Apple Destroys Q3 Earnings Estimates With Record Revenues, Profit, iPhone, And iPad Sales

Following Google’s stellar earnings last week, Apple has today announced their own earnings for their Q3 period. As expected, they’re good. Massively good.

Apple set several new records in terms of both revenues and sales. Most notably, Apple’s revenue was a staggering $28.57 billion — over $5 billion ahead of their (always low) guidance, and almost $4 billion ahead of the $24.92 billion that Wall Street had been expecting. What’s perhaps craziest about those numbers is that they’re a new record for the company, and it comes in a non-holiday quarter (typically the best for consumer electronics companies). Apple’s last holiday quarter earnings, Q1 2011, saw revenues of $26.7 billion.

As for some other key numbers, Apple saw net quarterly profit come in at $7.31 billion — also a new record, by a long shot (last holiday quarter was $6 billion). Earnings per share were $7.79, far, far ahead of the $5.03 EPS guidance, and way ahead of the $5.80 Wall Street had been looking for.

Apple sold 20.24 million iPhones in the quarter, a new record. The Street had been hoping to see sales around 16.5 million. The iPad numbers were just as bright, with 9.25 million units being sold. Wall Street had been looking for 7.8 million there. The iPad sales were also basically double what they were last quarter.

One slight dim spot were Mac sales, which came in at 3.95 million, blow the roughly 4.2 million Wall Street was hoping for. And, as expected, iPod sales continue to fall. Apple sold 7.54 million for the quarter, which was down 20 percent year-over-year.

Apple CEO Steve Jobs gave the following statement in the release:

“We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent. Right now, we’re very focused and excited about bringing iOS 5 and iCloud to our users this fall.”

Wall Street is obviously reacting very favorably to these results. Apple’s stock just surged past $400 a share in after-hours trading. My Exxon prediction is looking better each day.

Apple CFO Peter Oppenheimer’s guidance for next quarter is $25 billion in revenue and EPS of $5.50. In other words, Apple fully expects to blow through those as well.

UpdateThe Key Subtle Notes From Apple’s Earnings Call

Below, some live-notes from the earnings call:

Peter Oppenheimer, Apple CFO

  • Highest quarterly revenue and profit ever.
  • Record iPhone and iPad sales
  • June quarter record for Mac sales
  • Mac sales strong in the Asia Pacific region in particular
  • Excited to launch OS X Lion tomorrow.
  • iPod touch continues to account for over half of iPods sold
  • over 70% of market still
  • iTunes revenue up 36% year over year.
  • 225 million iTunes accounts
  • 15 billion songs downloaded
  • iPhone 20.3 million sales
  • iPad 9.2 million sales
  • “we sold every iPad we could make”
  • iPad 2 launched in 36 countries. Now in 64 countries.
  • 86% of Fortune 500 testing or deploying iPad
  • 222 million cumulative iOS device sales through June quarter
  • iOS 5 – 200 new features — looking forward to launching it this fall
  • iCloud also previewed in June — also released in the fall
  • 425,000 apps and 15 billion downloads to date
  • Over $2.5 billion in cumulative payments to devs — far ahead of competitors.
  • Revenue grew to $3.5 billion in Apple Stores
  • Opened 4 new stores in the quarter, 327 total Apple Stores now
  • 73.7 million visitors last quarter.
  • Gross margin 41.7%. On strong iPhone sales, lower commodity costs, and leverage on higher revenue.
  • $232 million in stock-based compensation.
  • Cash now $76.2 billion — wow. Gained $10.4 billion
  • Continue to charge for major OS and iLife sales. But sales will be deferred and recognized over a period of 3 years
  • Mac users get iCloud in the fall, this will be valued at roughly $22. We’re now deferring that for each new Mac sold (again over 3 years)
  • Same with iOS devices, now $16 in revenue for iPhone and iPad, $11 for iPod touch.
  • $25 billion next quarter (guidance)

