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Apple earnings release Q2 2013: relentless drive or signs of trouble?

by May 4, 2013






Apple earnings release Q2 2013!

continuation of the relentless drive to greatness?
or signs of trouble are brewing?

Latest AAPL financial reports are charted below, as reported by the company.
We have added some comments below charts.
It’s your turn to decide whether AAPL is a sell, a buy or maybe just hold.
Comments welcome.

Apple earnings release Q2 2013, Chart showing: revenues, cost of goods sold, gross margin

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Apple (AAPL) sales increased YoY, however gross margin decreased. This signals that while Apple products are still selling well, increased competition pressures on margin. That may well reverse if new products are launched.

Apple earnings release Q2 2013, Chart showing: gross margin, OPEX, operating income

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Adding to the decreased gross margin, Apple’s operating expenses increased YoY, cutting even more on the operating income.

Apple earnings release Q2 2013, Chart showing: details on operating margins

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A little detail on Apple’s Q2 2013 margins. Nothing new so far.

Apple earnings release Q2 2013, net income chart

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A little more detail of how gross margin works out as net profit.

Apple earnings release Q2 2013, revenue and costs chart

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Detailed revenue versus costs are presented here for perspective.

Apple earnings release Q2 2013, assets and liabilities chart

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Overall Apple’s balance sheet quality increased: more long-term assets doubled by more equity, despite overall balance sheet size decreased. Current assets decreased on account of decreased sales QoQ.

Apple earnings release Q2 2013, current assets chart

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Current assets particularly include mostly cash and securities, and quite little inventory and receivables. No inventory build-up particularly.

Apple earnings release Q2 2013, long term assets chart

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A tremendous build-up of long-term securities, over $105 billion, dwarfing the GDP of most countries on Earth. Property, plant and equipment decreased, maybe a better utilization ratio or just more outsourcing.

Apple earnings release Q2 2013, current liabilities chart

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A quite low figure for accounts payable – maybe lower production ahead? That could be a serious alarm bell!

Apple earnings release Q2 2013, equity chart

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Equity increased relentlessly, to a total of $135.5 billion.

Apple earnings release Q2 2013, cash flows overview chart

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Operating cash flow decreased YoY, apparently not good, chart below gives a little more insight.

Apple earnings release Q2 2013, operating cash flows chart

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Part of Apple’s cash flow decline YoY is explained by the company paying la large amount of accounts payable. That correlates with decreased accounts payable (as shown above in the current liabilities chart), but as well indicates possible lower production (and lower sales as well) ahead. Be aware!

Apple earnings release Q2 2013, non-cash flows chart

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Despite share price decline, and decreased profits YoY, AAPL still managed to pay more share compensation expenses.

Apple earnings release Q2 2013, financing cash flows chart

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A little cash back to investors. Note stock repurchase program did not succeed to stop the stock price decline. Troublesome.

Apple earnings release Q2 2013, investment cash flows chart

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No major acquisition yet, except some fixed assets.

Final comment on Apple earnings release Q2 2013: We are not worried for the weakness in Apple earnings and profits, as released for Q2 2013, that may get fixed soon with some Apple TV, iWatch or some other innovative products.
It’s the accounts payable position that signal a possible cut in orders and possible lower sales, that actually worry us.


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(7) comments

Andrew
1 year ago · Reply

Very nice information!

Clint Fyke
1 year ago · Reply

I love the layout of information. I got a twinge of cognitive dissonance with “This signals that while Apple products are still selling well, increased competition pressures on margin.” Apple’s situation is complex. I actually believe the margin compression is due to product mix, Foxconn factors, and component costs.

A look at the balance sheet shows an investment in property, plant and equipment in the ttm of more than $18B. The Asset section shows an increase of only $7B over the same period. There is always depreciation, but depreciation on the balance sheet is combined with amortization and accretion (internal growth). During that period there was significant amortization and accretion, so depreciation was likely not a major factor. Looking back to 2009 it came in at about 1.5% for the same item. Amortization for the server center and the new headquarters and internal expansion, seem most likely. The point is that depreciation should not have dragged down the property, plant and equipment number, significantly. Accretion should actually have added to the value.

