Apple just announced their second quarter earnings. Once again, the results were impressive: an 83% jump in revenue over the year before and an even higher increase in profits. What was more interesting was the product breakdown behind the numbers. It was not what one might have expected. Also telling was the fact that management’s forecast was not optimistic for growth from the second to the third quarters.
The first thing that you may not understand about Apple is that they think that they are ahead of the rest of the planet, and that applies to their calendar too. In their fiscal year the first quarter begins in October of the prior year. So the first quarter for them includes the holiday season, not the fourth. It also means that if a product has shown growth between Q1 and Q2 it is doing extremely well. For Q2 in particular the fairer comparison is always with the prior year and not the prior quarter.
Macintosh: Weak on the Desktop, strong in the Portables
Mac Desktop revenue declined 6 percent while the number of computers sold declined 12 percent. With 1,009K units and $1.44 billion in revenue it would mean an average system price (wholesale for units not sold in Apple’s own stores or website) of $1431 per system, certainly well above what most other manufacturers charge for their typical desktop systems. Portable Macs however more than made up for it. Revenues were up 59 percent on an increase of units sold of 53 percent. With 2751K units and 3.53 billion in revenue the average portable price (wholesale for units not sold directly) was $1284. The fact that the average portable was less expensive than the average desktop was unexpected since Apple’s portables, particularly the very popular MacBook Air, are not known for their low prices.
Combined Mac revenue increased 32 percent. That is impressive, but still far less than the 83 percent of the company as a whole. As a result, the share of Apple represented by the Mac product line continues to diminish. It now represents 4.97 billion dollars of revenue out of a total of 24.67 billion.
iPod: The Decline of the Player-Only Device Continues
A lot of tech writers have been compiling lists of single-purpose devices that are being ‘killed’ by smartphones: point-and-shoot digital cameras, wristwatches, simple video cameras (such as the recent shutdown of Flip) and even flashlights. Well, it seems that you might want to add one more item to that list: the personal audio-video player. The iPod product line showed a 17 percent decline in units sold and a 14 percent decline in revenue, a continuation of declines in prior quarters. During the earnings call management emphasized strength in sales of the iPod Touch, which only serves to emphasize the decline in the player-only segment. (For those unfamiliar with the details of Apple’s product line the iPod Touch, although it bears the iPod moniker, is an iOS device with far more resemblance to the iPhone than the other iPod models). They also emphasized that their market share in player-only sales has remained constant, which translates to “nobody else is selling these either”.
When I mention the iPhone killing iPod sales to an Apple loyalist, I frequently hear “But I still use my iPod regularly — for example when I am exercising”. To them I usually ask which device they expect to be upgrading next. This usually gets an admission that it will be the smartphone.
The Content Stays Strong.
iTunes, including the App Store and Bookstore, showed a 23 percent year over year increase in revenue and a 14 percent change from the Holiday quarter. Looking at prior years, iTunes frequently shows increased sales in the post-holiday quarter as users continue to load up their new toys.
iPad2: We Can’t Build Them Fast Enough.
When management makes their steady theme in the earnings call that ‘we are selling them as fast as we can build them’, it can mean one or both of two things:
- Demand has caught us off guard.
- We are having trouble building them
Unfortunately for Apple it appears that for the iPad2 the answer is mostly the latter. The iPad is not old enough to get year-over-year data, but from the prior quarter the iPad is down 36 percent in units and down 38 percent in revenue. This is the largest decline from any product segment except the iPod. In particular this decline is noteworthy because it is the first quarter of the much hyped iPad2 and the prior one well understood to be the last of the iPad1. Clearly just people wanting to be the first to upgrade to the iPad2 would have caused expected sales to be higher than a 38 percent decline! Management would not go into details regarding the supply shortage. They did point out that they were at present not expecting any parts shortage from the Japan earthquake/tsunami so the cause must be someplace else.
And Then There is the iPhone.
The numbers speak for themselves: 126% increase in revenue from the year before, 113% increase in units sold. The numbers even represent a 17% increase in revenue and 15% increase in revenue from the holiday quarter! Such improvements might have been expected if there was a hot new version to drive upgrading customers into the stores. But the iPhone 4 was, by Apple’s standards, in product midlife. The only big iPhone news was new carriers, meaning Verizon here in the US, but also several new overseas carriers as well. As we have otherwise observed, phone users are more loyal to their carrier than we like to admit so opening a new carrier expands the potential customer base almost one for one.
With this latest surge the iPhone represents just shy of half of Apple’s revenue: 12.29 billion dollars out of 24.67 billion.
Gaining almost as much attention as the Q2 results was that Apple said that they were only forecasting Q3 revenues of 23 billion dollars, a reduction of over a billion dollars from the numbers they had just announced. While the post holiday quarter almost always shows a decline from the prior quarter the summertime months frequently show a bump from the spring quarter.
The pessimistic third quarter forecast could simply be an attempt to depress analysts expectations so that Apple can once again beat them. Or maybe they don’t really have anything that they think will play the Superhero. The iPhone 4 sales may be beginning to be cooled over anticipation of the iPhone 5. Rumors are already running strong over the next model, including foremost predictions that it won’t actually be available until October and thus Q1 2012.
On the other hand, each quarter Apple somehow manages to find a part of their business to fuel still another double digit growth. Maybe it will be fixing the manufacturing bottlenecks on the iPad2. Maybe it will be some new thing that has been kept under tight wraps. But I wouldn’t bet against it being something.