AAPL’s eye-popping 3Q11

the results

AAPL reported earnings for its fiscal 3Q11 (the company’s fiscal year ends in September) after the close of trading in New York yesterday.  Sales came in at an all-time high for the company at $28.6 billion.  That’s up 82% over 3Q10.  Net income of $7.3 billion ($7.79 a share) was another company record and represents 125% more than in the comparable period of last year.  Analysts had been expecting eps of $5.85.

the details

All the company’s product categories showed interesting deviations from what one might have expected:

iPad  …the biggest positive surprise.  iPad was over 20% of AAPL’s revenue in the quarter, in which the company sold 9,246,000 of them.  Sales were up 97% quarter on quarter in units and 113% in revenue.  Year on year, units were up 183% and revenue 179%.  The iPad continues to be capacity constrained, meaning AAPL is selling them as fast as it can make them and still can’t satisfy demand.  With manufacturing capacity added in early July, the company appears to be close to supply-demand balance, however.  My hunch is that there’ll be a strong seasonal uptick in the December quarter as consumers buy holiday gifts.  If so, we may see shortages again in a few months.

iPhone  …another big number.  The company sold 20,338,000 in the June period.  That’s up 9% in units and 8% in revenues qoq, and +183% in units, 179% in revenue, yoy.  A continuing surge in smartphone sales, combined with the fall from grace of both NOK and RIMM, are the main reasons.

Mac   Overall sales were up 5% in units qoq and 14% yoy.  Portables, however, were up only 1% qoq and 13% yoy.  One reason is the strength in the prior-year quarter, which saw a new MacBook Pro introduced.  Another, however, is that some customers are buying iPads instead of Macs.

iPod  …sales dropped sharply.  This shows how far APPL has evolved in the past half decade.  The product that sparked AAPL’s revival and effectively doubled the size of the company now represents less than 5% of current total revenue.  Management said the 7,535,000 units AAPL sold in the quarter exceed its expectations.  But qoq units were down 16% and revenue down 17%;  year on year, units were down 20% and revenue minus 14%.

what caught my eye/ear

1.  The company conference call seemed to me to be almost devoid of content.  Maybe it’s always been this way and the fact just hasn’t struck me so forcefully.

2.  Analysts did ask two interesting questions, both of which the company evaded.

–The first concerned the relative strength of Android-based phones, which appear to be growing faster than iPhones.

–The second was about whether the iPad is cannibalizing Mac sales to a greater degree than it’s cannibalizing Windows-based machine sales.

The non-answers suggest two things to me.  First, the ability of Android phones to cover a wide spectrum of price points, vs. AAPL only at the high end, is a bigger competitive issue for AAPL than the consensus thinks.  Second, while it’s always better to cannibalize your own sales than to allow a competitor to do so, it sounds like more potential Mac buyers than AAPL expected (maybe MacBook Air buyers) are “trading down” to an iPad instead.

3.  Look at the difference between analysts’ estimates and AAPL’s actual reported eps for fiscal 2011 to date.

1Q:   $5.40 estimate, $6.43 actual

2Q:  $5.37 estimate, $6.40 actual

3Q:  $5.85 estimate, $7.79 actual

Actuals were 19%, 19% and 33% above what analysts had projected.

Two points:  analysts have been pretty awful–and unusually so–at projecting AAPL’s earnings this year.  Also, despite the big positive earnings surprises, huge earnings growth, and a price earnings multiple in the mid-teens, AAPL has been no better than a market performer in 2011, until a couple of weeks ago (more about this phenomenon in a day or two).

the stock

The numbers continue to be stellar and the PE is low, so I think AAPL will continue to be at least a mild market outperformer.  For the first time in many years, however, I don’t feel that I can pencil in an aggressive earnings growth number for the upcoming fiscal year and be confident the actuals will be at least what I’ve estimated…and probably substantially more.  In fact, if you told me you thought AAPL’s eps would only be up by 15% in fiscal 2012, I’d have to do a bunch of spreadsheet work before I could express an opinion.  (Note, too, that AAPL is making a minor accounting change that will depress near-term results slightly.)

That shouldn’t be so surprising, since the stock (I haven’t owned it for some time) is up 30x since I first bought it, and is now one of the largest-cap stocks on Wall Street.  Could this maturing of AAPL’s business be what Wall Street has been discounting for a while now?  In conceptual terms, probably.  Myself, I think the inflection point for growth is a new thing–but it’s possible I’ve just been behind the curve.

2 responses

  1. Also, I’ve read that Apple said its revenue in China, Hong Kong and Taiwan combined has grown 6x in just the last year, and now accounts for about 15% of Apple’s quarterly revenue. And, according to the WSJ (whatever that’s worth), Apple is close to close to signing a deal with China Mobile, China’s largest cellphone company. All that looks good for future growth.
    — Russ (Apple fan-boy and YBIL)

    • Thanks for your comment. Everything you say is true.
      You might want to check out the transcript of the Apple earnings call, which you can get for free at Seeking Alpha. Looking at the transcript is a lot faster than listening to the call. There are two very peculiar exchanges between a questioner and Apple management.
      At one point, an analyst asks for a reaction to Google’s comment that Android phones/tablets are up 56% quarter on quarter in June, which is about 3x the growth rate of Apple’s offerings. The analyst gets no answer; he gets a rant, instead.
      At another, a different analyst asks for a statement of Apple’s cellphone strategy. As I understand it, prior to the collapse of Nokia and Research in Motion–whose joint demise is a big reason why iPhones and Androids are in such high demand–Apple was content to have its $600 phones be more or less a niche item. Now Apple seems to be talkng about being a market leader, which would seem to imply extending its product range down in price to reach more than the ultra-wealthy in emerging markets. The analyst’s point, I think, is that this would be a big change. Again, no answer, just a rant.

      In my experience, even if the analyst isn’t the sharpest pencil–and, remember, managements hand-pick the people they allow to speak on the call–good companies answer questions asked. Management’s voices may drip with condescension, but they explain stuff. Only companies in real trouble do what AAPL did yesterday.

      I also think something is going on with cannibalization of Mac sales by iPads. Techcrunch, for instance, is reporting that the MacBook (like the one I’m writing on now) is beong discontinued, leaving the MacBook Pro and the Air. My guess is that cannibalization of Macs is greater than Apple has planned. The topic came up, but again, no details.

      As far as growth for next year goes, the only things that matter, I think, are iPhones (50% of Apple’s business) and iPads (20%). I’m not worried about iPads. The company will sell about 30 million this fiscal year; I think 40 million next year is easy. It’s smartphones I wonder about. The Boy Genius Report writes about a Gartner analysis of the global smartphone market that seems to predict that iPhone growth will decelerate to a mid-teens level over the next several years–but will be 30% or so in 2012 (the idea is that Apple won’t enter the lower-priced smartphone market, which will be increasingly important). If that’s right, and if I’m correct about the iPad, then my back-of-the envelope guess is that Apple will earn $33-$35 a share in fiscal 2012. I have no strong conviction that the Gartner forecast will pan out, though.

      So I find that, contrary to my “normal state of mind”, I have no strong view on AAPL.

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