Apple Q2: Margins down; China growth, enterprise mojo up

Following on from Apple's second-quarter earnings release, the company dished out some more details on where it is and where it's heading next. All eyes are on Apple's gross margin figure and where it's heading in the lucrative enterprise space.
Written by Zack Whittaker, Contributor

Apple's second-quarter earnings were better than expected.

The company reported second-quarter earnings of $9.5 billion, or $10.09 per share, beating Wall Street expectations of $10 per share on revenue of $42.3 billion.

In short, Apple may not have done much in the public eye for the last three months, but it still exceeded analyst expectations. Very few lemons, but it's still producing a lot of lemonade.

Image: CNET

From today's call, Apple trumpeted its mobile growth in the enterprise markets, but warned that its overall gross margin is struggling. Meanwhile, China is rocking Apple's socks, and other tidbits and commentary from the Apple executive suite are outlined below.

Apple's margins down; expect lower for the third quarter

Apple chief executive Tim Cook said that the company's gross margin was closer to that of a few years ago.

The company's gross margin figure stands at 37.5 percent margin, compared to 47.4 percent on the same quarter a year ago, which is mostly attributable to the lower overall margin for the iPad mini and slowing sales in its Mac division.

"Though we've achieved a credible scale and financial success, we acknowledge that our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012," Cook said.

He also cited the company's fiscal 2012 results as being "incredibly strong," and that is "making comparisons very difficult this year."

Last year, Apple had a richer mix of higher gross margin products, a more favorable foreign currency environment, and historically low costs. This year, not so much, as a result of the iPad mini, which was "strategically priced at a lower margin."

Apple is guiding to flat revenues year over year for the coming third quarter, along with a slight sequential decline in gross margins.

Stock price tumble "frustrating"

In just seven months, Apple has seen its share price tumble from a record high of $702 per share to a recent low of $390 per share in mid April. And a year to date, that's down 27 percent.

Cook said:

The decline in Apple's stock price over the last couple of quarters has been very frustrating to all of us. But Apple remains very strong, and we will continue to do what we do best — we can't control items such as exchange rates and world economies and even certain cost pressures, but the most important objective for Apple will always be creating innovative products. And that is directly within our control.

Instead of worrying about the company's share price, instead Apple will "focus on the long term," and remain "very optimistic" about its future. To prove this, Apple announced an aggressive $100 billion return of capital program over the next three years. The company is also increasing its cash dividend by 15 percent to further appeal to investors.

"We appreciate the input from shareholders," Cook said, but noted that Apple will "review cash allocation strategy each year."

Enterprise: iOS vs. Android

Cook said that iOS has a "strong lead" over Android, accounting for 77 percent of activations for corporate customers. He also noted that McAfee found in a recent report that 97 percent of identified mobile malware was on the Android platform, with the remainder primarily on Java-based platforms.

With more custom applications, Cook said that the iPad now features in 95 percent of the Fortune 500 companies. In the Global 500, it's 89 percent in total.

From an internal software and services point of view, Cook pointed out that not all of its revenue and profits come from the end retail point of sale. Apple generates $4 billion in software and services after the company ships products, Cook said.

China, Asia markets doing well

Cook noted that while the iPhone was top in U.S. rankings for the three-month period ended in February, it also hit the number-one spot in Japan, according to IDC figures. This, he said, is the first time a non-Japanese company has achieved this.

He also noted that the iPhone 5's impact on China has led to a "very different set of dynamics" year over year. While Apple is missing out China's biggest cellular service, it still has a significant share of the Chinese smartphone market. Looking forward, things are only set to grow for Apple in the coming quarters across the region.

The iPad also did well in Japan and greater China, doubling year over year. Cook said Apple was able to sell significantly more iPad minis during the March quarter than in the December launch quarter, and was unable to meet demand in December for the iPad mini. Channel inventory was therefore low coming in.

In total, Apple saw $8.8 billion in revenue — including in retail stores — in greater China. That figure represents over 18 percent of the company's total global quarterly revenue, up 11 percent year over year.

The iPad grew by 138 percent year over year, and Apple expects to see a "significant opportunity in China" going forward. It's a "great market," said Cook. He also confirmed that the company will be doubling its total stores in the region in the next two years. Currently, Apple has just 11 stores in the region.

But with only 19,000 new iPhone sales each day, Cook says this is "currently too low." Apple has already embraced China by making the entry-level iPhone 4 more affordable to first-time buyers, but also noted that China has an "unusually large number" of first-time smartphone buyers.

"That's not lost on us," Cook said.

Other bits from the call

  • "No shortages," Cook said in response to one analyst remarking that Apple may have struggled with component suppliers. Cook pretty much stamped that one out as clear as day.

  • Cook referenced IDC and Gartner figures: IDC said the tablet market will double in four years, and Gartner estimates that the tablet market is growing at an even faster rate from 125 million units in 2012 to a projected 375 million by 2016. No word on when a new tablet will be released, but Cook said that they "continue to be very confident in our future product plans."

  • "We've got a lot more surprises in the works," said Cook, in reference to the iPhone and iPad, notably the culture that brings Apple's employees to work every day.

  • Cook said that there's "some amazing new hardware, software, and services" coming in the September quarter and "throughout 2014." ZDNet's Larry Dignan has more.

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