Apple Inc. (NASDAQ:AAPL)
Q4 2014 Results Earnings Conference Call
October 20, 2014, 05:00 PM ET
Nancy Paxton – Senior Director of Investor Relations
Tim Cook – CEO
Luca Maestri – SVP and CFO
Shannon Cross – Cross Research
Bill Shope – Goldman Sachs
Katy Huberty – Morgan Stanley
Toni Sacconaghi – Sanford Bernstein
Steven Milunovich – UBS
Ben Reitzes – Barclays
Gene Munster – Piper Jaffray
Keith Buckman – Bank of Montreal
Good day, everyone, and welcome to the Apple Incorporated Fourth Quarter Fiscal Year 2014 Earnings Release Conference Call. Today’s call is being recorded.
At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead.
Nancy Paxton – Senior Director of Investor Relations
Thank you. Good afternoon, and thanks everyone for joining us today. Speaking first today is Apple’s CEO, Tim Cook; and he will be followed by CFO, Luca Maestri, and after some final remarks we’ll open the call for questions from analysts.
Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, taxes and future products.
Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2013, the Form 10-Q for the first three quarters of fiscal 2014, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.
And I’d now like to turn the call over to Tim for introductory remarks.
Tim Cook – CEO
Thanks, Nancy. Good afternoon, everyone and thanks for joining us. Since we spoke in July, it’s been an exciting and very busy time, so we have lots of great things to talk about today.
Just last month, we launched the biggest advancements in iPhone’s history with iPhone 6 and iPhone 6 Plus. These iPhones are the best we have ever created and customers absolutely love them.
Our operational team has done an extraordinary job executing the manufacturing ramp throughout the entire supply chain. Today we’ve launched in 32 countries including China and our new iPhones will be shifting in 69 countries and territories by the end of this month, making this our fastest and most successful iPhone launch ever.
Demand for the new iPhones has been staggering and geographically broad-based markedly higher in every single country where we’ve launched compared to the iPhone 5s a year ago.
We’re working hard to fill orders as fast as possible and we’re on track to be in more than 115 countries by the end of December.
Last month we introduced two new categories; the first is Apple Pay, an entirely new way to pay for things in stores and in apps. It makes mobile payments easier, more secure and more private. Apple Pay went live today and now making purchases and participating stores happens with just a touch of a finger.
Paying within apps is as easy as selecting Apple Pay and placing a finger on Touch ID. Today Apple Pay supports credit and debit cards from the three major payment networks and the top U.S. banks and over 500 additional banks have signed on and will be supporting Apple Pay beginning this year and early next year. Apple Pay is being supported by many of the nation’s top retailers and we continue to sign more retailers.
The second new category is Apple Watch, our most personal device ever and one that has already captured the world’s imagination. We can’t wait to get Apple Watch to customers beginning in early calendar 2015. We’ll be providing more details on Apple Watch as we get closer to the shipment day.
Last week we launched the new iPad Air 2 and iPad Mini 3 with innovations that make them dramatically better than previous generation and the stunning new iMac with a Retina 5K display.
We released iOS 8 last month and our customers are enjoying new ways to use their iPhone, iPad or iPod Touch with intuitive new features and groundbreaking security.
Last week, we also released OS X Yosemite, with an all new design and continuity features that deliver an even more fluid experience across all of our iOS devices and Mac.
These introductions reflect years of innovation and hard work by teams all across Apple and they demonstrate the seamless integration of hardware, software and services that provides unparallel user experiences for our customers. These are things that only Apple can do.
We’ve also communicated and demonstrated our commitment to respecting and protecting users’ privacy with strong encryption and strict policies that govern how our data is handled.
Today we’re also reporting very strong results for Apple’s fourth fiscal quarter. We generated our strongest revenue growth rate in seven quarters far surpassing our expectations we communicated in July and establishing a new record for Apple’s September quarter revenue.
We’re also reporting gross margin of 38% compared to 37% last year, leading to a very strong EPS growth of 20%. Fueled by the launch of iPhone 6 and 6 Plus and strong demand for our previous iPhone models, we set a new September quarter record for iPhone with revenue growth of 21% year-over-year.