A look at Foxconn reveals that they increased margins by 7.7% last quarter, but revenues lagged. Their EPS increased though. The increases in iPhone and iPad production were the reasons. Increases in wages were part of their recent issues. Tim Cook said during the Jan conference call that Apple was investing significantly in their supply chain partners. If Foxconn invested in expansion, the cost would have been passed on to Apple and shown in Foxconn’s revenue. It did not. The amount Apple invested in property, plant and equipment, that does not show up as Assets in the statements suggests Apple invested directly. It also explains why Apple is not seeing the full Foxconn increases, reflected in their margin, despite they’re having increased labor costs. Apple received consideration in COGS. Also one of the advantages of farming out production is quality control. Apple returned a number of iPhone 5′s because of scuffing in the assembly process. This shows up as warranty accruals initially, but then Foxconn has to absorb a good part of the cost due to quality control commitments. They were quite vocal about it.

Product mix also hit margins. iPhone 5′s came in at only about 50% of new phone sales. iPhone 4′s were reduced in price. Component costs are less from suppliers since they have already recouped R&D and setup costs. Labor costs rose causing margin compression. iPad mini and iPad sales are combined, but inventory issues were singled out for the mini suggesting sales were strong. The mini is known to have a lower margin than the iPad. The mix of iPads and minis brought down the margin for the group. The mix of phones is also impacted by the fact that many buyers, especially in emerging markets have no support for 4G. The marketplace is moving the demand away from the newest phone because of infrastructure issues.

Knowing these things makes me question a competition factor. In fact the lower priced iPhone 4′s offer that competitive response, without going outside their normal practice. Going forward it seems that the margin compression is more an adjustment than a trend.

    stelian
    1 year ago · Reply

    Clint,

    Thanks for appreciating the layout.

    For Apple, margin compression is normal, as any product that is hugely successful attracts heavy competition.

    Nokia fiddled with smartphones for some 10 years (the “Communicator”), until Apple figures how to mass market smartphones, leaving Nokia in the dust.
    Microsoft pushed tablets for 10+ years (even had a version of “XP tablet edition”) until same Apple figured the proper way to make a tablet.

    So far, no competitor figured how to make a better product yet, but still some Android manufacturers succeeded to make products similar in functionality, and at somewhat lower pricing.
    By outsourcing to Foxconn & others, Apple still has the best cost structure among competitors, and still margin pressure is felt. Particularly that lower-margin iPad mini sales cannibalized larger iPad sales, instead of adding to them as hoped by Apple.

    Practically Apple grew so large – “the elephant in the room” – that organic sales growth is difficult to achieve. If new products would be added, that could indeed increase again sales and margins (provided Apple still have the recipe of successful products where others limped).

    You are indeed right that increased pressure on Foxconn may explain the reduced margin, however I do not see yet a reason for the reduced payables position, that may be linked to reduced sales in current quarter. iPhone 5 returned to Foxconn (and consequent claw back in payables) could partly explain the issue, let’s see.

      Clint Fyke
      1 year ago · Reply

      First, about this process. I am looking to collaborate and end up with a more complete model to understand Apple. To start with I think your presentation of facts and the comparisons give us a good start. My point was about complexity and you have acknowledged the Foxconn influence with a reduced payables reservation. The payables is something we won’t have factual answers to. It could be timing of when payables were paid, it could be part of a lower net payables in exchange for Apple investing in production capacity.

      The outsourcing issue could also pinpoint an issue we have not touched on. Apple is trying to get arms length from Samsung. Samsung has been their foundry for their A5&6′s. Transitioning to new fabricators may involve some higher initial costs in the setup phase, that eroded margin.

      Commenting on
      “Particularly that lower-margin iPad mini sales cannibalized larger iPad sales, instead of adding to them as hoped by Apple.”

      Another fact for us to mull over is how much cannibalization and of what? My wife has an LG dumb phone with a slide out keyboard. She has older eyes and a smartphone would be nice. She always borrows my iPad when we’re out because she likes to browse the Internet. We looked at a Note 2 but Apple is sticky to us. The Note wasn’t really what she wanted. We looked at a new iPhone but the tablet screen was more appealing. She settled on a mini, with 3G and she is going to keep the LG. Without the mini, she would have settled for the Note 2 or might have done an iPhone. She was not an iPad buyer. From the conference call it seems that many buyers might have bought at the price point. They indicated that a far larger percentage of mini’s were new customers than other products.

