Apple Inc. (AAPL)
reported robust sales and earnings growth in the third quarter of
2011.
The company’s earnings per share
(EPS) comfortably exceeded the Zacks Consensus Estimate of $5.81
per share by $1.98 (34.1%) in the quarter.
Operating
Performance
Apple reported earnings of $7.79
per share in the third quarter, well ahead of its conservative
guidance of $5.03. Earnings shot up 122.0% from the year-ago
quarter.
Net income stood at $7.31 billion,
reflecting a remarkable growth of 124.7% from $3.25 billion in the
previous year.
Gross margin expanded 170 basis
points (bps) year over year to 41.7%, well above management’s
forecast of 39.0%. Operating margin increased to 32.8% from 27.0%
in the year-ago quarter.
The margin expansion was due to a
higher mix of iPhone and lower commodity and other costs. Total
operating expenses increased 33.7% year over year to $2.54 billion
(down 320 bps to 8.9% as a percentage of revenue).
Revenues
Total sales in the reported quarter
surged 82.0% year over year to $28.57 billion, representing the
highest sales in the company’s history. The growth was primarily
driven by strong sales of the iPhone and the iPad.
Revenues beat the Zacks Consensus
Estimate of $24.87 billion and Apple’s own forecast of $23.00
billion. International sales accounted for 62.0% of the total
revenue in the quarter.
Product
Highlights
Macintosh: Apple shipped
3.95 million Macintosh computers in the reported quarter,
representing a 14.0% year-over-year increase, attributable to
strong demand for Macs across all geographic regions. In the
Asia-Pacific region, Mac sales grew 57.0% year over year. The
growth in Mac sales was driven primarily by strong sales of MacBook
Air and MacBook Pro. In May 2011, Apple updated the iMac with its
next-generation quad core processors, powerful new graphics, high
speed input/output technology and a new space time, high definition
camera.
Apple outperformed the personal
computer (PC) market for the 29th consecutive quarter,
which according to research group IDC, increased 3.0% in the
quarter ended June 30, 2011.
Apple is set to launch the new
Macintosh operating system Lion on July 21, 2011. The new operating
system includes more than 250 new features such as a multi-touch
gestures, system-wide support for full screen apps, mission control
and many other features. We believe the new operating system will
further boost Apple’s revenue growth going forward.
Retail
Stores: Retail revenues in the
quarter were a record $3.5 billion, up 36.0% from the year-ago
quarter, primarily attributable to increased Macintosh, iPhone and
iPad sales. The retail stores sold 768,000 Macs in the quarter
compared with 677,000 in the year-ago quarter, an increase of
13.0%. Half of the Macintoshs sold through retail stores in the
quarter were to new customers. During the quarter, Apple opened 4
new stores, including 2 in France and 1 each in Germany and U.K. At
quarter end, Apple had 327 stores worldwide, with 91 stores located
outside the U.S.
The iTunes store also delivered
strong sales of $1.4 billion in the reported quarter, driven by
higher revenue from music, video, iOS apps and books.
iPods: Apple sold
7.5 million iPods during the quarter, representing a unit decline
of 20.0% from the year-ago quarter. According to NPD data, Apple's
share of MP3 players in the U.S. was over 70% in the month of June,
and iPod was the highest-selling MP3 player based on the latest
data published by GFK. iPod touch sales remained strong, accounting
for over 50% of all iPods sold during the quarter.
iPhones:
The iPhone continues to be a star performer for Apple, with strong
growth in both the Americas and the Asia-Pacific regions. Overall,
iPhone unit sales were 20.3 million during the quarter,
representing a surge of 142.0% from the year-ago quarter. iPhone
sales growth also outpaced IDC’s estimated growth of 67% for the
global smartphone market in the June quarter.
Revenues from iPhone handset sales,
accessory sales and carrier payments totaled $13.3 billion compared
with $5.33 billion in the year-ago quarter, a significant increase
of 150.0%. The company had iPhone distribution agreements with 228
carriers in 105 countries at quarter-end.
iPads: Total iPad units
sold in the quarter were 9.2 million, up from 3.3 million sold in
the previous year quarter. During the quarter, Apple launched iPad
2 in 36 additional countries. Combining the original iPad and iPad
2, the tablet device is currently available in 64 countries.
Recognized revenues from sales of iPad and iPad accessories during
the quarter totaled $6.0 billion.
Apple’s app store continues to top
the charts with more than 425,000 apps and over 15 billion
downloads to date.
Balance Sheet
Apple’s balance sheet remains
strong. Cash and investments were $76.1 billion at the end of the
quarter compared with $65.8 billion in the previous quarter. The
company generated cash flow of $11.1 billion during the quarter
versus $6.2 billion in the previous quarter.
Fourth Quarter
Guidance
For the fourth quarter of fiscal
2011, Apple expects revenues to be approximately $25.0 billion.
Earnings are projected at approximately $5.50 per share. The Zacks
Consensus Estimate was pegged at $6.40 per share at the time the
company reported its second quarter results.
Apple expects gross margins of
38.0%, reflecting stock-based compensation expense of approximately
$55 million. Operating expenses are estimated to be $2.7 billion,
including about $245 million related to stock-based compensation,
while Other Income and expenses are anticipated at around $50
million. The tax rate is estimated to be about 24.0%.
Our Take
We believe Apple is well positioned
to achieve strong top-line growth over the long term, based on
product innovation. Apple provided conservative revenue and
earnings guidance for the fourth quarter of 2011. Apple expects
sequential revenue growth (12.5%) and earnings growth (29.4%) for
the upcoming quarter.
However, we differ from the
company’s outlook based on the upcoming release of iOS 5
and iCloud. iCloud, which is a complete suite of
services (iPhone, iPad, iPod touch running iOS 5, Macintosh running
Mac OS X Lion with a valid Apple ID), enabling Apple product users
to store and retrieve applications in the cloud for free. We
believe that the new product releases will drive further growth for
Apple.
The new iCloud service will likely
generate incremental revenue for the company. With this new
offering, the company is focused on strengthening its footprint in
the emerging cloud computing market. Apple has three data centers
to support iCloud.
We also believe that
iCloud will also provide Apple a competitive edge over the
music services launched by Google Inc.
(GOOG) and Amazon Inc.
(AMZN) as Apple has license agreements
with three top record companies. These agreements favorably
position Apple with its licensed cloud-music service.
The company is also rumored to
launch iPhone 5 in September. The hype around the new iPhone has
already scaled new heights and if Apple realizes iPhone 5 revenue
for an entire month (if it chooses to release the product in early
September), it will be major revenue driver going forward.
However, Apple continues to face
tough competition in the smartphone and tablet market from
Research In Motion Ltd. (RIMM),
Hewlett-Packard Co. (HPQ),
Dell Inc. (DELL), Samsung,
Cisco Systems Inc. (CSCO),
Toshiba and Acer.
As Apple remains heavily dependent
of iPhone and iPad sales (68.8% of the third quarter revenue), the
company is taking every possible step to safeguard its dominant
position in the smartphone and tablet market, including further
lawsuits against major competitors and allies such as Samsung and
HTC.
Apple remains entangled in a number
of lawsuits against Eastman Kodak
(EK), Amazon and Microsoft
Corp. (MSFT) over a number of other issues. As the outcome
remains uncertain, we believe the lawsuits will remain an overhang
on the stock going forward.
We maintain our Neutral rating over
the long term (6-12 months). Currently, Apple has a Zacks #2 Rank,
which implies a Buy rating in the near term.
APPLE INC (AAPL): Free Stock Analysis Report
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