Apple reports $9.5 billion second quarter profit | Hacker News Reader

Apple reports $9.5 billion second quarter profit

loopinsight.com

66 pointsshawndumas86 comments

Official Apple press release: http://www.apple.com/pr/library/2013/04/23Apple-Reports-Seco...

65% more iPads sold and 7% more iPhones sold than in last year’s FQ2. Mac sales remain stable, while the rest of the PC market continues to shrink.

Profit margin decreases as Apple offers cheaper tablets (iPad mini) and phones (iPhone 4 & 4S). Profit margin on Macs is also lower because of retina screens, but Mac sales represent only a small part of Apple's income, it’s not significant on the whole.

China Mobile (703 million subscribers) doesn't carry the iPhone (yet), India, T-Mobile, etc. lots of room to grow.

One of my main reason I got long Apple 4 weeks ago.

Do iPhone 4/4S sales actually result in significantly lower profits for Apple? Those devices are sold at $200 off or $100 off the price of an iPhone 5, and I would imagine the cost of manufacturing the older devices must have dropped significantly by now. (the iPhone 4 is going on 3 years old at this point!)

Also, one would expect a drop in sales of the '4S' (or '3GS') model when the "completely redesigned" iPhone 5 (or iPhone 4) is announced, relative to sales of the iPhone 4 when the 4S was released, or sales of the iPhone 3G when the 3GS was released. The release of the iPhone 5 makes the 4S look especially old, while the release of the 4S didn't really do that for the 4.

"Do iPhone 4/4S sales actually result in significantly lower profits for Apple?"

Not lower profits, lower profit margins.

Edit: a really basic example that shows the difference in profit and profit margin is the calculation below.

(Profit Margins) X (Revenue) = Profits.

Check your math. If Apple made $100 on both a $400 item and an $800 item, the profit margin on the cheaper item would be twice that on the more expensive item.

There's nothing wrong with my math. It's still profit margin (25%) times revenue ($400) equals profit ($100). You're confusing a different concept with what I'm writing about.

25% x $400 = $100

Notably: this is exactly what the investor set expected when the mini was announced. Remember all the hand-wringing about why Apple's stock price dropped? The investors were right -- the market wanted cheaper hardware that Apple couldn't make as much money on. And, of course, Apple was right to give it to them.

>And, of course, Apple was right to give it to them. How was Apple right? The market always wants cheaper hardware.

They devalued their products by competing on price. It will be a short term gain but a long term loss.

The iPod mini, nano, and shuffle didn't devalue the iPod brand. The Mac mini didn’t devalue the Mac brand. Apple didn’t simply slash the prices on iPad 10" devices, with the iPad mini they added choice. The iPad mini isn’t underpowered and plasticky, its build quality is at least as high as the larger model. The move is very much like how Apple introduced the iPod mini, 2 years after the first iPod.

Mac sales are critical in that they are also development machines used internally as well as their "partners" who create and sell apps for the platform. Apple will never abandon the Mac platform even if it looses them money.

I wrote that income from Mac sales is not significant, looking at the whole of Apple’s income. That’s not to say that Mac’s aren’t critical to Apple’s philosophy. It’s hard to see the ’Digital Hub’[1] without Mac computers.

[1] The Digital Hub (2001): http://www.youtube.com/watch?v=9046oXrm7f8

it's actually impressive that they sold 37.4M iPhones this quarter considering they sold an amazing 47.8M iPhones last quarter. Compare that to last years numbers.

Q1 2012 = 37M iPhone, 15.4M iPads

Q2 2012 = 35.1M iPhones, 11.8M iPads

Q1 2013 = 47.8M iPhones, 22.9M iPads

Q2. 2013 = 37.4M iPhones, 19.5M iPads

Really just mind-boggling numbers. Just the ability to ship that many. Mind you they are smaller-sized consumer products, still need a lot of factories making them though.

I don't see how it is all that impressive. Nokia has been shipping a million plus phones a day from a long time ago.

A few things here are impressive.

You have cleverly made the distinction of phones, rather than smartphones, in your assertion that Apple's supply chain isn't impressive in the act of shipping 0.6m iPhone/iPad devices each day for a quarter.

When all unit shipments are considered Nokia actually ships slightly fewer than 1m phones per day (2012 it was approx 340m units shipped) or 0.93m per day.

