Tim Cook speaks at a celebration held in memory of Steve Jobs
On Tuesday Apple announced the results of its fourth fiscal quarter of 2011, the results of which came as a bit of a shock to many analysts who expected Apple to continue its strong streak but weakened iPhone sales dented the outcome of the quarter.
Following the release of Apple’s quarterly financials company CEO Tim Cook and Chief Financial Officer Peter Oppenheimer chatted with analysts on its earnings call, which can be heard again here.
Whilst World of Apple would historical present notes of interest from the earnings call immediately following, this extended article will weave those notes into a bigger picture.
Tim Cook began the earnings call with the following statement:
This is our first earnings call since the passing of Steve Jobs. The world has lost a visionary, a creative genius and an amazing human being. Steve was a great leader and mentor and inspired everyone at Apple to do extraordinary things. His spirit will forever be the foundation of Apple, and we are dedicated to continuing the amazing work that he loved so much.
Only Apple brings together software, hardware and services into such a powerful and integrated experience for our customers. As we move forward, we will continue doing that with relentless focus. I’d like to take this opportunity to express our gratitude for all of the condolences and expressions of support that we have received following Steve’s passing.
Beginning with the Mac Peter Oppenheimer said that customers had downloaded more than six millions copies of OS X Lion during the quarter. OS X Lion is of course the first of Apple’s operating systems to be download only and not be available to purchase on physical media.
During Apple’s fourth quarter the Mac set an all time record for sales and revenue. Unit sales were 4.89 million spurred on by the ever popular MacBook Air and were in fact 26% higher than the same quarter in 2010. Sales of desktops also made a new record led by the iMac but portables continue to dominate making up 74% of all Mac sales.
Whilst Apple only speaks generally in terms of channel inventory it can often be a sign of product transitions in the pipeline, for the Mac this is difficult due to the number of product lines but for the likes of the iPhone this is easier. So although no indication of changes, Apple ended the quarter with between 3 and 4 weeks inventory, lower than expected as Apple usually aims for between 4 and 6 weeks.
iPod nano 2011 lineup
The iPod which remains in steep decline once again saw a mediocre quarter. Apple only shifted 6.6 million iPods during the quarter compared with 9.1 million in the same quarter in the previous year, to put it more sharply the iPod now only makes up 4% of Apple’s revenue, even the iTunes Store makes more than that.
With minimal refreshes to the iPod lineup this month ahead of the holiday season and Apple openly clarifying that iPod touch sales made up more than 50 percent of iPod sales, it makes it somewhat surprising that Apple wasn’t more aggressive with an iPod touch refresh.
Despite this the iPod still remains the top selling MP3 player in most of the countries that Apple tracks through the data published by GFK and in the US market still dominates with about 70 percent market share.
Unlike previous conference calls Apple didn’t reveal as many statistics about iTunes as in the past, possibly because Tim Cook had taken to the stage only two weeks before to tout many of the impressive stats.
Notable for the quarter was iTunes Store revenue which has now topped $1.5 billion, an impressive 35% climb year-over-year. We can attribute this to just how much the App Store and iBookstore have taken hold.
There are 500,000 apps in the App Store with 18 billion downloads since the store opened in July 2008. Also by the quarter’s end the App Store was operating in some 123 countries. iBook downloads also topped 180 million and the iTunes Store itself continues to give impressive figures with 16 billion songs downloaded and 650 million TV shows.
What really dented Apple this quarter was sales of the iPhone, unlike previous fourth quarters Apple didn’t release a new iPhone model, yet iPhone unit sales came in at 17.1 million compared to 14.1 million in the previous September quarter. What was certainly surprising to wall street and analysts was that persistent rumours of an iPhone refresh evidently affected the sales of the iPhone. Sequentially iPhone sales were down from 20.3 million.
Quarterly iPhone unit shipments Q109 - Q411
Apple even made a rare acknowledgement that rumours played their part. Peter Oppenheimer said that the company was “pleased with the iPhone sales growth as we prepared for the transition to the iPhone 4S” and that they “expected iPhone sell-through to decline sequentially from the June quarter as a result of new product rumors following the announcement at our Developers Conference in June that iOS 5 and iCloud would become available in the fall”.
Looking forward, iPhone sales are sure to be record breaking during the current December quarter. We already know that Apple has sold over four million iPhone 4S units, this doesn’t take into account those cheaper iPhone 4 models or even the heavily discounted iPhone 3GS units that are still being sold by many carriers. When we next hear of iPhone unit sales, expect a big record breaking number.