      A comment on
      “Practically Apple grew so large – “the elephant in the room” – that organic sales growth is difficult to achieve.”
      I am reminded of political budgets and in particular how language affects perception. Comparison is often the name of the game. Let’s say a budget last year was $80B and this year’s is $100B. And, last year there was a deficit of $20B and this year the same. The rhetoric will be about how they reduced the deficit by 5%. What is important are the numbers. By using percentage to measure growth, we miss the real numbers. I like to look at how many combined devices are connecting to the eco-system. They feed into other income streams.

      A growing marketplace is one thing, but a marketplace that can support margins is another. Years ago, Toyota faced quotas for imports. They originally entered the NA market as a budget item. Once they had market penetration they got rid of the low end. Revenue was the reason. Given equal margins, it made more sense to sell the higher priced item. The Asian market is large enough that being a niche player on the higher end, with margin, makes more sense than trying to compete in the low margin market. Google and Amazon are playing a zero margin game on hardware. Who wants to go there? Yet the zero margin buyer is counted as part of the overall market growth. Percentage is used to compare profit. Apple had 67%? last year and 58%? this year. Looking at it in real numbers is more important. If last year’s market was 100% and grew by 90% YoY, then Apple made $67 out of every $100 profit made last year compared to 58% of $190 pie this year or $110 compared to $67. Yet the media will focus on a 9% drop in total market share rather than a 64% increase in actual dollars. The reality is they were challenged to supply the existing demand. Imagine the nightmare they would have faced if they retained marketplace demand percentage and had not been able to fulfill it.

      The issue is retention. The Rating Agencies rated it highly. AT&T’s CEO was elated with it when questioned about the high cost of Apple phones. Not only was data usage higher but churn was small. In my own family I have seen long time Samsung users decide to try iPhones 4&5. They have said, they will not go back. The issue wasn’t Android vs iOS. It was quality of product and user experience. Part of Apple’s growth is current customers replacing and adding to existing hardware. Retention feeds this.

      We seem to be mostly on the same page, I think there is competition but I think they largely ignore it. Until such time as capacity outpaces demand they can afford to ignore it. Buffet told the media that that is what Tim Cook should do, decide what to do based on company health and interests. You astutely made the point that nobody has truly produced comparable products, despite attempts.

      Android face another issue, fragmented OS. Google made the OS open source. That means they don’t provide support. Lack of support and cross device compatibility issues will eventually erode customer experience and increase developer problems. Security is the next mobile issue and they are very vulnerable given the open source nature of Android. The bloom will come off the Android rose. Windows is a more logical threat but traction will be difficult. Last years trend is not next years. When Apple released the iPhone their computer market share was under 3%. Today it is over 10%. They sell more iMacs in a quarter now than an entire year then, yet the PC market is dying. Patient commitment to quality got them here and will win out. Settling for second best loses its appeal, when you don’t have to settle.

      The massive buying of iPad 2′s by the school systems helps create a pipeline of tomorrow’s consumers with a taste for the experience. In many ways they are no longer just a hardware company, they are an experience company. That truly differentiates them.

        stelian
        1 year ago · Reply

        Drafting a complete model is indeed very challenging, given the complexity and extent of Apple’s operations.

        I’m working as well to detail top line and bottom line by product, that will come at some point, it isn’t easy as official reports appear more obfuscating than clarifying.

        You are right that security is a critical consideration for Android, but keep in mind that having the most secure smartphone did not prevent RIM/Blackberry from sliding out of the game. I would assume that customer experience comes above security.

        Customer experience (plus adequate pricing) put Nokia in the pole-position of mobile phone game, and same customer experience pushed them out later on. Same for RIM.

        It’s probably more a game of customer experience as you identified, and less about hardware. I still have an iPhone 4, that works flawlessly, and at the same time I had acquired a HTC Desire (the original high-end Android model). In one year the support for the HTC just disappeared, albeit the phone still works pretty much ok. And even later Galaxy S3 phones I have tested have some quirks despite having far superior hardware to iPhone 4.

        The real risk to Apple is that they get overboard trying to ring-fence their customer experience platform. I have now a big difficulty trying to get non-Apple content on iPhone and iPad. Latest versions of iTunes made adding ringtones a real nightmare, and adding music (like mp3s acquired from Amazon) quite difficult. It used to be very easy.

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1 year ago · Reply

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google
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