Apple doesn't manufacture phones, they manufacture smartphones. Same for a huge portion of Samsung's unit shipments. Same for a small portion of Nokia's shipment, but the real grist here is in how much easier it is to make a dumbphone than a smartphone. It's practically prefabbed for you.

Here's a dumbphone teardown: http://www.formymobile.co.uk/3310disassembly.php

Here's an S5 teardown: http://www.ifixit.com/Teardown/Samsung+Galaxy+S+4G+Teardown/...

Manufacturing and assembling a dumbphone is easy, comparatively. Fewer components overall. Nothing fragile or fiddly requiring human QA (wifi). Nothing expensive (gorilla glass, capacitive screen) which hasn't had 20 years of mass-production driving its margins up.

So that's impressive.

Also impressive is shipping different devices in these quantities each year. Apple currently manufactures and sells iPhone 5 (16, 32, 64GB), iPhone 4S (16, 32, 64GB), iPod Touch (16, 32, 64GB), iPad (16, 32, 64, 128GB) and iPad Mini (16, 32, 64GB). Judging by revenue ($180 per iPod sold), a big portion of the 5m iPods sold in the quarter were iPod Touch.

Also impressive, I think, is that every two years, Apple ignores what its supply chain can do and goes back to the same 10-15 people to ask what they can do to improve on an already high quality device. Then they gut the supply chain and build it again from the ground up to make the better device.

They're in a tock rather than tick year for a new iPhone, but that just means that their supply chain managers and fabrication designers are in a tick year, preparing factories for what it will take to build iPhone 6 whilst iPhone 5.1 is still being shipped to 37 million people each quarter.

In brief, the impressiveness here is in the complexity of the devices; the breadth of different devices being manufactured; and the philosophy that leads to innovation not just in design but manufacture.

This is also true of Samsung. They are accomplishing astonishing things with their supply chain and, unlike Nokia, genuinely do ship well over 1m phones a day, of many more varieties than Apple.

Possible causes for the longer momentum: Apple added several carriers last Fall[1], added LTE service for more than 40 carriers[2], and more countries where iPhones can be bought unlocked[1].

The iPhone 5 was announced 3 weeks earlier in the season than the iPhone 4S was the year before, but Apple was better prepared to deal with the demand. That meant that during the holiday season, you could actually buy a new iPhone in stores.

[1] http://support.apple.com/kb/ht1937

[2] http://www.apple.com/iphone/LTE/

Perhaps the most important thing to remember from today - the CFO said that Apple, for the first time, will take on debt.

In a nutshell, a company with around $100bn in cash (and equivalents) held offshore[1] would rather raise debt and pay interest on that debt, than repatriate funds to the US and pay corporate income tax.

[1] http://www.zerohedge.com/sites/default/files/images/user5/im...

That's because the cost of borrowing money is a lot cheaper than the tax hit that the company will incur if they repatriated cash back to the US. In most cases the tax rate is as high as 35%[1]. Microsoft, for example, reported that it would owe $19.4 billion if it repatriated its $60.8 billion in offshore holdings[2]. using the same numbers, Apple will have to pay $35 billion in taxes if they repatriated $100 billion in offshore profits earned (and already taxed) in foreign countries.

[1]http://appleinsider.com/articles/11/02/16/apple_lobbies_for_...

[2]http://www.bloomberg.com/news/2013-03-08/offshore-cash-hoard...

Companies do this all the time.

"Google Borrowing $3 Billion In First Ever Bond Offer"

http://www.businessinsider.com/google-bond-offering-2011-5

It feels like Apple is now on the defensive by announcing a buyback initiative and a higher dividend. They realized their growth peaked from insane highs and they have no new product to give it another boost in the short term. Very smart move.

However, I will say that they really need a killer new product by 2015, which is when their stock buyback initiative ends. Repurposing the iOS in various form factors such as the iPhone, iPod, and iPad has run its course.

What do you mean by "they really need a killer new product"?

They're the most profitable company in the world. What pressure are they under?

> They're the most profitable company in the world. What pressure are they under?

The pressure is probably focused on remaining the most profitable company in the world.

I think he's predicting a Microsoft-like fate, where the indisputable de-facto of a market segment eventually stagnates and then is disrupted.

their profit is irrelevant. public companies are always under pressure to increase growth.

Immense pressure. I can think of no other company that has the amount of pressure of Apple to follow up their iPhone/iTouch/iPad cash cow.

