Apple Earnings Report Recap

6:05 p.m. EDT:

You can bet that we’ll have more Apple earnings coverage for you tomorrow morning but here are some quick takeaways.
1. Growth in China is explosive. Huge iPhone numbers, huge Mac numbers.
2. China isn’t alone. 71% revenue growth in emerging markets?! Apple is taking the world by storm.
3. Profit margins remain very strong as well. This is a great sign for the company, especially as we enter the quarter in which Apple Watch sales will hit the financial results. Because the hardware is largely the same but price points vary greatly, the consensus seems to be that Apple Watch margins will be significantly higher than the company’s broader margins, despite the company’s somewhat tepid guidance.
4. iPad remains weak. Business Insider published this chart just minutes ago, it tells the sad story of iPad sales.

Thanks for following along!
– Jay M. Taylor

6:00 p.m. EDT:

And that’s all folks! The stock is up 1.3% in after-hours trading as of the end of the call.

5:57 p.m. EDT:

Question: You mentioned that you thought a lot of the iPhone sales were going into the middle class in China. Can you talk about where your phones are ending up re: demographics? Do you have the right price points?
Tim Cook: If you look at the emerging market, our revenues were up 58% year-over-year, accounted for around 40% of Apple’s revenue. BRICs were up 60% year-over-year. As I look at that, it’s clear to me that it has to be coming from the middle class. There are only so many upper income earners, we can’t grow those kinds of numbers without the middle class.
Follow up about HBO Now: How should we be thinking about Apple as a conduit for HBO Now and similar products? Is it more about selling incremental devices? Or expanding the revenue pie?
Tim Cook: First of all, it’s about giving the customer something that they want. We’re marrying their great content and our great ecosystem. We’ve only been at this for a couple weeks or so but I see a lot of traction there. I think we’re in the early stages of major, major changes in media that will be positive for consumers and I think Apple can be a part of that.
 

5:53 p.m. EDT:

Question from UBS: Can you talk about the decisions that went into the capital return program. Regarding debt, do you have a debt-to-EBITDA ratio you don’t want to go over?
Luca: We look at our goals and our needs and we see that we’re in this great position to return cash to shareholders. We’re very confident in the pipeline of products and services that we have and that there is great value in our stock. That’s why we’re increasing our share repurchase by so much. We also know that income investors value the dividend so it’s important for us to increase it as we can. As we said in the past, we plan to increase the dividend every year around this time.
From funding perspective, a good portion of our capital return program will be funded through debt – both U.S. debt and debt raised outside the U.S. We have a very open dialogue with the rating agencies and we feel there is a lot of room on our balance sheet.

5:46 p.m. EDT:

Question: 71% year-over-year growth in China revenue, can you give us more info?
Tim Cook: Correct, a strong year. A record in China. We benefitted from Chinese New Year, iPhone grew 70%, giving us an additional 9% of market share. Mac also had an unbelievable quarter in China, sales up 31%. IDC predicts that PC sales as a whole in China fell by 5%. So we’re bucking the trend. App store in China grew over 100% year-0ver-year.
iPad had its best year ever in China and, as with Mac, in a market that contracted.
Everything we look at in China was extremely good. We’re working on expanding our ecosystem there, including adding UnionPay. iPhone point-of-sale is up to 40,000, up 9% year-over-year.
We’re in many more cities than we were in before. We’ve opened several stores in China, 21 total now and on track for 40 stores by the middle of next year. Online store will expand to more than 300 cities with 2-day delivery. We’re investing a lot across the board in our infrastructure and product. And Chinese developers are coming in significant numbers.
Huge momentum building in the developer community there as well. I’ve never seen as many people coming into the middle class as there are in China. And that’s where the bulk of our sales are going.
Follow up: iPad, what do you think it would take to re-accelerate the iPad?
Tim Cook: #1, we have to stop having inventory issues. Have we had cannibalization from Mac and iPhone 6 and 6+? Yes. At some point it will stabilize. I’m not sure when, but I think it will. the IBM (NYSE: IBM) partnership is in its early stages. And I’m confident in this partnership.
First time buyer rates are around 40% in the U.S. and around 70% in China. I don’t think the market is saturated in either market. Usage numbers are off the chart compared to competition and customer satisfaction remains at or near 100%.

