As iPhone Sales Dip Ahead Of 4S, Apple’s Earnings Fall Below Street Expectations

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Apple has just announced their Q4 2011 earnings. As expected, they’re big — but unlike the last several quarters where Apple has destroyed the number expected by the Street, Apple actually fell short of those expectations this time.

How short? Well, even though Apple’s own guidance for the quarter was $25 billion in revenue, analysts seem to have wised up to Apple’s always-low estimates and were projecting numbers far higher: they were looking for around $29.5 billion. Apple came in at $28.27 billion. That’s still their second best quarter ever — just shy of last quarter’s record $28.5 billion quarter — but it is below the Street.

So why the miss? Well, the main reason is likely the iPhone. Sales dipped over 3 million compared to last quarter. This is undoubtedly because the world was awaiting the next version, the iPhone 4S, which launched last week. Though that device sold 4 million units in just three days, those numbers will count towards next quarter. Apple sold 17.07 million iPhones in the quarter, which is 21 percent growth year-over-year, but again, 3 million less than the 20+ million iPhones Apple sold in their record previous quarter. The iPhone is Apple’s biggest source of revenue.

But it wasn’t all bad news for Apple. The company did manage to beat the Street’s expectations for the iPad. Apple sold 11.12 million in Q4, which was ahead of the 10 million or so expected. Apple also sold 4.89 million Macs in the quarter — a new record for the company. This was also above what some analysts were hoping for.

iPods sales continue to fall. Apple sold 6.62 million in the quarter, which is down 27 percent year-over-year.

Apple’s earnings-per-share (EPS) were $7.05. Apple’s EPS guidance for Q4 had been $5.50, but again, the Street was aiming higher, looking for around $7.30 EPS.

Apple’s quarterly net profit was $6.62 billion, down a bit from last quarter, but up over $2.3 billion from a year ago. Gross margin was 40.3 percent, up from 36.9 percent a year ago.

Interestingly enough, Apple says that international sales now account for 63 percent of overall revenue.

Since this was Apple’s Q4 and end of their fiscal year, the company also announced a new milestone: the first $100+ billion year in terms of revenue. The total came in at $108 billion, with profits coming in at $26 billion.

Apple gained $5.4 billion in cash for the quarter. Guidance for next quarter is $37 billion — which is massive — and an EPS of $9.30. Again, Apple is always low in estimating these, so next quarter, the holiday quarter, may not only be Apple’s first $30 billion quarter. It may be their first $40 billion quarter.

Update: After Their Miss, Apple Predicts Record iPhone, iPad Sales And Hints At A $40 Billion Quarter

Apple’s earning call live notes (paraphrased):

Tim Cook, Apple CEO:

This is our first earnings call since the passing of Steve Jobs. An amazing human being. A great leader and mentor. His spirit will forever be the foundation of Apple. We’ll continue his amazing work. Only Apple can do the integrations we do. Moving forward we have “relentless focus”. I’d like to thank everyone for the support in the time of Steve’s passing.

Peter Oppenheimer, Apple CFO:

Record September quarter for us. Huge Mac and iPad sales, records. Record iPhone quarter for us too.

4.89 million Macs, a new record — ahead of last quarter.

Portables make up 74% of Mac mix. But desktop sales

OS X Lion response has been tremendous — 6 million downloads in the quarter.

6.6 million iPods. Down year over year, but ahead of our expectations. iPod touch is over half of the sales.

iPod share is still over 70% in the U.S.

iTunes Store near 1.5 billion. Over 16 billion songs downloaded. iBookstore also popular.

17.1 million iPhones. Very strong in Asia Pacific. We prepared for transition to iPhone 4S.

We expected this with “rumors” out there. iPhone sales did decline — especially the second half of the quarter.

iPhone seeing great corporation deployment.

We’re extremely enthusiastic about Siri.

We’re shipping iPhone 4S in seven countries right now. 22 more countries by the end of this month.

New record for iPad — 11.1 million in the quarter.

iPad 2 now in 90 countries.

iPad revenue was $6.9 billion.

Been since 18 months since we introduced iPad. 92% of Fortune 500 now testing or deploying iPad.

Airlines love iPads.

25 million iOS devices sold last quarter.

iOS 5 is great.

iCloud has had a great launch so far. We believe it’s the easiest way for customers to manage content.

