#earnings

Quick Observations On Apple’s Q2 2014

In no particular order:

  • A 7-for-1 stock split is insane (in a good way).
  • 800 million iTunes accounts and almost all of them have credit cards attached. This is perhaps the most important (and to some extent, most overlooked) part of Apple’s business going forward. They’ll hit a billion very soon.
  • Tim Cook’s second explanation on the iPad “miss” was better than his first. At first, he said it was channel inventory and sell-through. But later he spoke about how fast it grew — faster than any other product Apple has ever done — and implied that it’s hard to maintain such growth. Both explanations may be true, but the first is a technicality, the second is something everyone should be able to understand.
  • iPad revenue for the quarter was $7.6 billion. If my math is correct, the iPad has brought it roughly $32 billion in revenue in the past 12 months. If it were a stand-alone business, those numbers would place it in the top 100 of the Fortune 500. Think about that for a second.
  • By the same count, the iPhone as a stand-alone business would be in the top 25 of the Fortune 500.
  • Overall, this quarter was only the 15th best in terms of profit in the history of any company in the world.
  • Apple cash horde was actually down this quarter due to the buybacks. But it was almost all U.S. cash that was down — Apple still refuses to repatriate the overseas cash and instead is borrowing debt to pay for these massive buybacks. At one point, it sounded like Apple was basically (but indirectly) asking the U.S. for a tax holiday to bring some of their money back to the U.S.
  • The iPhone ASP decreased by quite a bit. But it wasn’t because the iPhone 5c is selling well, it’s because the iPhone 4S continues to sell well.
  • That said, margins overall were still amazing at 39.3 percent.
  • Angela Ahrendts is starting next week, nullifying reports to the contrary.
  • Tim Cook continues to sound more confident about the Apple TV as a product category as he announced “about” 20 million units sold. If I had to guess, I think we’ll see a new Apple TV product announced well before the iWatch this year.

The iPhone Company

It’s Apple earnings day which means two things:

1) Wall Street freaking out amidst record numbers.

2) Lots of people on Twitter linking to lots of different charts trying to explain Apple’s quarter.

I’m pretty sure we’ve reached peak chart.

The issue is that the only real things these charts show at this point is that Apple is both a habitual company and a money-making machine. And, to some extent, they prove the law of large numbers. The charts aren’t going up-and-to-the-right as fast as they used to because well, there are only so many people in the world who can buy Apple products.

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Gross, Margins

Microsoft beat analyst estimates today with what look to be some pretty good numbers. But what struck me were not the numbers themselves, but how much harder it is to dig into a few key metrics now.

When I loaded up the press release, I wanted to see where the Entertainment and Devices division stood after the Xbox One launch. And I wanted to see just how much blood still surrounded the Online Services Division.

Unfortunately, you can no longer see such numbers — at least not easily.

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Nomura analyst Rick Sherlund in a note to clients following Microsoft’s Q4 earnings:

"This (the results) was much more disruptive than investors have expected, with Microsoft missing its guidance in every division and guiding lower," wrote Sherlund. "Everything an activist investor could ask for."

And another view from the same note (in a piece in which author Nick Wingfield makes a strange, loose connection to the Detroit situation):

In a research note on Friday, Rick Sherlund, an analyst with Nomura Equity Research and a veteran Microsoft watcher, noted how Wall Street had warmed to Microsoft’s message lately. “Not so fast,” Mr. Sherlund wrote. “It was discouraging to read down the table and see that every division was below expectations.”

Just to follow up on something, the correct answer to this tweet from April was “next”. And per the guidance, it could still get worse…

Mary Jo Foley of ZDNet on Microsoft’s earnings today:

The Windows division posted revenues of $5.7 billion for the quarter. After adjusting for the $1.1 billion of revenue related to the Windows Upgrade Offer, the Windows division’s revenue was flat. Windows client net income for the third fiscal quarter of 2013 was $3.46 billion, up from $2.98 billion for the same quarter a year ago.

Some Microsoft watchers seem downright enthusiastic that the numbers were flat. After all, the earlier PC shipment estimates indicated they could have been much worse!

That’s ridiculous.

The (revenue) numbers were flat year-to-year even though Microsoft put a major new version of Windows on the market. In what universe is that good or even decent news? 

I had a sense this is exactly what we’d see today. There are some other variables, like pre-existing OEM deals and enterprise volume licensing, that are masking what is pretty obvious: Windows 8 is a total nightmare. I doubt even the shiniest gloss will cover that up next quarter.