Q&A Time with Oppenheimer and COO Tim Cook

  • Q: 12 percent revenue downtick next quarter is much more conservative than you usually state. Why will it be better?
  • PO: Education buying is part of it, best lineup of Macs ever. iPhone sales should raise, and iPad too. iPod will decline though. But a lot going on this fall, iOS 5 and iCloud. And a future product transition that we’re not going to talk about today.
  • Q: Thoughts on iPad 2 cannibalization?
  • TC: We do think some people chose to buy iPad instead of a Mac. But even more went iPad over Windows PC. There’s a lot more of Windows business to cannibalize than the Mac. And the Mac has other good attributes to make it appealing. We grew year over year and well ahead of others’ pace. We were selling every iPad we could make. Into July, we now have increased supply further. Some SKUs in some countries are in balance for supply/demand. Sales of iPad 2 have absolutely been a frenzy, for people to get one. We feel good about our progress ramping up.
  • Q: Talk a bit about China?
  • TC: Good question. China was very key to our results. We define greater China as mainland, Hong Kong, and Taiwan. Year over year is was up 6x, revenue $3.8 billion during the quarter.
  • Q: Gross margins?
  • PO: We think we’ll lose some component leverage, lose a bit on back to school transition, and a product transition.
  • TC: Most components are good, but solid state hard drives are constrained.
  • Q: More color in one-time benefit in gross margins?
  • PO: We saw benefits in settlements, not huge, but it offsets other loses.
  • Q: What about the patents disputes?
  • TC: We have a very simple view here, we love competition, we think it’s great. But we want people to invent their own stuff. We’re going to make sure we defend our portfolio.
  • Q: What drove iPhone strength? New carriers? New countries?
  • TC: Great question. We did add 42 new carriers in 15 new countries in the quarter. Over 100 countries now. Real improvement was due to developing markets, China, Latin America, Middle East, all a big part of it. That’s great for Apple, because normally we’re not as strong there. But now we’re seeing the fruits of our labor.
  • Q: Any milestones you hope to hit?
  • TC: Nothing to share. But it’s of great focus to us.
  • Q: iOS activations were up 20% but that’s behind Android?
  • TC: The Android numbers are tricky. Remember, we have the iPod touch for iOS devices too. We have over 222 million overall. We think it’s incredible. Our numbers are straightforward. iPhone is up over 2x versus rest of smartphone market. We sold every iPad 2 in the quarter we could make. There’s no shortage of demand. Gaining traction in enterprise too. Largest app store, over 100,000 iPad app. The other ones have only hundred. The other tablets aren’t getting any traction to speak of. And remember, $2.5 billion paid to developers. We’re very confident. Great numbers, great reception, and our roadmap is great. iPhone is the clear leader in customer satisfaction.
  • Q: Any update on Apple TV?
  • TC: Apple TV continues to do well. I don’t want to mislead, we still call it a hobby here. We don’t want anyone to conclude that it’s another leg of the stool — it’s just not in the size market that iPhone, iPad, Mac, and iPod. We love it, customers love it. We really got it right with new Apple TV last fall. But right now it’s still a hobby status. We’re continuing to invest in it because we think there’s something there.
  • Q: The trajectory of iPhone growth has been astounding. Trying to understand thinking to sustain that growth. Does pricing have to change — form factors? Especially with Android out there?
  • TC: On tariffs, Apple doesn’t set it, the carriers do, better question for them. At a macro level, if you talked to carriers, virtually all of them want a smartphone that will use data on their network. I firmly believe there is no better device than the iPhone for people to move from any phone to a smartphone. I think there’s a good alignment there. I mentioned the key driver was emerging markets, so you can see we’re putting more and more energy there. I think we have a good focus here, we can compete with anyone.
  • Q: What about pre-paid?
  • TC: Those markets in emerging world, there are some percentage of post-paid, but in aggregate they’re pre-paid. In some cases, we’ve gotten ones to do a post-paid plan, it’s better for customer, carrier, and us. But we’re not avoiding pre-paid. We know we need to play there, to get the volume we want.
  • Q: Mac growth about 5% sequentially, in past few years it has been higher. Was it cannibalism, or pull-backs in anticipation of Lion?
  • TC: I’d look more year-over-year than sequential. But I’m proud of the numbers. To grow 14% when market is growing 2.6% is certainly something to be proud of. But why isn’t it higher? We always focus on that. Three things: 1) some cannibalization of new Macs by iPad — we sold over 2x iPads versus Macs. 2) Some customers have delayed until Lion becomes available. That will be tomorrow. It’s a fantastic product. 3) In year-ago quarter, we launched new MacBook Pros, this quarter we did new iMacs. Both well-received, but MacBook Pro makes up majority of sales in the Mac area. Those are the three key things why the number isn’t bigger. This is the 21st consecutive quarter that we beat the market.
  • Q: Will Lion help growth next quarter?
  • TC: We don’t predict unit sales. We think iPad will continue to grow year over year, the rest you can conclude.
  • Q: A bit more color about iPad ramping up issues?
  • TC: Demand is fantastic. It’s not the supply side that’s the huge issue. It’s a good problem. I usually wouldn’t do this, but in July supply has further improved. That has led up to be in balance in some countries. We’re working very very hard to get as many units to customers as we can.
  • Q: Is there anything you’re doing differently in enterprise sales space?
  • TC: We train and provide a lot of help for carrier forces and we do some sales our self. Last quarter we sold more iPads in K-12 than we did Macs. That’s shocking. We wouldn’t have predicted this.
  • Q: How about iCloud?
  • PO: We can’t wait to get iCloud and iOS 5 to customers in the fall. We think we did it right with iCloud. In the ChangeWave results, we think this is driving future demand.
  • Q: Competitive edge?
  • PO: We’re good with delivering things over the Internet, iTunes, the App Store, etc. We probably have some things to learn, but we’re excited.
  • Q: China Mobile said it has a lot of iPhones on their network already, but it doesn’t sell them yet, so pre-paid or unlocked are there clearly. Can you talk more about that?
  • TC: Phones without a contract are very key in China – and a number of the emerging markets where the credit systems aren’t as established. I’m not saying we have figured out how to play perfectly in that environment, but we’re growing. We have more to do, more to learn. But I feel very good about our progress. China is far passed our big hopes already.
  • Q: Some stats say you’ve lost share with iPhone in some places — how important is growing share?
  • TC: Share gain is important. We don’t want to go the opposite way and we’re working hard to change that. In terms of different price points, we have the iPhone 3GS in the U.S. for $49 with a contract. But we will only make products we’re proud of. It has to be the best in the world. If we can do that and the price is lower, we’ll do it. Like the iPod shuffle, it started higher, but now it’s $49. In China, it’s also up to us to get people to pay a bit more for a better product. People will do that, we’ve seen.
  • Q: What about media consumption on the iPad so far?
  • TC: We love that people love using it for a whole variety of things. That’s the beauty of the iPad. You talk to 10 different people, they’ll all give you a different reason why they love it.
  • Q: Why aren’t there more movie titles on iTunes?
  • PO: We have a very broad library of movies and TV show, particularly here in the U.S. It’s less in some other countries. Look for some more content later this quarter, across the various stores. We have some neat stuff coming.
That’s a wrap.