Apple Beats The Street With $43.6B And Higher Than Expected iPhone, iPad Sales, Record iTunes Sales

The bears were wrong. Apple beat Wall Street financial analysts’ expectations this afternoon. The company had been steadily losing value as analyst after analyst expressed anxiety about the company’s outlook.

Apple reported quarterly gross revenues of $43.6 billion, compared with a $42.3 billion consensus estimate. Second quarter revenues in 2012 were $39.2 billion. Growth was driven by better-than-expected iPhone and iPad sales. Last quarter Apple reported $54 billion in revenue (a miss) and $13 billion in profit (a beat).

Profit was $9.5 billion vs. $13 billion for the holiday quarter.

The company was widely expected to announce lower gross margins, which had been running above 40 percent. Indeed Apple’s gross margins came in at 37.5 percent, slightly lower than expected. This compared to 47.4 percent last year. The company also offered lower than expected guidance for next quarter.

In terms of device and iOS sales, here are the numbers:

• iPhone: 37.4 million (vs. 35.1 million a year ago)
• iPad: 19.5 million (vs. 11.8 million a year ago)
• Macs: “Just under 4 million” sold last year (vs. 4 million a year ago)
• iPods: (5.6 million vs. 7.7 million a year ago; iPod Touch represents over half of sales)
• iTunes: $4 billion ($16 billion annualized run rate)
• China revenue: $8.8 billion

Apple also announced an aggressive, $100 billion stock repurchase program and a 15 percent higher dividend. Those announcements have more than mitigated any disappointment over reduced margins.

Earnings call:

CEO Tim Cook: 1H revenues were $98 billion, which is “unprecedented.” But says fiscal 2012 high growth is hurting the company by comparison this year. He says he’s been frustrated by the stock decline but the company will focus on the long term and says that the company continues to see great opportunity ahead.

Teams are at work on “exciting” new products. We’ve “got a lot more surprises” in the works. Cook is saying the company will be returning more cash to shareholders: $100 billion by the end of 2015 in the form of share repurchases (roughly $30 billion per year). The company is also increasing its dividend to investors.

CFO Peter Oppenheimer: reviews the numbers. He says iPhone number one in Japan, which is “unprecedented” for a non-Japanese company. iPhone has greater loyalty and customer satisfaction than competing smartphones. iPad sales “more than doubled” YoY in China and Japan.

Not able to meet iPad Mini demand in quarter. The iPad is “widely adopted” by business customers as well.

Global computer/PC market declined by 14 percent; Mac sales declined by 2 percent.

There are 401 Apple stores around the world; average revenue per store was $13.1 million in the quarter. Apple had $144 billion in cash at the end of the quarter; $102 billion of it offshore.

Apple’s annual dividend payments are roughly $11 billion. Oppenheimer is discussing Apple’s share buy back (“capital return”) program and its intention to use debt to partly finance the program.

Anticipates next quarter’s revenue to be between $33 and $35 billion vs. $35 billion a year ago.

Analyst questions:

Financial analysts very focused on gross margin declines. CFO Oppenheimer offers several explanations (“headwinds,” “loss of leverage”) for the declines. However gross margins also anticipated to be lower next quarter.

Question about revenue in China: has Apple hit a wall? (so to speak). Cook says revenue $8.8 billion in the quarter in China. He’s upbeat and saying things are very strong. Revenue up 18 percent on a “sell through” basis.

China has “unusually large number of first time smartphone buyers.” Apple has made iPhone 4 attractive for first time iPhone buyers.

Asked about competitive landscape, Cook says: Android and Samsung “tough competitors” but we “have the best product by far.” We feel confident about product pipeline. “We have the best ecosystem by far.”

Asked about timing of new product launches, Cook says “We’ve got some really great stuff coming in the fall and across all of 2014.”

Asked about Apple competitive position (again) and growth of iPhones vs. growth of smartphone market overall. Cook says he’s confident about the iPad. He sidesteps the question and cites consumer satisfaction data, usage data, loyalty. “We see first time buyers” in developing countries and “we’ve made the iPhone 4” more affordable in those markets.

Asked about screen size, Tim Cook says that “iPhone 5 has the best display in the industry.” However he acknowledges that “some customers” value screen size. He says that larger displays require trade-offs. He adds that the company won’t ship a larger iPhone display “while these trade-offs exist.”

About mobile payments, Tim Cook says that the industry “is just getting started” — implying that Apple will continue to wait before entering.

“Market for PCs incredibly weak,” says Tim Cook. He adds there’s some cannibalization of Mac sales by the iPad but he “doesn’t think it’s a big number.” Says Apple is still committed to Mac and that iPad sales may benefit the Mac by bringing new people into the Apple ecosystem.

Cook said that the iPad is being used in 95 percent of Fortune 500 and 89 percent of global 500.

The call ended with a question about the Apple ecosystem and CFO Oppenheimer reporting, “We’re paying our developers more than $1 billion every quarter.”