Apple Q4 – New life needed

Growth from here needs another segment.

• Apple reported good Q4 results but concerns around competition and profitability caused weakness in after-hours trading.
• Revenues / EPS were $37.47bn / $8.26 which was better than consensus at $36.84bn and $7.93.
• Q4 shipment numbers / ASPs were:
  • iPhone: 33.8m ahead of consensus at 33.4m but ASPs were soft, falling to $577 with the shift to older and cheaper models.
  • iPad: 14.1m slightly ahead of consensus at 13.9m with ASPs stable at $439. This gives some hope that the mix between the regular iPad and the mini may have stabilised. However this may lurch southwards again with the launch of the iPad mini with the retina display.
  • iMac: 4.57m which was ahead of consensus, pointing to some small back-to-school effect this year.
• Q1 guidance was mixed with:
  • Revenues $55bn-$58bn compared to consensus at $55.5bn
  • Gross margin 36.5% to 37.5% below consensus at 38.5%.
• Mid-point of the guidance gives an implied EPS forecast of $13.51 which is below the $13.86 consensus estimate.
• This is entirely due to the gross margin guidance and this is where the real concerns were to be found.
• However the gross margin miss was entirely due to a change in the way the company defers revenues on iPhone, iPad and Macs.
• This is due to the fact that the software updates on these devices are provided free of charge and that the ASPs of the devices implicitly include software.
• Hence some of the revenues need to be deferred to match the costs incurred in updating the software over the life of the device.
• If one takes out this change, gross margin guidance would have been around 38.5%, which is in line with consensus.
• It was this issue that caused the recovery in the share price in after-hours trading after its sudden collapse.
• The problem that Apple faces is that it needs to address new segments in order see a proper return to growth.
• I detect some disappointment that this has still not happened meaning that the shares are likely to drift around current levels until that happens.
• I remain pretty indifferent to Apple as there remains no catalyst and I am worried about its own service offering to consumers.
• Yahoo! and Microsoft are the places to be when looking for those that might surprise on the upside.