sales in RIM’s most recent quarter.

The other thing the 3-Q numbers did was push Apple’s shares to brand new heights.BusinessInsider says Apple shares broke the $400 mark for the first time ever yesterday. The new peak came in after-hours trading, though they eventually settled back down to $394.

As exhaustive as that rundown may have seemed, there was more on the earnings call. You can hear it for yourself as a podcast; it’s available for download at the iTunes Store.

HTC Takes it on the Chin
Apple has picked up a partial victory against HTC with the U.S. International Trade Commission, one that could spell trouble for a number of Android phone makers.

AppleInsider has the a judge for the ITC issuing a preliminary ruling that HTC violated two of the 10 patents over which claims had been brought against it by Apple.

HTC says it will appeal the decision, though the ruling is not binding. The full USITC panel still has to do the thumbs up/thumbs down thing on the judge’s decision.

Plying “what if” with the ruling, what if the ruling on the two patents stands? Patent expert Florian Mueller of FOSS Patents says if that happens, “every Android device out there” could be affected.

The two patents HTC is said to have violated are “System and method for performing an action on a structure in computer-generated data” and, “Real-time signal processing system for serially transmitted data.”

My god, they make smartphones sound boring.

Interesting bit though: Mueller says those two patents are actually part of Android’s architecture, not part of any monkeying around with Android HTC did on its own, which means both Motorola and Samsung could be at risk as well. assuming the full USITC panel agrees with the judge’s preliminary ruling. That final ruling is expected by the first week of December.

Consumers + iPhone = Love
While Android may still be winning the smartphone market share game, the people who choose iPhones are best pleased. At least that’s the finding of the most recent ChangeWave Survey.

Fortune runs down the survey of mostly U-S smartphone owners, finding 70 percent of iPhone owners “very satisfied,” better than Android’s “very satisfied” 50 percent. Owners of Microsoft smartphones were 27 percent “very satisfied,” just edging out the Research in Motion BlackBerry’s 26 percent — and leaving me to wonder for whom I should feel more sorry.

iCloud — not even here yet — and already goosing iPhone interest not only for current owners but also for people not yet doing the iThing. According to the piece, “iCloud seems to have made owners of Apple products more likely (29 percent) to buy Apple. Even non-Apple owners say they are more likely (13 percent) to swing Cupertino’s way now that iCloud has been announced.”

iPhone saw a bump in the first quarter of the year, probably thanks to the Verizon iPhone, and it saw another bump in the second quarter, despite the lack of a new iPhone.

That makes ChangeWave’s Paul Carton think the phone’s share will skyrocket with the launch of the next one, saying, “Apple is poised for extraordinary growth when the next iPhone arrives… Assuming it works.”

Details, baby. Details.

Happy happy are the people who buy things with Apple logos. Sure there are the “very satisfied” iPhone people, but Apple makes more than iPhones.

PC Mag has run down its Readers’ Choice Survey 2011 Winners.

“Here’s a quick glance at the companies we deemed worthy of receiving our Readers’ Choice Awards for 2011,” reads the PC Mag post, which is kind of funny because you’d think it was the readers who’d deemed the companies worthy of receiving a readers’ choice award.

Anywho…

In the categories Laptops & netbooks, desktops, and Network Routers, it’s Apple, Apple, and Apple.

Mobile platforms: iOS.

Mobile phones on AT&T: This is interesting. Samsung with Windows Phone 7 was the choicest readers’ choice winner, though the iPhone on AT&T garnered enough votes to win an award as well.

Switch to Verizon Wireless, though, and it’s all iPhone all the time.

You know when Apple opens its new headquarters, it should fill its old headquarters with all of its awards. Assuming they’d all fit.

Comments

nealg

Ken,

Thanks for the piece. Been too busy to get into the meat of the quarterly report and this would seem like a nice summary of things.

In looking over your short bio at the end of your piece, I see that you have something called “Mac Os Ken” and this raises a question from me for which you, or anyone, even Apple, may not have a good answer for. My question to you is how many Mac Os X users out there will need to upgrade their machines to run Lion and how many will actually upgrade if they have to? If a significant number need to upgrade and the economy doesn’t tank, I am thinking that Apple’s cpu sales could head up even further from here. It sounds like Lion, with the iCloud component, may have enough new stuff in it that make it worthwhile for upgrades to occur for a good number of people, especially those that have invested in Apple portable devices recently.

Neal

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