The Apple Financials Report: An Apple Miss?
October 19th, 2011I suppose Apple is entitled to one quarter where the final numbers doesn’t quite meet the predictions of financial analysts. At the same time, it does appear that expectations may have grown a little too extravagant, almost as if they expect Apple to walk on water quarter after quarter. It had to happen some time, and the street’s bullish attitude may have created unrealistic hopes and dreams about what Apple would announce.
But the figures themselves seem awfully good to me. In fact, Apple’s quarterly financials ought to be the envy of any large company. Sales totaled $28.3 billion, up 39 percent from last year. Net income amounted to $6.62 billion, or $7.05 per share, up 54 percent from last year. But industry analysts were expecting revenue of $29.4 billion, with earnings of $7.28 per share, so there you go.
As a result of Apple failing to meet what may have been overblown expectations, shares dropped 5.8%, or $24.33, in after-hours trading. I suppose a little reality check might be sufficient to restore the stock price after the numbers are digested for a few days. Let’s not forget that Apple sold over four million copies of the iPhone 4s on its first on sale weekend. That has to count for something. More to the point, Apple’s forecast for the current quarter actually exceeded analyst expectations, at $37 billion, with income totaling $9.30 per share.
Remember that Apple tends to lowball forecasts, so this may indicate a positively huge December quarter. What’s more, it does appear that the iPhone 4s continues to sell at a good clip, and it’ll probably be several weeks before supply begins to catch up with demand.
Looking at the actual units sold, iPhone sales tallied 17.1 million for the quarter ending September 24th, less than the previous quarter, where 20.3 million were sold, but that ought to be a pretty decent number considering that everyone knew as the quarter progressed that a new model would arrive in October. How many potential iPhone purchases were postponed? Since analysts were looking for sales in the 20 million range, that’s a clear reason for the revenue shortfall.
But even CEO Tim Cook admits that there was some impact, understandable considering all the publicity those rumors of the next iPhone revision generated. It seems inconceivable that some of those initial sales weren’t made to potential customers who sat on the sidelines waiting for a new model. That, of course, is always the danger, which is one key reason why Apple seldom announces new products very far in advance, with the exception of operating system releases, where developers need to know about the changes to keep their apps compatible.
In this case, Apple not only released a new iPhone, but the usual iOS revision had an unusually high number of new features and improvements. While existing iPad and iPhone users are evidently doing well with the upgrade, that may have been one more reason to postpone purchase.
In a more favorable light, Apple also reported that 93 percent of Fortune 500 companies are deploying or testing iPhones. This is up from 91 percent during the last quarter. That news can’t be too encouraging to the management of Research In Motion, who just announced their new OS, dubbed BBX, and please don’t ask me the reasoning behind that label, though it’s no doubt based on QNX, the OS that is, in part, the basis for the upgrade.
And before I forget, Apple reported setting 11.2 million iPads, which seems in line with expectations, though some pegged possible sales at over 12 million. That’s an increase of 166 over last year, making the iPad the fastest growing product in Apple’s catalog.
It’s also obvious that so-called iPad killers are still going nowhere. Perhaps the biggest potential threat, however, appears to come from the forthcoming Amazon Kindle Fire: Predictably Cook had a dismissive response to the Fire’s potential: “We’ve seen several competitors come to market to try to compete with the iPad over time. Some had different form factors, different price points. I think it’s reasonable to say that none of these have gained any traction thus far.”
The most surprising announcement is about the ongoing success of Apple’s original business, personal computers. Some 4.89 million Macs were sold, an all-time record, no doubt due, at least in part, to the release of Lion. Cook described the unexpectedly high Mac sales as “almost unbelievable” when you consider the stellar growth of the iPad. Clearly the iPad is cannibalizing some of those sales, but perhaps more from traditional PCs, which aren’t doing so well nowadays. If that trend continues through the holiday quarter, it’s likely Apple will crack the top five among global PC sales; it’s currently number three in the U.S.
At the same time, Apple is flush with more money than ever, ending the quarter with $81.6 billion in cash and short-term investments; it was $76.2 billion in the past quarter. No doubt those who are asking Apple to declare dividends, or make some high-dollar acquisitions, will only increase those demands going forward.
If you want to explore the financials in more detail, you’ll find the key figures are posted, as usual, at Apple’s site.
