Two quarters ago, Apple unleashed Godzilla. It was a quarter so spectacular that the only appropriate way to describe it was in pure expletive form. $46 billion in revenue. $13 billion in profit. 37 million iPhones sold. 15 million iPads sold. A gross margin of 44 percent. These weren’t just good numbers, they were obscene.
That’s what made yesterday’s earnings release insane: Apple almost managed to match those numbers last quarter.
While pound-for-pound, Apple’s Q1 is the clear winner, I actually think Apple’s Q2 was more impressive. It was Apple’s Mothra.
In Q1, Apple was coming off a quarter than some considered “disappointing”. It was their first “miss” in forever. I put those terms in quotes because that’s where they belong. Those who actually knew what they were talking about with regard to Apple, knew that Q4 2011 was a fluke that happened for a few reasons — namely the launch of a new iPhone in Q1 rather than Q4 (in terms of Apple’s fiscal calendar, which is different from the ones human beings use). So it wasn’t hard to predict that Q1 was going to be big. Hell, Apple itself even hinted at it.
Of course, no one knew the quarter would end up being that good, but plenty of us were thinking big. But last quarter was more complicated. First of all, it was the quarter after the holiday quarter, which typically sees a good sized drop as buying slows. Second, because of an oddity in Apple’s fiscal calendar, Apple’s Q1 was actually a week longer than their quarters typically are. That means a week less of sales in Q2 compared to Q1. Third, the iPhone 4S was no longer brand new, so the pent-up demand was probably going to dissipate. Fourth, a new iPad was expected, but it wasn’t expected to be on sale until the end of the quarter, creating a sales void leading up to the launch. Fifth, there were no new Macs released in the quarter.
All of this seemed to be setting Apple up for a fairly significant drop quarter-to-quarter.
Nope.
Instead, what happened was that iPhone sales remained insane. 35 million for the quarter. While the phone grew its command of the smartphone market in the U.S. percentage-wise, the absolute sales numbers were down (again post-holiday and post-launch). But it was a different story in China. Because the phone was introduced in Q2 in that country, sales went through the roof. And it nearly offset the drop-off in the post-holiday and post-launch U.S. market.
Since the iPhone is Apple’s most important product revenue (and profit)-wise, this bolstered the overall numbers — especially with regard to profit (more on that in a bit).
Much was made yesterday about the iPad’s “miss” in terms of sales. Because Apple “only” sold 11.8 million of them, plenty of folks were disappointed. Those folks are idiots.
The new iPad only went on sale in the last two weeks of the quarter. But everyone knew it was coming. As a result, buying of the old iPad slowed in anticipation. This isn’t rocket science.
Further, Apple had trouble meeting demand for the new iPad in those two weeks on the books. If they can get the inventory up to speed, it will be this quarter which will be the big one for iPad. You release a new product, people buy more of them when they’re available. That’s generally how it works.
But again, this iPad dip did little to slow Apple’s quarter because of the iPhone sales. And more broadly, Apple’s overall business in China is booming. As Kim-Mai pointed out yesterday, Apple’s revenues for the quarter in China reached a record $7.9 billion, which was up threefold year-over-year. If you look at the graphs at the bottom of her post, you’ll see that Apple is becoming a much more global company. This means that their numbers are less susceptible to the ebbs and flows of the U.S. market.
But the most amazing number from Apple’s Q2 was 47.4. That was their gross margin for the quarter. It’s hard to describe how ridiculous that number is, but I’ll try.
In Q1 — again, the Godzilla quarter — Apple’s gross margin was 44.7 percent. It was so high that Apple CFO Peter Oppenheimer noted during the earnings call that the company didn’t expect to match such lofty levels ever again. Instead, they destroyed the number in Q2.
Why?
It was mainly because the iPhone made up an even larger percentage of overall revenue in Q2. The iPhone is Apple’s biggest money-maker and their product with the best margins, thanks largely to carrier subsidies (though more in the U.S. than other countries). The iPad also has great margins, but they’re significantly less (the iPad is not carrier subsidized anywhere). Less iPad sales (both in quantity and percentage-wise) and strong iPhone sales meant a higher margin. That’s why Apple’s revenue dipping $8 billion only equated to profit dipping less than $2 billion.
For some other margin context, look at this chart that Horace Dediu of Asymco put together. For the first time, Apple’s operating margin (different than gross margin, but just as important) surpassed that of both Google and even Microsoft. Apple is predominantly a hardware company. Google is predominantly an advertising company. Microsoft is predominantly a software company. This is not supposed to happen.
Going forward, those margin numbers almost have to drop. Not only will the iPad sales be big this quarter (again, the first full quarter the new iPad is on sale), but the $399 iPad 2 is apparently selling very well. That will drag margins down (but likely drive revenues up and make Apple less of an iPhone company).
The bigger questions will be if China sales continue on their torrid pace and if/when Apple finally gets around to releasing some new Macs.
While there is some confusion as to the timing of the next iPhone (due to the history of the launches), it seems pretty safe to assume that Apple will stick to the fall timeframe. Apple announced WWDC 2012 today, and while iOS was mentioned, it will probably be an iOS 6 developer reveal followed by a new iPhone in the fall again. This means iPhone sales should remain strong this quarter and will weaken in the following quarter leading up to a new device.
Apple is expecting revenues of $34 billion in Q3, which means they actually expect to destroy that number in Q3. I’ll probably have to come up with another Kaiju at that point.
[image: Toho Kingdom]