App Store has over 500K apps and 18 billion downloads. It’s now in 33 more countries. 123 countries now.

$3.6 billion from Apple Stores. iPhone sales were down in stores because of the iPhone 4 launch a year ago.

First store in Hong Kong now. 5 other China stores are the highest trafficked stores.

357 stores now.

77.5 million visitors in September quarter.

Looking ahead: about 40 new stores. 3/4 outside the U.S. Replacing higher volume store primarily in the U.S.

40.3% margin. Lower component costs.

$81.6 billion in cash now. Daaaamn. Some of it was spent on Nortel patents and legal agreements.

Once every six years we add a week to fiscal quarter — we’re doing that next quarter.

Guidance: $37 billion for next quarter. Massive.

$108 billion in revenue for the fiscal year. A huge increase over last year.

Almost $26 billion in profit for the year — that’s growing even faster than revenue.

==============Q&A====================

Q: iPhone 4S was launched so close to holiday time. Are you ready?

TC: We’ve gotten off to a great start — 4 million in 3 days. We’re confident that we’ll have a large supply. But I don’t want to predict when it might balance. I’m confident, we’ll set an all-time record for iPhones this quarter.

Q: Last quarter there was a problem with the sell through?

TC: The sequential comparison was down, but it was much less than what we were expecting. That’s why our revenue exceeded our guidance. We thought it would be more — we knew there was great anticipation of a June or July new iPhone because we had done that the past few years. But it wasn’t as bad as we thought. The reduction happened largely in the back half of the quarter as speculation hit “extreme highs”. But iPhone 4S is out there now. So is iOS 5 and iCloud. We’re confident in a record next quarter. The iPhone 4S start is better than our wildest dreams.

Q: 40% gross margin — why can’t you do better next quarter?

PO: The new price points for iPods will change some of that. Other price points as well fluctuating.

Q: What about China?

TC: Progress has been amazing. 2% of total Apple revenue in ’09, this year just ended it was 12%. This last quarter it was 16%. “It is growing at a feverish pace.” We have 6 stores now in greater China. The online store isn’t even a year old there. Over 7,000 point of sales on the iPhone in greater China. I’ve never seen a country with as many people rising into the middle class aspiring to buy products that Apple makes. It has quickly become #2 on our list of top revenue countries. Other areas are key too: Brazil (up 118% year over year), Russia (looks more and more promising), the Middle East. Several of these markets that Apple hasn’t been strong in, but the iPhone changes that.

Q: Talk about the strength of manufacturing.

TC: I think we have an outstanding team in this area. A track record that’s unparalleled in this industry. We are diversifying some. But our approach is to do business with as few people as we can so we can be very deep with them.

Q: Amazon is coming with the Kindle Fire with a lower price point. Weigh in on that?

TC: We had an outstanding quarter with record iPad sales — and at the same time a Mac record, which is phenomenal. Several competitors have come to market over time, some had different form factors, different price points, none of these have gained any traction thus far. In fact, our share went up. In the June quarter IDC says we are responsible for 3 out of every 4 tablets sold. iOS 5, iCloud, iTunes, etc — I feel very, very confident about our ability to compete. And extremely confident in our product pipeline.

Q: Deferral of iPhone for new carriers?

PO: We opted to defer adding new carriers or countries in the September quarter knowing the iPhone 4S would come in October month. So we waited. Biggest impact were the rumors that were very pervasive.

Q: Size of tablet market?

TC: We thought it would be a huge market. And it has been even greater than we thought. We’ve sold 40 million cumulative now. I still believe it will be larger than the PC market.

Q: Talk more abou the iPhone. How many units were deferred?

TC: You can’t run the experiment twice, we can’t tell you how many we would have sold without rumors. But I certainly believe it was substantial. That’s why we called it out. I think if you’ll talk to the customers, you’ll get the same kind of answer. The iPhone 4S opportunity is huge. Again 4 million sales in 3 days — the mother of all uplifts. We’re thrilled with how we’ve gotten started. I couldn’t be more pleased with where we are.

Q: iPad in next quarter?

PO: We won’t provide thoughts yet for March, but next quarter we expect company records for both iPad and iPhone. For Macs we expect to outgrow the market for 23rd consecutive quarter.

Q: How do you see Siri? A feature or a key way to interact?