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Recently Gene (and everybody else) has been ruminating about whether Apple is or is not going to change under Tim. The issue of this huge 81.6 b. cash reserve is one subject that doesn’t usually enter into the discussion. Perhaps the reason for this is that such a large number is virtually meaningless – I mean, it’s easy to comprehend the difference between a thousand bucks and a million, a million and a billion, or perhaps even one billion and ten billion. But what’s the difference between, say, fifty billion and eighty-one billion? It’s like trying to compare one infinity with another! Eighty-one billion bucks is also meaningless as long as it’s parked in a vault doing nothing except growing into a larger and equally meaningless sum. Money, essentially, is like electricity. It only gets interesting when you put it to work. So what does Apple need all that cash for? It’s far, far more than Apple needs to ward off unfriendly takeover bids or make all the corporate acquisitions it could possibly want (and Apple has no history of making major acquisitions). So what to do with it? Steve is rightly credited with having been a visionary enterpreneur, but it would seem that on this subject even Steve’s enterprise and imagination failed him. If you want to speculate about Apple’s future, maybe it would be better not to focus on the individual product lines Apple markets, but on the question of what Apple will ultimately do with its massive cash reserve. One way or another, that’s the thing which is going to determine Apple’s future (and the thing which will test the quality of Apple’s leadership). I have no idea how it might be used, but I strongly believe that there’s no point in having all that muscle unless somehow you use it.
As stated in the article, the interesting sales data is from the Mac business unit, which blew past almost all estimates from analysts. Notebooks and desktops both hit new records. With a stagnant PC market, it shows that when folks need to upgrade to a new computer, a good number of them switch to a Mac. It’s really quite remarkable considering the average price of a new Mac. In a down economy that is an accomplishment. The Mac business isn’t Apple’s primary growth engine, but this shows that the Mac has plenty of opportunities, given its relatively small market share, especially outside of the U.S.
These numbers refute many of the arguments often heard, such as “Lion is Apple’s Vista”, “Apple needs an xMac”, and “they need cheaper models”. Those arguments may represent valid concerns, but the sales data shows that Apple knows how to operate its computer business better than anyone else.
Colstan
@dfs, It’s from my understanding that most of that cash is in short-term investments. So it isn’t like they just have a pile of cash sitting around collecting dust. It does seem to be put to some purpose.
As a company (or individual) how does one know how much is enough? It’s not the same for every company. I would think you would want as much “cash” on hand so you have the freedom to do what you want. Apple has that, that’s for sure.
This talk of dividends and major purchases of other companies is fun to speculate on but in the end. I think Apple just likes having the security of having enough money to do what ever they want. It’s a good position to be in.
I prefer Apple to hang on to the cash, as a insurance policy against sharp increases in raw materials and component costs, supply constraints, increases product distribution costs, and possible changes in production/manufacturing (expanding more outside China).. Not to mention strategic acquisitions of other companies/intellectual property (large and small).
Apple could help ensure long term stability of raw materials costs… they could at some point include acquiring mineral rights in areas where deposits of rare earth metals (used in the production of their products) are just now being discovered in their long-term strategy … Apple having it’s own supply of these materials, could insulate it from wild market fluctuations and supply constraints.. This would put them in a unique position in the market..
As transportation (fuel) costs continue to go up, they never seem to go down, the all-eggs-in-one-baskett (China) approach to product manufacturing may loose some of it’s appeal, extra cash to inject (persuade) their partners to build new plants in other regions could come in handy..
I think Jobs/Apple were already thinking different on this cash issue, and that’s a good thing. Just because it doesn’t make sense to us now, doesn’t mean that in 5 years we won’t see Apple surprising us yet again.
It is always of interest to me to see how well the stock analysts do with their best guesses. Only three items that I find of value are revenue, profit, and cash-on-hand. If all three are growing, I would say that Apple knows what its doing.
My hope is that Apple continues to make good acquisitions that adds value to the company. I would hate to see ones like the buyouts of Skype or Motorola. I recall one company wanted to by Yahoo! for $40 billion a few years ago. Ouch!
As for the subject of the pile of cash, obviously one would not stockpile that much money and keep it growing unless there was some far future endgame scenario that might come into play given the right circumstances or manipulated into the right circumstances. One should not underestimate the power of Apple’s four major competitors, Microsoft, Google, Amazon and Facebook. I take comfort knowing Apple has that cash flexibility to build something, for example, the NC data center pair. Who says Apple will stop at one pair or maybe there is other infrastructure on its corporate mind.
Apple has taken quite constructive and forward-thinking actions with its cash. They’ve bought up billions of dollars worth of flash memory, RAM, lcd screens and the like to not only secure the supplies they’ll need well into the future, but also diminishing those supplies for would-be competitors. That’s a double-whammy that’s worth twice the cost at half the price. Supposedly, the iPad 3 is already (or about to) enter production, if you believe recently published reports (based on rumors, of course). Now, if the iPad 3 has the equivalent of a 10-inch retina display, what would-be competitor has a chance of getting their hands on these high-rez screens for their own product? As another example, Apple has invested in chip-design companies to make their own chips, again with the whole-widget paradigm in mind. These sorts of expenditures are compounding investments the likes of which no other high tech company (maybe any company) has taken advantage of. If, as someone suggested, the prices of component materials and parts increase substantially, Apple will be even better positioned with its $80 billion warchest than any other manufacturer. Going forward, I would like to see Apple invest a bit more into software R&D, but even in this arena, they’ve not been slouches.