Apple (NASDAQ:AAPL) blew past expectations when it announced its Q2 FY 2012 results Tuesday afternoon, posting its second best quarter ever and almost doubling its net income over the year ago quarter.  The iPhone, the iPad and the Mac saw record March quarter sales helping Apple post over $39 billion in revenues that not only exceeded its own estimates by more than 20% but also most analysts’ as well. As a result of the growing economies of scale, gross margins improved heavily and net income surged to $11.6 billion, up 94% over Q2 FY 2011. To put this figure in context, Google’s (NASDAQ:GOOG) entire revenue last quarter was $10.65 billion.
The record earnings was cheered by the market as the stock bucked the declining trend over the past couple of weeks to shoot up almost 8% in after-hours trading post announcement. In the wake of the earnings call, we have a revised price estimate of $700, about 16% ahead of the current market price.
International sales bulk up iPhone revenues
Apple continued to bank on the success of the iPhone 4S for the second quarter running to sell more than 35 million iPhones last quarter. While this figure falls just short of the 37 million iPhone sales posted in the record December quarter, it easily dwarfs the 18.7 million sales recorded a year back.
After the frenetic holiday buying seen last quarter when the iPhone 4S was launched, we expected to see a seasonal slowdown in iPhone sales. (see Apple’s Earnings All About iPhone, iPhone, iPhone) While this was true in the developed markets of North America and Europe, Apple was able to recoup most of the losses by expanding its operations overseas.
Two of the largest U.S. wireless carriers, Verizon and AT&T, reported iPhone sales recently and the combined unit sales for the quarter came to about 7.5 million versus last quarter’s combined sales of close to 12 million. The seasonal slowdown saw Apple’s revenues from Americas and Europe combined fall 25% sequentially. However, the iPhone 4S’s launch in China on China Unicom’s and China Telecom’s networks last quarter helped its revenues from the Asia Pacific region grow 32% over the previous quarter, making up for most of the slowdown in developed market sales.
Going forward, China holds a lot of promise considering the huge 2G subscriber base that the carriers there are trying to transition to 3G (3G penetration is currently only 14% in China). A deal with China Mobile, the largest carrier in the world by subscriber base, is looking increasingly likely following Qualcomm’s recent announcement and Apple’s similar deals with the other two carriers. This deal is very important for Apple as it instantly doubles its current addressable market for the iPhone in China and can act as the next big boost to its stock, given that the iPhone accounts for close to 60% of our stock value now.
Declining commodity costs and a higher mix of iPhone sales within the overall revenues helped Apple post a sequential increase in gross margins for the second consecutive quarter. iPhone revenues accounted for almost 58% of sales in the quarter, up 8% over the same period last year. Improving economies of scale as Apple expanded its reach overseas also had a huge bearing on its overall gross margins, which rose almost 600 basis points over the year-ago quarter to more than 47%.
The iPad’s sales were partially muted as the new iPad was launched late in the quarter and customers probably held off buying an iPad until the new one was launched. iPad sales came in at 11.8 million units, about 150% higher than the year-ago quarter but 25% lower than the previous quarter. However, the new iPad had a tremendous opening, selling over 3 million units in the debut weekend itself and will have more of an impact in the coming quarters. In any case, the iPad only contributes less than 12% of our price estimate, and the impact of this product is therefore limited.
Going forward, we see the iPad performing well in the absence of meaningful competitors in the tablet market and the very nascent stage that the market is in. However, a very potent threat in the form of Microsoft’s Windows 8 looms on the horizon.
Microsoft plans to launch Windows 8, which will be made available on both PCs and tablets, later this year. A lot of PC as well as smartphone manufacturers are expected to jump in on the offering to tap the nascent tablet market. Microsoft has a widely installed PC base in place that it can leverage to pose a big threat in the young market. Moreover, it can also leverage its partnership with Nokia to push for an integrated experience across all devices, mobile or PCs, in order to create a viable third ecosystem.Notes:
- Apple’s CEO Discusses Q2 2012 Results – Earnings Call Transcript, Seekingalpha, April 24th, 2012 [↩]