Apple (AAPL, Financial) announced its fiscal Q3 2014 results on July 22, reporting a reasonably strong set of numbers that beat market expectation on earnings, although revenues were slightly lower than anticipated. The results were driven by the iPhone, which saw demand grow for all three models, and by the Mac, which saw double-digits sales growth despite a shrinking personal computer market. However, iPad sales continued to disappoint, owing to weaker demand in developed markets. Quarterly revenues grew by around 6% to around $37.40 billion, while quarterly net income grew by around 12% to $7.7 billion. Earnings per share jumped by around 20% year-over-year, aided by recent share repurchases, while gross margins expanded to around 39.4% from around 36.9% a year ago, owing to lower costs and possibly due to a higher share of iPhones in the company's sales mix. Here is a brief look at some of the key trends that drove Apple's performance for the quarter.
It seems not even the impending release of a new iPhone can slow down sales of Apple's most popular product. In spite of slightly missing analyst estimates, Apple posted a strong fiscal third quarter, generating $7.75 billion in profits due to strong iPhone sales.
According to the company's third quarter earnings, it sold 35.2 million iPhones between April and June this year. The figure represents a 13 percent jump in iPhone sales from the same period last year. In spite of the uptick in iPhone sales (which is in contrast with the weaker smartphone sales recently posted by rival companies such as Samsung), Apple's numbers disappointed market analysts, who predicted that the company would sell 36 million smartphones during the period.
The iPhone remains Apple's most important product by far, accounting for close to half of the company's value, according to our estimates. For this quarter, Apple shipped about 35 million iPhones, representing a 12.7% jump over the same quarter a year ago, although revenue growth was slightly lower at around 9% possibly due to a greater mix of lower-end handsets. Business remained healthy in emerging markets such as Brazil, Russia, India and China, where iPhone shipments grew by around 55% year-over-year. China turned out to be particularly strong market, with overall revenues (from all products) growing by roughly 28% year-over-year and iPhone sales growing twice as fast as the broader Chinese smartphone market. However, sales in Japan, which had been one of the iPhone's fastest growing markets in recent quarters, were impacted by an increase in value added taxes (VAT) and some changes to the regulatory environment for mobile carriers.
Apart from the stronger shipments, we observed two encouraging trends within the iPhone business. Firstly, Apple's mid-tier iPhone 5C appears to be gaining some traction. While all three iPhone models recorded year-over-year sales growth, Apple noted that the 5C saw the highest percentage growth when compared to last year's mid-tier model. Although it's safe to assume that the high-end 5S still remains the company's largest volume driver, we believe that a more well-rounded demand mix for Apple's handsets is a positive sign, given the increasing differentiation that smartphone customers are seeking. We estimate that Apple's mid-tier models (the 5C in this case) could be almost as lucrative as its higher-end offerings, considering their legacy components and lower manufacturing costs.
Secondly, Apple seems to be less dependent on the subsidy model of carriers who discount the upfront price that customers pay for smartphones. The company estimates that fewer than 25% of iPhones currently sold were tied to a traditional subsidy plan, marking a significant decline from 2 years ago. This is an encouraging development, since it points to the fact that more customers (many of whom are likely to be in emerging markets where subsidies are not prevalent) are willing to pay the high upfront price of an iPhone rather than have a carrier subsidize it for them. Some carriers, such as T-Mobile, have done away with subsidy plans altogether, while other large carriers including AT&T are experimenting with their own subsidy-free plans that save customers a certain amount off their monthly bills if they purchase their own device.
In spite of falling short of analyst expectations, the company exhibited growth all around. Revenue rose to $37.43 billion from $35.32 billion during the same period last year. The company also slightly beat estimates in terms of earnings per share at $1.28. Experts predicted that company would generate $1.23.
Apple also reported stronger sales for Macs, which is due to the introduction of cheaper iMacs and Macbook Airs. The company posted a 17.6 percent increase in Mac sales during the period. It sold 4.4. million units, up from the 3.8 million units that were sold during the same period last year.
The only letdown in Apple's third quarter performance was its iPad sales. The company sold 13.28 million units of the device during the period. This represents a 9.2 percent drop compared to the 14.6 million iPads that the company sold during the same period last year. Analysts expected the company to sell 14.4 million during the quarter. The company's weak sales is said to be due to competition from cheaper tablets from Samsung, Google and Amazon and people's reluctance to part with their older tablets.
Concluding Comments:
Apple's iPad shipments declined by about 9% year-over-year to around 13.3 million units, marking the second straight quarter of year-over-year declines. The lower shipments were due to weaker demand in mature tablet markets such as the U.S., which offset some double-digit percentage growth recorded in markets such as China, the Middle East and India. Additionally, the company's move to reduce iPad channel inventory by around 500,000 units from Q2 2014 levels also contributed to a decline in shipments. Although the iPad already has a market share of over 70% in the U.S. commercial market, the penetration levels of tablets are still low at around 20%.