Demand for iPhone was strong across all geographies with global unit sell-through growth of 26% and we exited the quarter with significant backlog for both iPhone 6 and 6 Plus.
We established an all-time quarterly record for Mac sales with revenue growing 18% year-over-year, thanks in particular to the very strong performance of our portables.
We’re especially proud of our Mac results considering the overall contraction of the global PC market this year and we achieved our highest quarterly market share since 1995.
We also set an all time record for the App Store revenue, thanks to the tremendous momentum and ongoing success of our developer community. App Store revenue grew 36% over last year and cumulative app downloads have now topped 85 billion.
These results bring to a close a record breaking fiscal 2014. Over the last four quarters, our products and services have generated a $183 billion in revenues, an increase of $12 billion over last year. We sold 243 million iOS devices and 19 million Macs, both all time highs.
Our revenue from iTunes software and services reached $18 million, which was more than the annual sales of two thirds of the companies in the Fortune 500 and we generated $6.45 in earnings per share, which is 14% higher than last year and also set a new record.
We made big investments in our business and have continued to expand our global footprint. Today we have 437 Apple retail stores in 15 countries and our partners are selling Apple products in hundreds of thousands of locations around the world.
We’re continuing to invest in developing markets where revenues approached $50 million in fiscal year ’14, up 16% over last year and twice the rate of growth of the company overall.
We [forged] (ph) a landmark partnership with IBM to provide a new generation of mobile enterprise application designed with our products legendary ease of use and backed by IBM’s cloud services and data analytics.
Our partnership aims to redefine the way work is done, address key industry mobility challenges and sparked true mobile-led business change.
Developer teams have been working closely to develop the first wave of Mobile First solutions and these solutions will be ready for customers beginning next month across six sectors; banking, government, insurance, retail, travel and transportation and telecommunication.
We brought tremendous new talent and technology into Apple through 20 acquisitions in fiscal ’14 including seven alone in the September quarter. We closed the Beats transition in July and we’re off to a great start with some wonderful plans we’ll share with you in the future.
Our strong results continue to generate significant cash and we’re extremely happy that this has enabled us to make substantial investments in Apple’s future, while retaining — while returning cash to our shareholders.
We had executed aggressively against our share repurchase program, spending $17 billion in the September quarter alone and $45 billion in the last year.
In addition to Apple’s strong business performance over the past four quarters, I am incredibly proud of all of our work to protect the environment, to advance human rights, to improve working conditions in the supply chain and to change the way teachers teach and students learn.
I’d like to thank all of our customers, employees, developers and business partners for making fiscal 2014 Apple’s best year yet and I’d like to thank all of our shareholders for their continued support. I could not be more excited about the road ahead in fiscal 2015.
With that, I’d like to turn the call over to Luca to discuss our September quarter results in more detail.
Luca Maestri – SVP and CFO
Thank you, Tim, and good afternoon, everyone. During the September quarter we generated record revenue of $42.1 billion, an increase $4.7 billion or 12% year-over-year. These results exceeded our guidance range due to better than expected sales of iPhones and Macs for which customer demand grew strongly year-over-year in all our segments.
Gross margin was 38% at the high end of the guidance range, operating margin was $11.2 billion representing 26.5% of revenue. Net income was $8.5 billion, a new September quarter record translating to diluted earnings per share of $1.42, a 20% year-over-year increase. Cash flow from operations was very strong, a $13.3 billion, also a new Q4 record.
For details by product, I will start with iPhone. We sold 39.3 million iPhones, an increase of 5.5 million over last year or 16% growth. Underlying demand was even stronger with sell-through growth of 26%.
iPhone sales grew across both developed and emerging markets. Unit sales in the U.S. grew 17% year-over-year, and in Western Europe they were up 20%. We saw even stronger growth in Latin America and the Middle East with sales up more than 50% and in Central and Eastern Europe where sales more than doubled.
We increased iPhone channel inventory by just under one million units during the September quarter this year, significantly less than the 3.3 million unit increase in the September quarter a year ago.