Tim Cook also spent a bit of time talking about the smartphone market as a whole. Reiterating much of what was said in his presentation at the launch of the iPhone 4S he said that he wants the iPhone in as many hands as possible. The current handset market stretches to 1.5bn with 400 million of that made up my smartphones but Cook notes that it’s growing and “the big win is to eat into the 1.5 billion and not just for us but I think for others as well, and we are very focused on doing that”.
Finally for the iPhone Tim Cook touched on some points about how the company is positioning the 3GS in the market. Primarily talking US, Apple has taken the iPhone 3GS free on a postpaid basis, as well as lowering the price of the iPhone 4 to $99. These advantages also play out in the prepaid market with considerably lower entry prices for an iPhone.
Whilst lower than previous quarters the iPhone continues to dominate Apple’s balance sheet, making up a massive 39% of the company’s revenue. Apple also said that during the fiscal year of 2011 it shipped 72 million iPhone units, a yearly record by a massive margin.
Apple’s hot product for the year has naturally been the iPad 2, whilst not yet outshining the iPhone in terms of revenue (just above the Mac with 24%), unit shipments are climbing rapidly on a sequential basis and year-over-year.
iPad Quarterly Revenue (Q411)
During the quarter Apple shipped 11.1 million iPads, a new record, and this is compared to just 4.2 million in the year-ago quarter. Sequentially Apple also moved an additionally two million units, a 20% unit increase.
More impressive was the reach that the iPad 2 began to make now that Apple has ironed out all the problems it initially had when ramping production towards the start of the calendar year. During the fourth quarter the iPad entered an additional 20 countries, ending the quarter in a total of 90.
Peter Oppenheimer obviously felt the need to rub in the iPad’s success a little and went on to note how 92% of Fortune 500 companies are testing or deploying the iPad and internationally 52% of the Global 500 are doing the same.
When asked on whether Apple was concerned with competitors coming to market with tablet products Tim Cook answered with a defiant no saying that he was “very, very confident about our ability to compete and extremely confident in our product pipeline.” According to June data from IDC the iPad was responsible for 3 out of every 4 tablets sold.
During the fourth quarter Apple also passed the milestone of shipping its quarter billionth iOS device.
Retail stores remain strong for Apple but revenue has begun to plateau despite continuing at a rapid pace of store openings during the quarter. Retail store revenue for the fourth quarter was $3.6 billion, representing just a 1% climb from the previous September quarter. During the quarter 30 Apple retail stores were opened, 21 of those outside of the US, ending the 2011 fiscal year with a total of 357 retail stores.
Apple blamed the slow growth in retail on sluggish iPhone sales, adding that Mac sales had increased 25% year-over-year from 874,000 to 1.1 million and once again touted the statistic that over half of all Macs sold in retail stores are to customers who have never purchased a Mac before. iPad sales are also said to be very strong.
In fiscal year 2012 there will be 40 new Apple retail stores, 75% of which will be outside of the US. The company is also embarking on a strategy where it will expand and relocate existing stores rather than crowding towns with multiple locations. This will happen to retail stores that are said to be constrained and unable to “deliver our desired customer experience.”
China remains a huge target on Apple’s radar but in just a year has also become a big number on Apple’s balance sheet. Total revenue for the fiscal year from China was $13 billion, in 2010 that figure was just $3 billion. Apple now has six retail stores in the wider China region and at the end of 2010 opened its online store.
The number of sales points in China is also amazing with the iPhone being available at 7,000 points of sale. 200 retailers also stock Apple products alongside Apple’s own retail stores. Apple expects China to become number 2 in terms of revenue very soon but also referred to growth in Brazil which was 118% year-over-year and Russia and the Middle East.
Finally Tim Cook made comment on the Thailand monsoons and flooding which have caused massive loss of life and damage to the area. Making it clear that any problems for Apple have already been factored into the forward looking guidance Cook explained that it is not currently known what the status is of some of the factories in the region.
Primary exposure is expected to be on the Mac with constraints to hard disk drive components with an industry wide shortage likely.
Looking ahead, Apple’s first fiscal quarter of 2012 will likely be very strong, with iPod, iPad and iPhone sales booming for the holiday season and with some Macs expected to receive minor refreshes it looks like Apple could smash records all round. Apple’s next fiscal results will be revealed in January following the end to the quarter on December 31.
Apple has very conservatively (as it always does) given guidance of $37 billion in revenue and a target EPS of $9.30 and gross margin of 40% for the first fiscal quarter of 2012.