Apple's earnings call for Q2 2014 kicked off at 10pm (UK time) on Wednesday. Here, we review the highlights of Apple's financial results for quarter two, and round up how the reality compares with what analysts were expecting from Apple's financial results announcement.
Apple CEO Tim Cook was joined by CFO Peter Oppenheimer and his successor, Luca Maestri, who'll be taking over as CFO in June when Oppenheimer retires. They discussed how many iPhones, iPads and Macs Apple sold in the second quarter of fiscal year 2014 and answered questions from analysts.
Arguably the biggest news of the evening was Apple's plan to split its stock, turning each share into seven.
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Apple's quarter two financial results, 2014
Here are the highlights of Apple's financial results for the second quarter of 2014 (January to March 2014).
Quarterly revenue was $45.6 billion, and Apple achieved a net profit of $10.2 billion, or $11.62 per diluted share. That compares to revenue of $43.6 billion and profit $9.5 billion, or $10.09 per diluted share in the year ago quarter. The average analyst estimate was $43.53 billion revenue for the quarter, so Apple exceeded expectations here.
According to Apple CEO Tim Cook, this is a new March quarter record. "This was the strongest non-holiday quarter ever," he said.
Gross margin was 39.3 percent, compared to 37.5 percent in the year-ago quarter. According to Cook, these were the best gross margin since September 2012.
How many iPhones, iPads and Macs were sold?
Apple annouced the following sales figures for its key products. iPhones and Mac sales were up, but iPad sales were down.
43.7 million iPhones - up, year-over-year. This is a new March quarter record, according to Cook. Apple gained smartphone share in US, UK, Japan, Germany, France, and more, he said. Luca Maestri, who will be replacing Peter Oppenheimer as CFO in June, explained that iPhone sales are 6.3 million up over this time last year, 17% growth.
Analysts were expecting iPhone sales to be around 38 million units in the quarter, so Apple again exceeded expectations here. 51 million iPhones were sold in the first quarter of 2014 - the Christmas quarter, which included the launch of the iPhone 5s and iPhone 5c.
16.4 million iPads - down year-over-year by about 17 percent. Analysts thought iPad sales would be over 19 million units... Cook explained that iPad sales were at the high end of Apple expecatations, while low for analysts. This is due to the fact that in 2013's March quarter Apple "significantly increased iPad channel inventory, while this year we significantly reduced it". There was also a "backlog of iPad mini" at the end of last year. Presumably seeking to remove any doubt that the iPad is struggling, Maestri noted that "iPad users in North America generated almost 4 times the web traffic of all Android users combined." He added: "Among people planning to purchase tablet within 90 days, 2/3rds plan to buy iPad." Analysts had expected sales of 19.36 million iPads.
4.1 million Macs - up, year-over-year. Apple continues to gain share in PC market, noted Cook. The Mac is defying industry trends by growing while the rest of the PC market is shrinking. The good Mac sales are thanks to strong MacBook Pro and MacBook Air figures, according to Maestri. "Macs have gained global market share for 31 of last 32 quarters," he said. Analysts were anticipating 4.07 million Mac sales during the quarter, so the Mac just managed to exceed expectations.
2.8 million iPods - sales of the iPod continue to decline, as would be expected. In the second quarter of 2013, Apple sold 5.63 million iPods, so there's been a significant drop. This year's average analyst estimate for the second quarter's iPod sales was just 3.05 million, so Apple just missed the mark there.
In Apple's press release announcing the results Cook states: “We’re very proud of our quarterly results, especially our strong iPhone sales and record revenue from services. We’re eagerly looking forward to introducing more new products and services that only Apple could bring to market.”
The Apple stock split
The company is splitting shares: seven-for-one. This means if you own Apple stock at the close of business on June 2, 2014, you'll get six additional shares for every share you own.
Tim Cook explained the motivation for this 7-to-1 split as being designed to "make Apple stock more accessible to larger number of investors." Each shareholder on record on June 2 will get six additional shares.
Apple says it has also increased its shareholder return program to over $130 billion by the end of 2015. The quarterly dividend has been increased to $3.29 per share of common stock. And Apple's board has increased it's share repurchase alocation to $90 billion.
During the conference call Cook was quick to refer to the fact that Apple's priority it to create good products, indicating that it isn't his desire to keep shareholders happy by plying them with cash. He said: "Apple has created value for shareholders by creating products for enriching peoples lives. Will always be top priority, will continue to invest in R&D and hardware, software, and services."
He added that the company: "Will continue to invest in retail stores, marketing, and so on."
Cook also noted that he believes that the current stock price does not reflect current value of Apple.
[Thinking about buying Apple Shares? Read our guide to investing in Apple]
Apple's next quarter guidance
Apple expects to see revenue between $36-$38 billion and gross margin between 37-38 percent for the next quarter. Operating expenses of $4.4-$4.5 billion, and OI&E of $200 million with a tax rate of 26.1 percent, are also predicted.
How much money does Apple have in the bank?
Apple announced that it has $150.6 billion in cash, that's down $8.3 billion. Domestic cash is $18.4 billion, a decline of $16 billion.
