Apple pips estimates

Apple results for their third quarter hit the screens last evening, post the market close. The Investor relations page has been spruced up since I last visited it, certainly looks better. In the traditional clean and crisp Apple way. How do they do it? The beautiful look, they are so very good at it.


Remember that the company did a share split, 7 for 1, so the earnings on a per share basis, as well as the dividend are adjusted accordingly. Revenues clocked 37.4 billion Dollars for the quarter, profits a whopping 7.7 billion. Yowsers. At the same period last year the numbers were 35.3 billion Dollars worth of sales and 6.9 billion Dollars worth of profits, the 2.1 billion Dollars represents only a six percent increase.


On a per share basis, the company earned 1.28 Dollars (1.07 at the comparable stage) and the highest growth rate in seven quarters. The dividend has been guided higher to 47 cents a quarter, which amounts to just shy of a two percent yield at this share price. Not a king's ransom by any stretch of the imagination, but consider that the company only paid their first dividend on the 9th of August 2012. Not their first ever, but their first in the current cycle. The dividend cycle was broken from November 21 1995 all the way through to that one paid in 2012.


The company has pots of cash, they generated 10.3 billion Dollars of cash during the June quarter and returned in the aforementioned dividends and share buy backs around 8 billion Dollars. Yowsers, that is serious. Cash on hand? 164.5 billion in cash and marketable securities, with 26.8 billion Dollars of that in the US. That means that Apple has cash of 137.7 billion Dollars worth of cash around the world. Oh I would love to know how the Apple hedge fund operates.


Historically the company trades on a price to earnings multiple of 15.8 times, if you strip out the cash (cash represents 28.8 percent of the market cap), then it is closer to 11.2 times. Wow. In my humble opinion this company is still cheap.


Apple sold 35.2 million iPhones, which is a third quarter record and an improvement of 4 million on the comparable quarter last year. That is a healthy 13 percent increase. Remembering that the rumour mill is suggesting a newer iPhone, in fact the rumour mill suggests two newer models with larger screens. As long as it still fits in your pocket. The iPhone still represents 70 percent of the business, it is their most important product. As such the next one is always going to be highly anticipated. Always.


They also had a record quarter as far as Mac sales are concerned, 18 percent higher year over year, selling 4.4 million devices. What makes those Mac sales even more mind boggling is the fact that (on the conference call - read the transcript - Q3 2014 Earnings Conference Call) according to a crowd by the name of the IDC, they estimate the PC market shrank by 2 percent. Apple Mac has gained global market share for 32 of the last 33 quarters.


We had speculated about this in earlier messages on Apple, wondering if when people upgraded they would get a Mac. Once you are in the ecosystem it is a whole lot easier. They are certainly beautiful devices, my MacBook is simply awesome. It is always on, no waiting for updates, no waiting for booting up. Simple, clean and easy to use. That is another thing about Apple users, they suddenly turn into sales people with the devices that they have. The success of the beautiful devices can be attributed to the company as well as the wonderful friendly user platform. I cannot wait for Yosemite.


Their fastest growing business? iTunes, where billings grew 25 percent year over year, and the last quarter was a record high. Once you are locked in and Apple have your billing details (genius) with a simple click of a button you can purchase an app, a song, a book and the list goes on. Movie? I have bought one of those before too. iTunes billings grew to 5.4 billion Dollars for the quarter, annualise that and you are closer to 22 billion Dollars for the year. From iTunes. Cumulative app downloads have passed 75 billion. And most importantly is that developers have earned 20 billion Dollars in sales through this platform. The larger the number gets, the more developers it will attract. The app gold rush.


The only blight on what are very good numbers are that tablet sales globally have tapered and are in fact decline, even though Apple have been shown to be the number one goto company as far as customer satisfaction is concerned. As per the conference call, where CEO Tim cook said "iPad sales met our expectations but we realized they didn't meet many of yours.". The company still managed to sell 15.3 million units which was better than the 14.6 million in the comparable quarter last year. Strong sales from the Middle East (sales up 64 percent), China (up 51 percent) and India (up 45 percent). Since the product was unveiled, the iPad that is, the company have sold 225 million. I remember many people were quite perplexed about the usefulness of the product.


The next powerful operating system and apps that can go with it are key for driving tablet sales globally, at least that is my sense. Having said that, people are so happy with their iPads. A crowd called ChangeWave surveyed iPad users and found a 100 percent customer satisfaction rate for users of the iPad mini with retina display (the crystal clear one) and 98 percent customer satisfaction for the iPad Air. Wow. Apple interestingly had internal data that suggested more than half of the iPad sales are to first time users.


Guidance for the current quarter was around 37 to 40 billion Dollars in sales (I think if I am not mistaken Mr. Market was expecting above 40 billion Dollars), gross margins of between 37 and 38 percent (inline with expectations). After all was said and done with the results and analysis and the conference call and the Q&A session (quite limited, but that is usual), the share price traded lower in the after hours session. Currently mooted to open at 94.15 Dollars, down 0.6 percent after having traded higher by 0.83 percent to 94.72 in the normal trading session. That tells you that these results were made of Goldilocks, the market got it right, not too hot and not too cold.


So where to next for Apple? Obviously the iPhone releases will be key to ramping up revenues. The business tie up with IBM is interesting, the company plans to roll more of their products across business and noted that the likes of Medtronic, which has developed over 175 internal apps for around 16.5 thousand iPhones used by its employees and Nestle who's employees use over 25 thousand iPhones are committed users already. The products are beautiful, the markets are still big. Margins should be maintained as the company does not discount the quality, it seems that will remain that way.


The company continues to be well placed, 29 other transactions have been done over the last 7 quarters, not including the one that was splashed out, the Beat's one of course. The company plugs away, always looking for awesome businesses to add onto their ever growing eco system. And whilst it is hard to tell, on the conference call Time Cook said that the Gartner research suggested that by 2018 tablet sales globally would be around 350 million annually with PC sales at 315 million, Apple aims to continue to add devices one at a time. We continue to buy this company.