TC: The number of people using it already is amazing. The questions and personality is also incredible. We see this as a profound innovation. Over time many, many people will use it as a substantial way. Hard to know the percentages of how they’ll use it. But it’s substantial.

Q: Supply chain thoughts?

TC: Our hearts go out to all the people in Thailand who have lost lives and property during monsoons. We get multiple components from Thailand. There are several factories that are not operable. The weather hasn’t allowed an ability to look at that. The primary exposure is on the Mac for this.

Q: Comment on patent disputes — specifically with Samsung on Android?

TC: Don’t want to comment on litigation. But as you know we spend a lot of time and money and resources on coming up with incredible innovation. We don’t like it when someone else takes those. Unfortunately we’ve been pushed into the court system as a remedy to that.

Q: Price reduction on iPhone 3GS offering?

TC: We wanted to make the iPhone more accessible to a broader market. 3GS is now free on a post-paid basis in many markets. But we lowered the price of the iPhone 4 to $99. These are still fantastic products and we think we can do reasonably well selling those in the post-paid market. And the advantage of lower price in the pre-paid market — not free and $99, but lower.

Q: More general view of supply demand and pricing into next quarter? Unibody?

TC: We treat every concern we hear about our suppliers very seriously. We’re investigating. We factored that into the numbers given earlier. The general market — we see pricing to continue at favorable levels.

Q: Will there be pressure on gross margins with the lower priced products?

PO: About 40% next quarter in terms of margins. Quite strong. Looking forward we will continue to offer the best products to customers that we can. We’ll be innovative and aggressive.

Q: On iPad where are we on full roll-out?

TC: About 40K points of sale around the world. 50K for iPod. 120K on iPhones right now. There was no slow down in iPad numbers. We’re now in a supply/demand balance.

Q: What about the other growth markets?

TC: The basic approach is the same as the gameplan we used in China.

Q: Now you’re CEO, any thoughts on strategy with the cash?

TC: We’ve wanted to maintain flexibility. It’s not burning a hole in our pocket. We’re not doing silly things with it. We’ve done things in our best interests. We’ve acquired companies, some IP, invest in the supply chain, and use money to build out our stores. I believe what we’re doing with the cash is great. That said, I’m not religious about holding cash and not holding it. We’ll continue to ask ourselves what’s in Apple’s best interest? It’s a topic for the board ongoing.

PO: Remember that $54B of our $81B is offshore too.

Q: The tablet market bigger than PC market — what about cannibalization?

TC: I do believe we’re seeing cannibalization. Some people are electing to buy an iPad rather than a Mac. But I believe a larger number are electing to buy an iPad instead of a Windows-based PC. We’re coming out well. The Mac had it’s best quarter by far ever last quarter. That was during the best iPad quarter. That’s unbelievable. With cannibalization like this, I hope it continues.

Q: Is buying back shares with your cash perhaps kind of a white flag that you can’t create value through innovation anymore?

TC: I think anyone looking at our track record wouldn’t say we’re waving a white flag. We have a pipeline that’s unbelievable. I view buying back shares to be separate. The cash is always a topic, it’s always about what in our best interest.

Q: You blew through initial iPhone goal. Do you have a similar goal going forward?

TC: We want the iPhone to be in as many customers hands as possible — we think it’s the greatest phone by far. That’s why we live to do that. We aspire to higher volumes. We think the smartphone market will swallow the broader handset market. It’s still a tiny part.

Q: Is the extra week for the quarter truly linear?

PO: The 14th week will conclude on New Year’s Eve day — a good week for us. We’ll provide details on our January call in terms of what we saw. Expenses will be up a bit. But fixed costs will be fixed.

Q: On Japan — in terms of year over year, there was some discrepancy in revenue.

TC: A huge percentage of Japan’s total revenue in the year ago was the iPhone 4 launch. So when you do year over year compare, that affects the revenue compare. But Mac grew hugely in Japan this past quarter.

Q: Longer term iPad opportunity — is there more opportunity to go down market or up market?

TC: I dont’ want to get into what we might do — that answer would do that. We see the tablet market as a huge market. We could not be happier with our position in it. We have some fantastic things in the pipeline. 40 million in the first 18 months — I think we have a fairly good handle on what to do next.

Q: Lower price point on iPhone in emerging market?

TC: In some market we dropped the 3GS price a bit early. It was very good and led to some of what we did last month.

That’s a wrap.