Based on the very strong demand for our new iPhones, this left us below our target range of four to six weeks for channel inventory on a look forward basis.
iPhone momentum in enterprise market remains very strong. The latest data published by IDC indicates that iPhone have 69% share of the U.S. commercial smartphone market.
Also, In August ChangeWave survey of U.S. corporate IT buyers found that among those planning to purchase smartphones in the December quarter 75% plan to purchase iPhones. An iPhone continues to fuel innovation of companies around the world.
Schindler, a leading global escalator and elevator manufacturer has deployed over 20,000 iPhones and 20 customer apps to improve customer engagements for safety and to allow service technicians to access vital documentation, repair and safety functions when they are in the field.
Baidu, TriNet’s top search provider currently has over 20,000 employees using iPhones and the company has developed over 30 in-house iOS apps to help its employees work more efficiently, track sales leads and manage internal IT infrastructure and processes.
Next, I would like to talk about the Mac. We sold 5.5 million Macs, an increase of almost a million over last year. That represents 21% growth year-over-year and an all-time quarterly record. We saw great demand in the back-to-school season for both desktops and portables with especially strong growth for MacBook Pro and MacBook Air.
We achieved double-digit Mac growth across most markets around the world, with particularly impressive performance in emerging markets where Mac sales were up 46%.
These results are truly remarkable given the contraction in the global PC market and we now gain market share for 33 of the last 34 quarters. We ended the quarter with Mac channel inventory slightly below our four to five week target range.
Turning to iPad, we sold 12.3 million units compared to 14.1 million in the September quarter last year. In anticipation of our October new product announcement we reduced iPad channel inventory by 500,000 from the end of the June quarter, which left us within our target range of channel inventory on a look-back basis.
iPad sales were consistent with our expectations and we experienced very strong results in Japan where iPad sales were up 46% year-over-year. Customers continue to love their iPads. In an August survey by ChangeWave iPad Mini with retina display earned an incredible 100% satisfaction rate, and among consumers planning to purchase a tablet within 90 days, the survey indicated a 55% plan to buy an iPad.
We continue to see some momentum in enterprise for iPad. Progressive IT organizations around the world continue to deploy, manage and develop amazing in-house apps for iPad.
Healthcare leader Sanofi has over 25,000 iPads and over 450 in-house apps for sales teams and corporate employees to get their products and information into the hands of doctors and other healthcare providers.
Premium iWare designer group Soft iCA has deployed over 10,000 iPads to improve our customers’ experience to size, fit and overall look of iWare in a retail environment. Importantly, since the announcement of the partnership with IBM hundreds of corporations around the world have expressed interest in MobileFirst solutions and we are actively working with over 50 of them to become foundational client for MobileFirst solutions in their industries.
iPad continues to lead the U.S. education tablet market with 90% share based on the latest data from IDC. In the September quarter the St. Paul public school in Minnesota purchased over 22,000 iPad Airs and over 5,000 iPad Minis in the first race of the district’s personalized learning through technology plan that will ultimately equip every student with an iPad.
We are fully consistent and continue to strive. Our item store generated all time record billings of $5.4 billion in the September quarter, up 22% year-over-year, thanks to the tremendous momentum of the app store. Developers around the world have embraced the iOS platform and keep broadening the appeal of our thoughtfully designed app store to a large, loyal and engaged customer base.
Across all of our programs the number of registered app developers has grown by 22% in the last year and we are rapidly approaching 10 million. We are seeing especially strong interest in the enterprise with a number of registered developers is up 39% over a year ago.
Our retail stores also generated strong results. Revenue for the quarter was $5.1 billion, up 15% from a year ago and a new September quarter record. We opened 10 new stores and completed the remodels of three stores during the quarter ending with a total of 437 stores, 41% of which are outside the United States.
We are projecting a total of approximately 25 new store openings in fiscal ’15, about three quarters of which will be outside the U.S. We also plan to remodel about five stores over the course of the year.
With an average of 432 stores opened in the September quarter average revenue per store was $11.9 million compared to $10.9 million in the year ago quarter. We hosted 102 million visitors to our stores during the quarter, which translates to over 18,000 visitors per store per week.
