Pre-Holiday, Apple in ‘Significant State of Backlog’ on iPhone 5

Of the $36 billion revenue Apple had in fiscal Q4 2012, $17.1 billion came from sales of 26.9 million iPhone handsets or iPhone accessories, a 58 percent jump in the category year over year, Chief Financial Officer Peter Oppenheimer said on the company’s earnings call Thursday. IDC’s most-recent estimates for industry-wide smartphone category revenue growth was 45 percent, Oppenheimer noted.

Overall Apple revenue grew 27 percent for fiscal Q4. Revenue from sales of iPads and related accessories for the quarter was $7.5 billion versus $6.9 billion in fiscal Q4 2011, Oppenheimer said. Apple’s net income for the quarter was $8.2 billion, with 60 percent of revenue coming from international sales, the company said. The iPhone is now selling in 31 countries, Oppenheimer said.

Apple CEO Tim Cook said the company is currently in a “significant state of backlog” for the iPhone, citing “extremely robust” demand. Production output has improved since earlier in the month, he said, following what he called “the largest volume ramp in Apple’s history.” He didn’t predict when supply would catch up to demand, saying only that he feels “very confident in our ability to supply quite a few iPhones.” The company is headed into the holiday season with its strongest iPhone lineup to date, Oppenheimer said, saying the iPhone 4 is starting at “free” in the subsidized market.

Apple ended the quarter with about 9.1 million iPhones in channel inventory, a sequential increase of about 800,000 iPhones, and it ended the quarter below its target range of four to six weeks of iPhone channel inventory, he said. The 3.4 million iPads in inventory at the end of the quarter was a sequential increase of about 200,000, leaving the company “just over” its four-week target of iPad channel inventory, he said.

On iPad’s competition from Microsoft’s Windows 8 Surface tablet, Cook said he hasn’t tried the Surface yet but based on reports he’s read, it’s “a fairly compromised, confusing product,” compared with the iPad. He referred to “hard trade-offs” Apple made in developing the iPad, and said, “I suppose you could design a car that flies and floats, but I don’t think it would do all of those things very well.” When customers compare tablets, he believes they'll conclude “they really want an iPad.”

For fiscal 2012, Apple revenue topped $156 billion, a 45 percent bump over fiscal 2011, representing growth of $48 billion, Oppenheimer said. The company sold more than 200 million iOS devices in the year, including 125 million iPhones, reflecting 73 percent growth over the prior year, while iPad sales grew 80 percent to 58 million units, he said.

The iPod Touch continues to represent most iPod business as the music category continues to decline, Oppenheimer said. Apple sold 5.3 million iPods in fiscal Q4, compared with 6.6 million in the year-ago quarter, the company said, and held more than 70 percent of the U.S. MP3 player market, he said, citing data from NPD. The iTunes store generated nearly $2.1 billion, a new high mark for the content site, Oppenheimer said. Customers are “embracing iCloud in growing numbers,” he said, with the company reporting more than 190 million account sign-ups in the first year of the service.

The “most prolific product period in Apple’s history” has come at a cost, with gross margins expected to fall by about 400 basis points sequentially, Oppenheimer said, due to “transitionary costs” associated with multiple new product ramps. Sequentially higher revenue and a greater mix of iPhones will provide “positive leverage” for the overall bottom line, he said, but they'll be offset by higher costs associated with introducing “so many new form factors at once,” he said. Those include the iPhone 5, iPad Mini, iMac, MacBook Pro 13-inch, iPod Touch and iPod Nano, he said. New or re-priced products launched over the past six weeks will account for more than 80 percent of expected December revenue, he said.

All of the recently launched products have higher costs, and lower gross margins, than their predecessors, he said. In addition, the company dropped the prices on the iPhone 4S and 4 and is bringing out the $329 iPad Mini at an “aggressive” price, he said. The anticipated high-volume sales of iPhone 5 and other new products will generate “significantly greater deferred revenue sequentially,” he said.

On the threat of “cannibalizing” iPad sales with the introduction of a new flagship model and the Mini, Cook said the “far, far greater threat” of the multiple iPad offerings is to the 80-90-million PCs being sold per quarter. “There’s still over 300 million PCs being bought per year, and I think a great number of those people would be much better off” buying an iPad or Mac,” he said.

At the end of fiscal Q4 Apple operated 390 stores, including 140 outside of the U.S., Oppenheimer said. Average revenue per store was $11.2 million, compared to $10.7 million in the year-ago quarter, he said. Store traffic rose to 94 million visitors, up 22 percent from 77.5 million year over year, he said.