I’d say that Motorola, HTC, Nokia, and Blackberry are under quite a lot of pressure to remain relevant. That means that new products need to be popular — otherwise, the companies will have to pivot, or face being bought for its (IP) parts.

Pressure 1) Their stock price has gone from a high of just over 700 to a recent low of just under 400. Stock is a form of compensation to employees. They don't need explosive growth but they must stop the bleeding to get their employees better compensation.

Pressure 2) They're seeing increased competition and they will not remain an dominant player if they don't continue to innovate.

The issue is that they don't have a big moat like Google, Facebook and Amazon do. Competitors are nipping at their heels(the big decline in margin from a year ago shows it) and one bad iteration of their products is enough to turn the tide against them.

Big moat? Apple has more money than any other company. Facebook is losing users in droves and every day there's a new article on HN on how to get Google out of your life. Of the companies you mentioned Amazon is the only one with bright prospects.

I would not use Facebook and Amazon when comparing margins and profit. Both of these two companies aren't even in the same universe right now with Apple. Google is the only company that can play with Apple and Microsoft.

Last time I checked, Amazon posted in Q4 of 2012 around $90M (Million) in net income while Facebook did about $60M in Q1 of 2013 compared to Apple's $9.5B (Billion!!) in net income.

What drive me absolutely crazy is the fact that it would take Amazon/Facebook well over a decade to even come close to what Apple makes in three months.

Moat? Itunes, OSX, Objective-C, App store, iCloud, even the brand. These are all moats of varying strengths.

Dividends and share buybacks are not defensive moves.

For Apple it is. “We acknowledge that our growth rate has slowed,” Tim Cook.

Because the market they created is now saturated, with Apple dominating the profits.

I agree. Correct me if I'm wrong, but aren't share buybacks exactly what you'd do if you believed your stock was undervalued?

Exactly. It's company-sponsored arbitrage.

If markets, according to company insiders, are not behaving rationally (AAPL P/E is amazingly 9.21, compared to ~15 for MSFT and ~24 for GOOG), then buying when you think it's cheap is a wise move.

Cliche at this point, but got to be said.

"The market can stay irrational longer than you can stay solvent." John Maynard Keynes, (attributed) English economist (1883 - 1946)

That's probably true if you don't have >$100B in the bank

…and generate tens of billions in free cash flow per year!

It seems they sold more iPad Mini's and their profit dropped. I imagine it would be even worse for their profit if they ever released an "iPhone Mini" or whatever that cheap iPhone everyone talks about would be named.

It's a tough position. Do they also go after countries where subsidized plans aren't common by making a cheaper iPhone (Europe/India/etc)? The iPhone 4 which is 2 years old is still around $400 unsubsidized. Or do they try to keep high margins and let competition (which lets face it, is Samsung) dominate those markets.

Apple rarely competes on price. Their business model(s) for the last decade has shown that at least (Tim Cook may be different). But they tend not to be fans of low margin markets.

Not completely sure about this. After all, they did release the iPad mini, and before that, several variations of cheap iPods like the nano and shuffle.

Generally speaking, they target lower-end price points by releasing models with stripped down features rather than discounting the fully-featured products.

I completely agree with your statement, but what is the alternative? Dell? Look at most PC manufacturers based in the United States and they've been completely decimated by the race to the bottom in prices. I'm not a fan of Apple's pricing but I prefer that they make a profit and continue hopefully producing decent products.

I believe that Microsoft and Intel are going to face the same margin issues as the price of hardware continues to fall and manufacturers question the cost of the O/S and Intel CPUs.

“The Mac user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”

You know, maybe Google is the best thing that happened to Apple if you think about. If the iPhone owned the world it would make Apple very lazy which over the long run would be terrible.

nic try but..

Cook+Ive+Schiller,Cue,etc. >>> Ballmer.

Talk about damning with faint praise.

Not in total profit earned they're not. He beat Steve jobs too.

Steve Jobs big plan was to sell a computer for under a thousands dollars, given that macs used to cost over two thousand dollars in the "monopoly" years. And it was not only accomplished on the Mac platform when he returned to the company, but also on the mobile platform by releasing a computer less than five-hundred dollars with the iPad accomplishing Bill Gate's vision with Origami(1).

1) http://www.theregister.co.uk/2006/03/08/origami_umpc_clunker...

