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Apple Earnings Report - Q3 2014

Apple Earnings Report - Q3 2014

posted by Virendra Singh Chauhan | published by Amigobulls on
  • Apple reported Q3 2014 EPS of $1.29, beating analyst estimates of $1.22 while missing the topline consensus estimates marginally.
  • The 20% earnings growth was driven by margin expansion and share repurchase program.
  • The margin expansion was on account of a favourable shift in product mix. Improving gross margins and further buybacks will continue to drive earnings growth over the next few quarters.
  • Our Apple stock analysis reiterates our positive long term outlook on the stock.

 

Apple Earnings report Q3 2014

Apple (NASDAQ:AAPL) announced its Q3 2014 earnings after market close yesterday. The company came out with strong numbers for the quarter, with the iPad sales being the only cause for concern. The highlight of the quarter was a huge growth in earnings, which was a boosted by profit margin expansion and share repurchases through the quarter.

 

A solid quarter, but iPad sales continue to disappoint

The below table summarizes and compares the Q2 2014 performance with the Q3 2013 performance.

Apple Q3 2014 financial metrics

Q3 2012

Q3 2013

Q3 2013 YoY growth

Q3 2014

Q3 2014 YoY growth

Revenue

35023

35323

0.9%

37432

6.0%

Gross profit

14994

13024

-13.1%

14735

13.1%

Operating Income

11573

9201

-20.5%

10282

11.7%

Net Income

8824

6900

-21.8%

7748

12.3%

EPS (Earnings Per Share)

1.33

1.07

-19.6%

1.29

20.6%

 

Apple reported a Q3 2014 revenue growth of 6% YoY compared to a marginal growth of .9% in the year ago quarter. On the earnings front the 20.6% YoY growth in Q3 2014 EPS was in stark contrast to the 19% earnings decline in Q3 2013. The revenue growth was fuelled in large part by a record number of iPhone sales. The device sales by category are summarized in the table below.

Devices sold (in million)

Q3 2013

Q3 2014

YoY unit growth

YoY revenue growth

iPads

14.62

13.3

-9.0%

-8%

iPhones

31.24

35.2

12.7%

9%

Mac

3.7

4.4

18.9%

13%

iPod

4.57

2.93

-36%

-40%

 

The iPhone and Mac sales saw a good growth on a YoY basis, even as iPads continued a downward trend. The falling iPad unit sales have been a trend over the last few quarters which questions Apple’s ability to defend its tablet market share. It is now increasingly difficult to imagine Apple generating a significant growth from iPad sales. With the bigger screen iPhone on the horizon, a further cannibalisation of iPad sales can be expected unless Apple comes out with something drastically different. The iPad sales numbers were one sore spot in Q3 2014 even as MAC sales beat analyst estimates of 3.9 million units. MAC unit sales rose 18% YoY, partly making up for the lacklustre iPad sales. The solid iPhone sales fell marginally short of analyst estimates of 35.8 million. On the whole, MAC sales were the surprise driver of Apple revenue growth in Q3 2014, making up for the poor iPad sales.

 

Apple Profit Margins expand due to higher sales of Flagship models

Apple profit margins saw an expansion across all levels. The YoY profit margin changes are captured in the table below.

Profit margin

Q3 2013

Q4 2013

YoY change

Gross margin

36.9%

39.4%

2.5%

Operating margin

26.0%

27.5%

1.4%

Net Income margin

19.5%

20.7%

1.2%

 

The margin expansion was along expectations, as stated in our Apple earnings preview. The gross margin expansion by 250 bps can be attributed, in a large part, to the shift of sales mix in favor of the iPhone. The strategy of discontinuing the previous model seemed to have worked in Apple’s favour, boosting the flagship model sales. It is to be seen if they pursue with this strategy by shelving the iPhone 5S once the iPhone 6 is released this fall. The less than proportionate increase in operating margin was due to a 36% YoY growth in research expenses, which significantly outpaced Apple revenue growth for the quarter.

 

The profit margin expansions and topline growth led to Net Income growth of 12% YoY. However, the YoY EPS growth came in higher at 20.6%, a reflection of the Apple’s share buyback program, which is currently underway. The number of outstanding shares reduced by over 400 million from Q3 2013, implying a 7% reduction.

