Apple just finished reporting its fiscal Q4 2013 results, which ended in September. Overall it was a very solid quarter, with just under $38 billion in revenue, gross margin of 37% and earnings per share of $8.26 (fully diluted). Was it a record quarter? We have to keep in mind that Apple’s Q1 (December) is the big one every year, driven by holiday sales. But as far as comparable Q4 periods, this was a record setting quarter for iPhone sales, with 33.8 million units sold. They also tied last year’s Q4 shipments for the iPad (though no records were set on the Mac). So what does it all mean?
Earnings-wise, $8.26 is a solid performance in EPS, but it’s slightly lower than last year’s Q4, when earnings were $8.67. Why? Because gross margin was higher last year - 40% versus only 37% this year. It just so happens that the iPad Mini started shipping the very next quarter, and it’s well understood that this product had a negative effect on gross margin. When a company makes a shift in its product portfolio like this, we’ve got to ride it out, and by next quarter we’ll have a better idea of how earnings growth is shaping up. The company did guide to revenue of $55-58 billion for the holiday quarter, which would be ahead of last year’s $54.5 billion. I won’t dive deep into the accounting, but the implied growth is actually about a billion dollars better than it looks because of how Apple accounts for software now that Mavericks and iWork are free (pesky accounting rules!)
Judging from Apple’s guidance, it still seems like they will generate less earnings in the holiday season despite producing record sales. Again, the culprit is gross margin. Apple is always quick to point out that higher revenue usually produce higher gross margin. So analysts are bothered by the fact that management doesn’t expect the huge holiday revenue numbers to correlate into higher gross margin. In fact, guidance for margin in Q1 is flat with the Q4 they just posted. How can that be?
One possibility is the new lineup of iPhone 5s, iPad Air and the new Retina iPad mini. Unless Apple is sandbagging on guidance, it’s only natural to conclude that these brand new products come with higher bill of materials, which Apple will have to work hard to reduce over the next couple of quarters to help margins. But it’s a bit more complicated than this. Because of the accounting changes I mentioned above, about $900 million in revenue (relating to software, and usually very high margin) is being deferred. So absent that deferral, gross margin would be forecast to climb to similar levels as last year. With the stock dropping in reaction to this whole situation, I think the market is doing its typical overreaction.
At the end of the day Wall Street is obsessed with quarterly reporting and analysts are in an industry that is designed to respond to minutia. I prefer to look at the business performance with a long term horizon in mind. Apple has just finished refreshing the bulk of its portfolio with some pretty impressive, industry leading specs.
This will translate into record sales for the holiday period, and we’ve got a pretty clear message from Tim Cook about confidence on future product and service offerings into 2014.
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