5:38 p.m. EDT:

Question about the Apple Watch: Your assessment of the Apple Watch seems really modest. Are we reading this right? It looks like Apple Watch will ship more units than iPad in the first two quarters, is this right?
Tim Cook: “I’m thrilled with it,” don’t read into it more than that. When demand is much greater than supply, it’s difficult to gauge exactly what that demand is. I don’t want to forecast our Apple Watch numbers… but I feel really great about it. The customer response is close to 100% positive. It’s hard to imagine it being better.
Follow up: Luca or Tim, you talked about the Watch having lower margins in Q3, that’s surprising in the context of price points, what luxury watches sell for, and in terms of what margins we’re expecting from accessories like watch bands. Can you discuss these margins? Will Watch margins be lower than the company average?
Tim: We’re not going to guide or project margins outside of the current quarter. What we have now is a situation in which Watch margins for the current quarter are lower than company average, which we expected.
In the first quarter of any kind of product, you’d have learning. We’re not guiding to what it will be… but I would keep in mind that the functionality of the product we’re releasing is incredible.

5:34 p.m. EDT:

Question from Piper Jaffray’s Gene Munster: You mention that there were more switchers (from other products) than in previous cycles, any thoughts on why?
Tim Cook: Overall, we grew iPhone by 40% while the market grew by 16%. If you look at different countries, we grew at a multiple of the market as a whole. In emerging markets we did extremely well.
“We’re very bullish on the current quarter as well.”
We’re doing very well with first time buyers, a key metric for us.
It’s tough to find something in the numbers not to like.
Follow up: Talk to me about margins.
Luca: Margin guidance is slightly lower than previous quarters, largely due to seasonality and foreign exchange. Also, we launched the Apple Watch, a brand new product and brand new category with launch expenses.
Follow up: Can you give us an update on the upgrade cycle?
Tim Cook: About 20% of the active install base has upgraded to a iPhone 6 or a iPhone 6+.

5:32 p.m. EDT:

Follow up: R&D spend is ahead of revenue growth…can you explain? Are you making bigger bets?
Luca: Our current product portfolio is much broader than it used to be. Two iPhone models, two iPad models, Apple Watch… We’re also developing some foundational technologies more in-house than in the past. We’re also developing projects that will drive revenue in the future. That’s why you see these expenses. R&D is the core of the company.

5:28 p.m. EDT:

Question from Morgan Stanley analyst: You predicted slower ramp and launch of Apple Watch because of it being a new category, has that been true?
Tim Cook: Right now, demand is greater than supply. We’ve done a lot of work on that in the last week. And we’ll keep doing that.
By late-June, we anticipate being able to sell the Apple Watch in additional countries. From a demand point of view, it’s hard to gauge when we’ll have inventory. Filling orders online only at the moment.
We’re far ahead of where we expected to be from an app point of view, we had only 1,000 in iPad at launch, 350 in iPhone at launch. We now have over 3,500 apps in the app store for the Apple Watch.

5:26 p.m. EDT:

Follow up: Can you give us some details on iPhone purchases?
Tim Cook: Saw a higher rate of switchers (iPhone customers who were previously using a different phone) than previously. Higher percentage of first-time buyers, particularly in emerging markets. Emerging market sales up 58% y/y.

5:25 p.m. EDT:

Question from Goldman Sachs analyst about currency impact.
Luca (CFO): Previously expected negative impact of about 1% after our hedging efforts. That’s about what we expected. And we expect this to continue, with another 0.40% of negative currency impact.
“We feel very good about the margins we generated in the March quarter.”

5:24 p.m. EDT:

Now opening the call up to questions.

5:22 p.m. EDT:

“We continue to plan for annual dividend increases going forward.” “Proud to be one of the largest dividend payers in the world.”

5:21 p.m. EDT:

Have executed $112 of $130 billion capital return program. Increasing this to $200 billion including 11% dividend hike and $50 billion buyback increase. Extending capital return program to end of March 2017.

5:18 p.m. EDT:

“Services” revenue was record $5 billion. App store generated 70% more revenue than Google (NASDAQ: GOOGL) Play. Added 6 new stores in China during the quarter, 21 stores total now.

5:16 p.m. EDT:

iPad turns 5 this months, remains at the top of key app rankings including customer satisfaction. This tells me that the tablet market is simply weak, it’s not like another tablet is beating it.

5:15 p.m. EDT:

iPhone: Sold 61.2 million, 40% y/y growth. Demand for 6 and 6+ incredibly strong. Sales doubled in several emerging markets. Up more than 70% in Canada, Mexico, Germany, Turkey.

5:14 p.m. EDT:

Greater China: Quarterly revenue record, grew 71% y/y to $16.8 billion.