 

Apple CFO Luca Maestri stated on the conference call:

“We spent $5 billion to repurchase 59 million Apple shares to open market transactions.  We've now taken action on over $74 billion of our $130 billion capital return program, including $51 billion in share repurchases with six quarters remaining to its completion.”

 

With $56 billion left under the firm’s capital return program, the buyback program will continue to fuel earnings growth at Apple over the next six quarters.

 

Apple Q4 2014 Earnings Guidance

Apple’s management provided the following earnings guidance for Q4 2014.

  • revenue between $37 billion and $40 billion
  • gross margin between 37 percent and 38 percent
  • operating expenses between $4.75 billion and $4.85 billion
  • other income/(expense) of $250 million
  • tax rate of 26.1 percent

 

The revenue guidance is below analyst consensus estimates of $40.4 billion. The falling unit sales of the iPad and the possible introduction of larger screen models of the iPhones could continue to lead to a favourable product mix in Q4 2014 sales, leading to further margin expansions, which makes us believe Apple was too conservative in giving out the Gross margin guidance for the next quarter. In all likelihood, the gross profit margin will be higher than the 39% in Q3 2014.

 

In conclusion, the combination of higher iPhone sales (have higher profit margin), continuation of Apple’s huge buyback program and the highly awaited product launch this fall will continue to drive Apple earnings growth over the long term. Investors should look beyond the Q4 2014 guidance and focus on the upcoming product launch and management guidance for Q1 2015 to make more meaningful long term decisions. We reiterate our positive long term outlook on Apple stock, which is currently reflected in our Apple stock analysis.

Disclaimer: We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

About the author

Virendra Singh Chauhan
Virendra Singh Chauhan is a Financial Analyst at Amigobulls. An MBA(Finance) with specialization in investments, Virendra is a value investor who loves to analyze stocks and involve in discussions regarding investments in general. His areas of interest include personal finance as well as entrepreneurship, apart from equity analysis in particular. He loves companies with strong cash flows and profits today rather than companies built on promises of future. Contact him at virendra.chauhan AT amigobulls.com.
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recent comments

Michael Grove profile picture
Michael Grove bullish
Do you think Q4 gross margin will come in above guidance of 37%-38%? If so, why do you think they guided this level?
2 Vote up 0 Vote down reply 1 reply
Virendra Singh Chauhan profile picture
Virendra Singh Chauhan bullish
I think the current trend of higher iPhone sales as a proportion of total sales will continue into Q4, before the new products are launched. The higher margins on iPhone are well known, which is why we see Q4 margins inching higher than the guided range. The new launch could, IMO accelerate this trend as the larger screen iPhones could cannibalize the iPad sales further. Apart from this, as Claudio Rizzini mentions below MAC sales accelerated this quarter. If this trend continues with the deceleration in tablet sales, profit margins will only move one way as iPad is the least margin product from the Apple stable.
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Claudio Rizzini profile picture
Claudio Rizzini bullish
Tablet world growth is slowing down, in addition there are more companies with valid products that hadn't nothing comparable in the past, simply Apple arrived first in that market. It's normal that tablet revenue are slowing. In addition, a lot of people bought tablet thinking that tablets could completely substitute laptops but the difference in CPU and GPU power is wide, in fact this has been a big problem in business and those high power (for laptops) demand field which now converts to a little rise in PC (and laptops) sold devices. In addition, tablet are (in part) seen as optional devices while smartphones are a must which undergoes continuous turnover in buying smartphones. This doesn't always comes true for tablets. So a decrease in tablet revenue is totally NORMAL.
Finally, the quarter before the new release of new products always comes to a slowdown in revenue (in this case for tablets). Also look at mac revenue which is going up.
2 Vote up 0 Vote down reply 1 reply
Michael Grove profile picture
Michael Grove bullish
Apple appears to be attempting to raise the price of tablets since is margin is tightest on this product. I think the winddown of windows XP and corresponding pc upgrade requirements put the brakes on the tablet market near-term. When the pc refresh works through the enterprise and a tablet product offering refresh comes out with greater specs, then growth should pick back up next year for tablets.
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