As for the glaring omission — you know, actual sales numbers, Foley:

I’m curious when and if Microsoft provides a new update on number of Window 8 licenses sold. Maybe that will happen at Computex or TechEd North America — both happening the first week of June this year? In any case, today’s silence on this front is … interesting.

Indeed.

Michael Moritz writing for FT.com:

The television sound-biters were aghast that Apple’s sales growth was “only” 18 per cent and that management was forecasting slower growth. Everyone seems to have forgotten that it is hard for any company to grow quickly – and even harder when it is already massive. For comparison, during their most recent fiscal years Microsoft grew about 4 per cent and Cisco about 6 per cent – although the first is only about half Apple’s size, and the latter about a third. IBM shrank about 2 per cent to $104bn in sales.

And:

Between September 2000 (when it had sales of about $8bn) and September 2007, Apple grew – largely thanks to the iPod – at an average rate of 17 per cent. In the past five years, propelled by the iPhone and iPad, growth accelerated to almost 45 per cent. If that preposterous rate were to continue, annual sales would top $3tn by 2020, leaving it lodged between the current GDP of France and Germany. Even the devotees who camp outside its stores before a product release would have a tough time believing that Apple will occupy a place between the Maginot and Siegfried lines. If growth were to slow to 5 per cent it would have sales of $231bn in 2020 (compared with $156bn in 2012). At 10 per cent a year, sales would be a flabbergasting $335bn.

Easy to forget that Moritz used to be a writer — until you read him.

Larry Dignan for ZDNet:

Microsoft’s second quarter results were a mixed bag relative to estimates as its enterprise products fared well, but details about Surface units, hidden within the Windows division, were largely missing in action.

The second quarter was all about Windows 8 sales and the Surface, but in the end enterprise was Microsoft’s biggest strength. Products like Windows Server may not garner the headlines, but drive Microsoft’s results.

Microsoft is continuing the transition to a full enterprise company. Normally, a new version of Windows would lead to that division blowing away Office and Servers. This time, the division barely managed a win in terms of revenue, and was still behind Office in terms of profit.

But hey, at least the Online Services Division only managed to lose another $283 million last quarter. I believe that’s the “best” loss since sometime in 2007.

The most important thing to Apple is to make the best products in the world that enrich customers’ lives. That’s our high order bit. That means that we aren’t interested in revenue for revenue’s sake. We can put the Apple brand on a lot of things and sell a lot more stuff, but that’s not what we’re here for. We want to make only the best products.

Amazon’s Q2 numbers are wild. And the release is just odd (why the quote about Amazon Prime, exactly?). Sales were up, but:

Net income decreased 96% to $7 million in the second quarter, or $0.01 per diluted share, compared with net income of $191 million, or $0.41 per diluted share, in second quarter 2011. 

$7 million. Amazon made $7 million dollars last quarter on sales of $12.83 billion. That’s insane. Let’s pretend the sales were $12.837 billion. Amazon kept the 7, everything else vanished.

Yes, their Kiva Systems deal wiped out some profit, but not much ($65 million). This is not Microsoft writing-down billions due to an acquisition gone bad, this is just awful margins. 

Worse, Amazon is now projecting a loss of anywhere from $50 million to $350 million next quarter (on sales of anywhere between $12.9 billion to $14.3 billion). Amazon has been warning about the possibility of a loss for the past few quarters. But they haven’t had a profit range fully in the red before. They very well could beat their numbers next quarter, but it sure looks like they think they’re going to dip into the red. They’ve been profitable for a decade.

Yes, I realize Amazon is viewed as a growth business (forgoing short-term profits for long-term gains). But these numbers keep going the wrong way. At some point, they have to start going the right way, right?

As I noted earlier, Apple’s “disappointing” quarter included $8.8 billion in profit. Or maybe I should write it this way: $8.800 billion — if that last zero was a seven and you removed everything before it, that would be Amazon’s profit.

But wait! It’s an Apple-to-oranges comparison! The same used to be said when comparing Apple’s profits to Microsoft’s. SInce Microsoft was a software company, their margins were far better which meant far more profit than Apple. Not anymore. 

More importantly, all of these companies are increasingly competing all across the board — Amazon, for example, now finds itself in a dogfight with Google thanks to the new Nexus 7. The real difference is that only Apple seems to be making any money on the hardware side of things.