Remember the annoying orange? The YouTube channel according to Wiki had a whopping 3 million subscribers at the height - The Annoying Orange? Well, that was 2009. The story was a simple one, an orange being the main character who used to shout at the other fruit in the fruit bowl (yes, really) and one line that stuck with me was the: "Hey Apple". Good for Dan Boe. The annoying orange can also be the army of analysts who cover the company very closely. I would think that it is the most covered company around, both from a professional and blogger point of view. There are whole websites committed to rumours of new products as well as predicting earnings.
I suspect that it is because the products attract our attention, because they are so beautiful. They are really well made. And in life, unfortunately (or fortunately), you get what you pay for. That is why you pay top Dollar for all of Apple's products, it is one of the very few products that I know where their users are almost always sales people. Before I had an Apple product, those users were like the annoying orange, telling me how awesome the pro cut was. My first product was an iPod, a really nice one for my birthday when I cracked 30. It was marvellous. Beautiful. I loved it. You know what? It still works.
Apple released their first quarter numbers for their 2014 financial year, after the bell last evening. Records all around. The most iPhones ever sold at 51 million (versus 47.8 million in the comparable quarter) and the most iPads ever, at 26 million (22.9 million in the comparable quarter). And perhaps not so surprisingly, for me at least, the company sold more Macs, 4.8 million versus 4.1 million in the comparable quarter. Yes, that is right, they grew the number of laptops sold in a declining PC market. According to various pieces that I saw, Apple grew their Mac sales around 30 percent, whilst the rest of the market shrank 7.5 percent. It turns out that everyone is adopting the most expensive of their products.
iPods, that does not even get a mention, even though the company sold just over 6 million units (12.679 million in the comparable quarter), but that didn't even generate 1 billion Dollars in sales. Think about that for a second, for total Q1 sales were 57.594 billion, yet iPod sales were only 973 million. The iPod was released on the 23rd of October, 2001. After iTunes, believe it or not, that iconic software was released about three quarters prior. iTunes turned 13 on January the 9th this year, it just became a teenager in human terms. That segment, iTunes/Software/Services generated 4.397 billion Dollars, a 19 percent increase when compared to the comparable quarter.
Accessories, the Apple products sold on their website and in their stores, generated 1.863 billion Dollars worth of sales. To put that into perspective, you must have heard of Tiffany & Co? Right? They sell beautiful products. Jewellery. The last reported period, to end November, the company across all of their stores sold 911 million Dollars worth of goods. Apple has a small accessories business relative to all of their other businesses and still manages to be double that of Tiffany & Co. Astonishing.
Let us digress for a second here, just to get some historic context. 20 years ago, in the comparable quarter, Apple sold 2.468 billion Dollars worth of products, but because their costs were so high, they eked out a profit of only 40 million Dollars after tax. Or 34 cents a share. And all they sold back then were desktop personal computers in the form of the Performa and Quadra, as well as a relatively new PowerBook. Remember when we used to call them notebooks. International sales, as a percentage of total sales for Q1 in the 1994 financial year was 45 percent. The company only sold computers. Fast forward to 2003, well the first quarter (December quarter) of 2003 being the first quarter of the financial year 2004. Revenue topped 2 billion Dollars. Only. A very modest after tax bottom line of 63 million Dollars when compared to a loss in the comparable quarter of 8 million Dollars. Astonishing. They sold (only) 733 thousand units of iPods, but that was a 235 percent increase from the comparable quarter. Everyone wanted one. Mac unit sales topped 829 thousand units. But essentially the company sales were flat over ten years, even though the product mix had changed a little.
The iPhone and iPad changed everything. Revenues and profits exploded. As did the share price. Between then and now, the stock is up from basically 10 Dollars to 550 Dollars. So the company perception in the eyes of the investment community went from being a quirky hardware company with innovative chief and beautiful products to a business that sells many millions of products a year. And a product that is now mainstream, many people want the iPhone and an iPad to boot, and seemingly a Mac too.
For the last quarter, the company earned 13.1 billion Dollars, 14.50 Dollars a share. Gross margins were 37.9 percent. In the US and Japan the iPhone accounts for 69 and 41 percent of the smartphone market share respectively. Yes, the iPhone is indeed big in Japan. Ironically, Big in Japan, the song was released in January of 1984, at exactly the same time that the first Mac was released.
The Mac just turned thirty! OK, we digress, but follow the link to watch the cute video.
Cash on hand grew to just shy of 159 billion Dollars. Or at current levels that is 1.763 trillion Rand. That number is just mind blowing. As a percentage of the market cap (where the share price is indicated to open 8 percent lower, we will deal with why in a second), cash on hand is an amazing 35 percent of the market capitalisation. Not too unchanged from the recent past, the only difference here is that the company have bought back shares aggressively and have continued to pay a decent dividend. A pretax yield of 2.4 percent is not bad I guess.
The company continues to buyback stock at a breakneck speed. The capital return program was boosted last year April to 100 billion Dollars, from 45 initially a year prior. Currently, with that program ending in the calendar year 2015, we are only at 43 billion Dollars. 57 billion to go, 7 quarters left, you do the math. Around 8 billion a quarter, OK, I did it for you. To put that number in perspective, that is like returning shareholders the entire Shoprite, or Bidvest, every quarter. I apologise if you choked on your sandwich. That is massive. Huge. Or Imperial and Discovery put together, in one quarter. Just think about that for a second, for the rest of their financial year, Apple could return you the equivalent of those four companies market capitalisations put together. Just wow.
So why did the stock get a paddy whack in the after-hour trading session, and also in Frankfurt this morning? One, the expectations of the street for iPhone sales did not represent the reality on the ground, collectively the analyst community were looking for 4 million odd more units to have been sold. First problem, if you are looking short term. Second problem is that guidance given for the current quarter was light of what the same community predicted. I guess it proves that short term predicting is a tough pastime, and the best of the best missed completely. Well, not completely, but they did miss.
The
Q1 2014 Earnings Call Transcript is available via the Morningstar website, there are some great titbits there. The company has 78 percent of the tablet market in the US.
"iPad continues to spark innovation for businesses around the world, leveraging custom developed and App Store apps, progressive IT organizations have embraced mobility, armed employees with iPad and fundamentally changed the way people do their jobs." That app store part is important as well as the ability of these companies to integrate all their divisions together. And there we were led to believe that Apple products were for retail consumers only, a mere three odd years ago that was the mantra.
That is the point really. Things change quickly. And they may continue to change at an even quicker rate, which brings us to the third reason that Apple sank, Mr. Market and their hyperactivity is worried that there is no new product. Last year it was Apple TV. The year before too. The products will come. The existing ones will stay relevant and refreshed. The product renew cycle will mean people will continue to adopt the best product. And the newer products will be wow, quality people are attracted to quality businesses, we have said that a lot. They WANT to be associated with a company and walk the same halls as Steve Jobs. They WANT to be that person that invents the next wow product.
Be patient, stay the course, in the meantime continue to lap the shares up when they are cheap and present opportunities, like now. Buy.