Subsidized plans are common enough in Europe as far as I'm aware. It's just that you've also generally had the option of buying the iPhone outright.

Fwiw I think the 'cheap iPhone' option has been the iPod touch.

They sell a lot of older iPhone models which eats their profits, while they're still quite expensive to manufacture. Making a cheap model to replace those would increase their profits and increase total sales volume.

I wonder how true this is. The older a tech is, the cheaper it is to build and easier to refine.

iPhone growth has slowed: http://www.theverge.com/2013/4/23/4258068/apple-posts-9-5b-p...

Which is going to lead to Apple having to make a tough choice. Reduce margins but increase growth in countries that sell mostly unsubsidized phones or maintain margins and live with slower growth. Should be interesting to watch.

iPad sales growth is still amazing though.

I think it's because their iphone 4S was so good that most people weren't willing to "upgrade". It's getting hard to justify buying a new phone every year considering the great advancements made to them in the past few years.

the 4s was so good, and the 5 has been very very "meh"

What are they going to do with their massive bank account?

Maybe something in the services sector (not directly dependent on a piece of hardware)...

Do a GE? Become a bank? Buy Disney?

A lot of Apple’s stash can’t be spent freely, with a lot of it in Braeburn Capital[1] and set aside in tax havens[2]. To use those funds would mean sacrificing a lot of it in taxes. They haven’t been willing to do so in the past, but today Apple announced it will return $100 billion to shareholders in the next few years[3]. Last year, Apple also launched a program in which it matches employee donations to charities, up to $25,000 a year per employee.

Of course, there will still be plenty left to build new offices, open new retail stores, and acquire companies[4] – as they have done in the past.

[1] http://en.wikipedia.org/wiki/Braeburn_Capital

[2] http://www.telegraph.co.uk/finance/newsbysector/mediatechnol...

[3] “Apple More than Doubles Capital Return Program – Total of $100 Billion to be Returned to Shareholders by End of 2015” http://www.apple.com/pr/library/2013/04/23Apple-More-than-Do...

[4] https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...

White dwarf collapse down to a neutron star. Sad.

The real news is that their margins seems to have shrunk dramatically from 48% to 38% and profit is down 18% from the year ago quarter.

Looks like they're facing pressure and are dropping prices to maintain sales.

The iPad Mini didn't exist last year, and that's surely a lower margin product. I also have no doubt that margins are tighter than they used to be on their MacBook Pro line now they've switched to Retina screens and all-SSD. But both of these are likely to be less of an issue as the tech gets cheaper, so it might not be quite as dramatic as it seems at first glance. That said, they are surely facing tougher smartphone competition than ever now.

>The iPad Mini didn't exist last year, and that's surely a lower margin product

Why is it "surely" so? We're talking percentage margin here, not the margin in dollar terms. The iPad Mini can theoretically have a higher margin than the iPad.

Source: http://www.theverge.com/2012/10/25/3555664/apple-ipad-mini-m...

The way I think about it, the iPad Mini requires largely the same components as the regular iPad but runs at hundreds of dollars less. This is slightly mitigated by a cheaper screen and smaller battery, but I'd have thought it's still a lower margin product.

Apple has consistently warned that margins on the iPad mini are lower and it will impact overall gross margin.

To be clear: this is great news for anyone who isn't an Apple shareholder. If you're a fan of the hardware, it's getting cheaper! If you like the other brands, iOS's margins are shrinking and competition is working! It's a win-win all around. The kind of profit's Apple's been making over the last half decade really aren't a good thing, even for Apple. They can barely spend it, and that money could be driving growth elsewhere.

I was with you until you said that amazing profits aren't a good thing, even for Apple.

Yes, the amount of money is more than what Apple can realistically spend but they can give that money to shareholders who could invest that money in other ventures. That's an amazing result of great profits.

How is that different from not taking that money from consumers (or investors) in the first place? If a consumer gives Apple $1 to hold for N months before Apple hands it over to a shareholder, that is clearly less effective than the consumer simply giving that dollar to the investor in the first place (e.g. by dropping it in the stock market).

I'm not saying that "Apple doesn't deserve its profits". I'm saying that past a certain point, the marginal value to society of huge profits drops to zero, and that Apple is past that point.

"the marginal value to society of huge profits drops to zero, and that Apple is past that point"

It wasn't a discussion about value to society. It was discussion about too much money being a bad thing for Apple, which I disputed.