$132.2 billion or 88% of Apple's total cash is offshore. Apple's Tim Cook complained that to repatriate cash, the company would incur significant cash tax consequences. Apple doesn't believe this would be in best interest of shareholders, he explained. Instead, Apple will continue to lobby for streamlining the tax code.
Apple has been spending some of its cash. Cook revealed that Apple has acquired 24 companies in past 18 months.
THE FOLLOWING WAS WRITTEN BEFORE THE FINANCIAL ANNOUNCEMENT AND UPDATED ONCE THE RESULTS WERE MADE AVAILABLE
How much money did Apple make in Q2 2014?
During Apple's last earnings call, Oppenheimer's forecast for this quarter's revenue was $42 billion to $44 billion, with a gross margin of between 37 and 38 per cent.
That's significantly less than the $57.6 billion the company made in the first quarter of 2014, but let's not forget that was the first full quarter that Apple's new iPhone 5s and iPhone 5c had been available, and the quarter that saw the launch of the iPad Air and Retina iPad mini.
We've not seen much from Apple since then, aside from the release of the new Mac Pro and a few tweaks to the iPhone and iPad line-ups, so we can't expect to see such a blockbuster second quarter (which actually ran from the end of December to the end of March). A result between $42 billion and $44 billion would be in-line with the $43,6 billion the company reported in the year ago quarter.
Fortune has published the results of an analyst poll this week, revealing what both amateur and professional Apple analysts expect the company to announce on Wednesday. A total of 40 analysts responded to the poll, with an average estimate of $43.53 billion revenue for the quarter.
The highest estimation comes from The Braeburn Group's Patrick Smellie, who predicts revenue of $44.75 billion. Funnily enough, the lowest estimate also comes from The Braeburn Group, this time from Sunil Shah, who predicts Apple's revenue was $41.33 during the quarter.
ACTUAL RESULTS: Quarterly revenue was $45.6 billion, and Apple achieved a net profit of $10.2 billion, or $11.62 per diluted share. That compares to revenue of $43.6 billion and profit $9.5 billion, or $10.09 per diluted share in the year ago quarter.
How many iPhones did analysts expect Apple to sell in Q2 2014?
Apple sold a record-breaking 51 million iPhones in the first quarter of 2014, but nobody expected to see similar numbers in quarter two. As mentioned previously, Apple's fiscal year 2014 quarter one was the first full quarter that the new iPhones had been available so it was bound to be a big one. Plus, it was Christmas.
However, now that the initial excitement about the iPhone 5s and iPhone 5c has died down and we look forward to the release of the iPhone 6, which could be as soon as June, most potential iPhone 5s and iPhone 5c buyers will already have purchased one, and those hoping to buy a new iPhone will be wondering whether to wait for the next one to launch.
Analysts were expecting iPhone sales to be around 38 million units, which is similar to Q2 2013's 37.43 million. The lowest estimate of 34.7 million units comes from Credit Suisse's Kulbinder Gracha while the highest estimate at 42.5 million units comes from Needham's Charlie Wolf.
ACTUAL iPHONE SALES: 43.7 million iPhones - up, year-over-year. This is a new March quarter record, according to Cook. Apple gained smartphone share in US, UK, Japan, Germany, France, and more, he said
How many iPads did analysts expect Apple to sell in Q2 2014?
In the second quarter of 2013, Apple sold a total of 19.48 million iPads. This year, the average analyst estimate fell just below that, at 19.36 million. The iPad Air and Retina iPad mini were still reasonably new during the quarter so we expected sales will have been lower than the 26 million iPads sold in quarter one but still strong and steady.
The lowest estimate among Fortune's 40 polled analysts comes from Merrill Lynch's Scott Craig, who predicts sales of 17.53 million iPad units, while Asymco's Horace Dediu estimates that Apple sold 21.81 million iPads during quarter two.
ACTUAL iPAD SALES: 16.4 million iPads - this is down year-over-year, by about 17 percent. Cook explained that iPad sales were at the high end of Apple expecatations, while low for analysts, and blamed the fact that Apple significantly reduced iPad inventory for the quarter.
How many Macs did Apple sell in Q2 2014?
On to Macs now, and last quarter was an impressive one that exceeded expectations, with Apple announcing that it had sold 4.8 million Macs compared to 4.1 million in the year-ago quarter. In 2013's quarter two, Apple sold 3.95 million Macs so we were hoping to see another year-on-year growth for quarter two of 2014.
Overall, analysts were expecting Apple to announce that it sold 4.07 million Macs during the quarter in question.
ACTUAL MAC SALES: 4.1 million Macs - up, year-over-year. Apple continue to gain share in PC market, noted Cook. Defying industry trends by growing while the rest of the market contracted. The good Mac sales was thanks to strong MacBook Pro and MacBook Air sales.
How many iPods did Apple sell in Q2 2014?
It's no secret that iPod sales have been falling. In the second quarter of 2013, Apple sold 5.63 million iPods, but this year's estimate for the second quarter of 2014 was just 3.05 million, almost one million less units than expected Mac sales.
ACTUAL iPOD SALES: Just 2.8 million iPods.
As for iTunes, analysts expected a revenue growth from $4.11 billion in 2013's second quarter to $4.56 billion for the same quarter this year. Accessory sales are expected to have risen from $1.38 billion a year ago to $1.4 billion.