Let me now turn to our cash position. We ended the quarter with $155.2 billion in cash plus marketable securities, a sequential decline of $9.3 billion. We are continue to execute our capital return program aggressively with the total spend of over $20 billion in just the September quarter.
We launched our fourth accelerated share repurchase program at the end of August spending $9 billion. We also spent $8 billion to repurchase $81 million Apple’s shares to open market transactions, paid $2.8 billion in dividends and equivalence and utilized over $300 million to net share sell vesting employee RSUs.
So, we’ve already taken action on over $94 billion of our $130 billion capital return program including $68 billion in share repurchases with five quarters remaining to its completion. We remained firmly committed to our objective of delivering attractive returns to shareholders through both business performance and return of capital.
As we said before, we review our capital allocation regularly. We have solicited feedback on our capital return program from shareholders in the past and we will continue to do so. We plan to report on our conclusions in a timeframe similar to last year.
Now, as we move ahead into the December quarter, I’d like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $63.5 billion and $66.5 billion compared to $57.6 billion in the year ago quarter.
This represents a double-digit revenue increase despite significant foreign exchange headwinds from the recent strengthening of the U.S. dollar against most currencies. We expect gross margin to be between 37.5% and 38.5%. We expect OpEx to be between $5.4 billion and $5.5 billion. We expect OI&E to be about $325 million and we expect the tax rate to be about 26.5%.
Also today our Board has declared a dividend of $0.47 per common share payable on November 13, 2014, to shareholders of record as of November 10, 2014.
With that, I will hand it over to Nancy for some final remarks.
Nancy Paxton – Senior Director of Investor Relations
Thanks, Luca. We’d like to let you know about some reporting changes that we’ll be making beginning with the release of our Q1 ’15 results.
First, to better serve our customers and optimize our results around the world we are collaborating like never before across our direct and indirect channels.
Accordingly, beginning in Q1 ’15, we’ll be including the results of our retail stores in the geographic segments where the stores are located providing a consolidated view of regional performance that is consistent with the way our executive team measures the business.
This means that going forward our reportable segment will be Americas, Europe, Greater China, Japan and the rest of Asia-Pacific with the retail no longer classified as a segment.
Second, to better reflect our evolving products and services, we’ll be making some changes to our product summary reporting. We will continue to report iPhone, iPad and Macs as separate line items and we’ll also have a category that we refer to as services and this will encompass everything we report under the heading of iTunes software and services today including content, apps, licensing and other services and beginning this month it will also include Apple Pay.
We’ll be creating a new reporting category called other products. This will encompass everything we report in the accessories category today including Beats headphones and speakers, Apple TV and peripherals and accessories for iPhone, iPad, Mac and iPod.
In addition, we will begin to include iPod sales in the other products category and we will also reflect sales of Apple Watch in this line item once it begins shipping in early calendar 2015.
So to recap, beginning in Q1 ’15. our products reporting categories will be iPhone, iPad, Mac, services and other products. We wanted to give analysts and investors a heads up on these plans so you can reflect them in your models accordingly.
We’ll also reclassify historical results to be consistent with these newer groupings and we’ll provide that information on our Investor Relations website when we release Q1 results.
And finally, our distribution channels have evolved and expanded significantly in the last couple of years including traditional resellers, consumer electronic stores, mass retailers, distributors and carriers, and each of these channels have the different distribution model. Today, iPhone is sold in over 200,000 locations around the world and iPad is sold in more than 100,000.
In addition, revenue from emerging markets has increased considerably over the last few years and now accounts for over quarter of our sales. And channel inventory requirements in those markets tend to be much longer.
So, due to the size, complexity and different needs of our channels around the world we’ve determined that a five to seven week average range for both iPhone and iPad channel inventory is more appropriate and that will be our target range going forward. However, given the backlog for our new products, we expect to exit the December quarter within our old four to six weeks target range.
So with that let’s open the call to questions and we ask that you please limit yourself to one one-part question and one follow-up.
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