They're giving that $1 to the investor who was smart enough to invest in AAPL, which produced a product that was sufficiently valuable to consumers that it could demand such margins.

The theory is that investor will be more likely to make such smart investments in the future.

I don't see why the marginal value of profits drops to zero. Profits fund bets on the future. The bigger the profits, the bigger the bets that can be made.

I thought Apple was well known for not giving dividends?

tech companies are generally not well known for giving dividends. But there's also never been a tech company generating the kind of cash apple is.

I think Steve Jobs was against that kind of thing but he's not there anymore. He seemed to like hording money and I'd guess it was due to the history of Apple having financial trouble years ago.

I was with you until you said that amazing profits aren't a good thing, even for Apple.

Its terribly difficult to judge Apple or compare them to "normal" companies but there's a prevailing sentiment in some investment quarters that if your profits are too high it means you're not investing enough back into growth. In this case apple gave back 2 billion in profits but gained 4B in revenues. In a lot of cases this is a growth tradeoff many companies would take.

which is very stupid of them. It's akin to Porsche cutting prices on 911 because market (i.e. market analysts should be the term) demands it. I don't want cheap phone from Apple or a cheap car from Porsche. I want a smartphone from Apple that has the best design, the best build quality, the best user interface, the best customer service. Samsung and others are just assembly plants and they don't seem to "get" value added portion of the products. Switching from iPhone to S3 was for me what switching from Mac OS X to Win Vista/7/8 could have been. A disaster. I don't want cheap Mac OS X. I want one that doesn't suck like the competition does. And hell yeah, I'm going to spend more on it. The earnings are lower because Apple started to be more like everybody else - a commodities manufacturer where the cost is everything. Anybody resurrect Steve, please?

And yet that's exactly what Porsche did with the Boxster. It's exactly what BMW did with expanding their product line with the 1 series. I guess if you want continued growth, eventually you might have to expand into lower margin products.

It's not so black and white between expensive products and commodities, by the way. Both Boxster and 1 Series are still relatively expensive.

>> Both Boxster and 1 Series are still relatively expensive.

Right, spot on, $50k for a 6-cylinder two-seater while American counterparts are half the price with 8-cylinder engines. And who says Porsche/BMW are in trouble because of that? And who says GM has a great business model because of that? Nobody! But in the tech it is somehow backwards.

Who cares about Porsche market share in their right mind? Porsche makes about $20k on average on every vehicle they sell in Europe. And they have maybe 0.5% of the market share. GM losses nearly $2k on every vehicle they sell in Europe. And has about 20% of the market. I don't think that "commodity model" makes sense for Apple. They should stay away from it.

Time to pay the employees more.

That's for Apple and the market to decide.

The market would just pay the money to the shareholders and management in a stock buyback/cancel deal.

Which is what Apple chose to do today: http://www.apple.com/pr/library/2013/04/23Apple-More-than-Do...

Share buyback will do that for many Apple employees.

If I have a penny every time I hear this...

Every year for the last 4 years, Apple has spent 50% more on labor[1]. Mainly because it’s hiring so many new employees, but also because it’s raising salaries and benefits.

As of September 2012, Apple had 76,100 employees, including 42,400 Apple retail store employees. Operating expenses in FY2012 divided by the total number of employees were $176,360.

As for employees at Apple’s suppliers, Apple releases a Supplier Responsibility report every year[2], in which they detail exactly what they’ve done to ensure suppliers treat their workers well. Apple already made Foxconn pay their workers more in past years, but the pay increase alone is not a good solution. From Apple’s latest report:

“Third-party labor agencies help many suppliers recruit contract workers from other countries. [...] Workers are often required to pay fees to each of these agencies to gain employment. [...] They must hand over a high proportion of their wages to recruiters to pay this debt, and they have to remain at the job until the debt is paid. We consider this a form of bonded labor, and it is strictly prohibited by our Supplier Code of Conduct. When we find violations, suppliers must reimburse excessive recruitment fees—anything higher than the equivalent of one month’s net wages—for any eligible contract worker found working on Apple projects.”

[1] Apple annual report FY2012: http://files.shareholder.com/downloads/AAPL/2439775143x0xS11...

[2] Apple Supplier Responsibility report 2013: http://www.apple.com/supplierresponsibility/

Reply on news.ycombinator.com