5:13 p.m. EDT:

Apple Watch launch has been exciting, more than 3,500 Apple Watch apps. Turning the call over to Luca for financial results.

5:12 p.m. EDT:

New Macbook response is strong. New streaming service through HBO has been very popular, “one of the top downloaded apps in the U.S. app store.”

5:11 p.m. EDT:

Apple building a solar farm to generate 40 k/w, a big investment in solar.

5:06 p.m. EDT:

Expanding capital return program to $200 billion through 2016. Discover Financial Services (NYSE: DFS) announced today that it will participate in Apple Pay.

5:05 p.m. EDT:

Tim Cook: Strongest March quarter ever. iPhone has been extremely strong. Unit sales up 63% compared to last year. App Store = 20% growth.

5:04 p.m. EDT:

I expect we’ll hear that the report would’ve been even stronger if not for currency headwinds re: strong U.S. Dollar. Piper Jaffray analyst Gene Munster was discussing this earlier today.

5:03 p.m. EDT:

Call is starting.

5:00 p.m. EDT:

Some very fine hold music is still playing, we are just seconds away from the earnings report conference call.

4:52 p.m. EDT:

Here’s some data:

4:46 p.m. EDT:

27% revenue growth, 40% earnings growth. Especially considering this is the largest company in the world, these are big numbers.

4:44 p.m. EDT:

Record second quarter for iPhone, Mac & App Store.

4:43 p.m. EDT:

Shares up around 1.5% in after-hours trading. Just about 15 minutes away from the earnings call.

4:42 p.m. EDT:

iPad sales are definitely weaker than expected, iPad remains a weak area. Fell 23% compared to the same quarter of 2014.

4:39 p.m. EDT:

Big sales numbers.
iPhones (big) – 61.2 million vs 58.1 million expected.
iPad (continued weakness) – 12.62 million vs 13.6 million expected.
Mac (stable in a weak market) – 4.56 million vs 4.7 million expected.
Margins (strong) – 40.8% vs 39.5% expected

4:36 p.m. EDT:

Dividend increased by 11%, boosted to $0.52.
Added an additional $50 billion to $90 billion repurchase. $140 total.

4:34 p.m. EDT:

Quarterly revenue of $58 billion, expectations of $56. Profit of $13.6 billion.

4:33 p.m. EDT:

This is a big report. EPS of $2.33 vs expectations of $2.16.

4:31 p.m. EDT:

Earnings report is in! Details on the way…

4:25 p.m. EDT:

Still waiting on the earnings report…t-minus just a few minutes!

4:18 p.m. EDT:

Here are the earnings expectations via Bloomberg. I’ve been reading all day about how this could be a blowout quarter. Expectations are clearly high.
Earnings Per Share – $2.16
Revenue – $56.03 billion
iPhones sold – 58.1 million
iPads sold – 13.6 million
Macs sold – 4.7 million
Gross margin – 39.6%

4:13 p.m. EDT:

And we’re live! The earnings report generally hits around 4:30 p.m. and I’ll bring you the key details as soon as it does!
Apple closed out the day up 1.7%, trading at $132.08 per share. The stock is up 20.03% YTD, 6.46% in just the month of April.

And we’re live!

Apple (NASDAQ: AAPL) will release its fiscal second-quarter earnings report today. The earnings report itself is due out immediately following the market close, with management hosting its earnings conference call starting at 5 p.m. EDT.
We’ve put together this live blog to bring you the latest from the report and the subsequent earnings call. Check in after the market close to see key details and analysis from the earnings report. Come back an hour later and follow along as I bring you the key details from the Apple earnings call.
We’ll hear from CEO Tim Cook, CFO Luca Maestri and more as they discuss the company’s results and answer questions from analysts.
According to Nasdaq.com, the company is expected to earn $2.19 per share, with analyst estimates ranging from $2.06 to $2.43 per share. This would be a huge jump – just over 30% – from the $1.67 earned during the same quarter of last year.
Shares are up 18% for the year, rising nearly 4% last week in the run up to earnings and the first deliveries of the Apple Watch on Friday. The company has generated huge momentum recently, largely due to the surprising success of the new iPhone 6 models, Apple Pay and the launch of the Apple Watch.
Follow along to see the latest from the world’s most valuable company as management discusses earnings, iPhones, Apple Watches, Apple Pay, dividends, buybacks and much more! If you’re interested in learning how to profit from current and future Apple product launches, click here.
DISCLOSURE: I personally own shares of Apple.