5 Takeaways From The Apple Earnings Call

There is plenty going on in the tech industry today, such as Google (GOOG) and Oracle’s (ORCL) ongoing lawsuit over the patentability of Java APIs used in Android, which is playing out like the final quarter of a sports-fiction movie. At some point, the good guy, whoever that is, will launch a slow motion basketball towards the basket in a moment of absolute silence, hit the rim, and sink it with less than a second before the buzzer. But that will be in a few weeks. And there’s the debut of Google Drive, which may or may not be robbing you of ownership of your own files. And then there’s Sprint-Nextel (S) beating earnings expectations and selling1.5 million iPhones.

But the big, unavoidable big news today is Apple’s (AAPL) explosive March quarter.

At this point, reader, I trust that you have already read that Apple’s profit grew 94% over last year and sold 35 million iPhones and yada yada yada. Here are a few details from the press release and earnings call (hat tip to Seeking Alpha) that have implications for the long term.

1. Despite “iPad cannibalization,” Mac sales were 7% higher in this year’s March quarter than last year’s, but 23% lower than last quarter’s. This shows that there is some pent-up demand for Macs. Once OSX Mountain Lion (when will they run out of feisty felines?) or Apple comes out with a significant hardware upgrade, expect a jump in Mac sales. Consumers are getting hooked on gateway devices like iPods, and it’s becoming less uncommon to see Mac desktops popping up in workplaces.

2. The Apple Story is becoming a “China Story.” China isn’t just where Apple products are made. In the past quarter, revenue from the Asia Pacific region grew 114%. iPhone sales in China grew fivefold over last year. China Telecom agreed to sell the iPhone in March, very late in the quarter. With 600 million subscribers, the iPhone still has plenty of potential users. If Chinese economic growth slows down any further, however, Apple will have to look elsewhere for growth opportunities. As CEO Tim Cook says, in China, “[T]he halo that [iOS devices] have produced for the Mac is also incredible. Mac was up over 60% year-over-year. And that compares to a market rate of growth of about 6%… And so there’s obviously a lot more opportunity there.” Also, Japan, formerly a weaker market for Apple, grew 91% year-over-year.

3. The iPad 2 is selling well after the price cut, but the more expensive new iPad, in the words of Peter Oppenheimer, “is on fire, and we’re selling them as fast as we can make them.” Struggling to meet demand for a big-ticket product with extremely high margins is a good problem to have. The education market for the iPad is also growing at a clip. The lower-priced iPad could help solidify Apple’s appeal with  more price sensitive customers such as students and buyers for municipal school systems.

4. Many Apple investors are becoming concerned that the iPhone could be hurt if carriers like AT&T (T) and Verizon (VZ) reduce subsidies for the iPhone. Apple gets its ~$650 per unit one way or another. If you go to the store and get one with a two-year contract, you will pay far less. Older models can even come free. CEO Tim Cook doesn’t see this system breaking down, no matter how much the carriers whine. Why? Customers want the iPhone. This should require no explanation. Also, iPhone customers have the lowest churn rate of any phone user. iPhones use data more efficiently, too, which saves the carriers money.

5. Tim Cook pretty much dismissed the coming Windows 8 hybrid tablet/laptops that Intel (INTC) and Microsoft (MSFT) are working on. He said, “[A]nything can be forced to converge. But the problem is that products are about trade-offs, and you begin to make trade-offs to the point where what you have left at the end of the day doesn’t please anyone. You can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user… Now having said that, I also believe that there is a very good market for the MacBook Air, and we continue to innovate in that product. And — but I do think that it appeals to somewhat — someone that has a little bit different requirements. And you wouldn’t want to put these things together because you wind up compromising in both and not pleasing either user. Some people will prefer to own both, and that’s great, too. But I think to make the compromises of convergence, so — we’re not going to that party. Others might. Others might from a defensive point of view, particularly. But we’re going to play in both.”

For Minyanville.


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