Profits dip again for Apple, while iPhone sales beat record

Apple’s profits fell for a second consecutive quarter, even as the company enjoyed record iPhone sales for the April-to-June time period.

For its fiscal third quarter ended June 29, Apple reported sales of $35.3 billion, with net profit at $6.9 billion. That translated to earnings of $7.47 per diluted share. Apple’s revenue marked a record for the June quarter, ticking up 1 percent from the $35 billion Apple posted in last year’s third quarter. Still, profits fell 22 percent year-over-year, down from $8.88 billion in 2012. Apple also reported a drop in profit during its fiscal second quarter of 2013.

Apple’s performance for the third quarter topped analyst expectations. Analysts were looking for the company to earn $7.32 a share on $35 billion in revenue.

With a tiny increase in revenue but a drop in profit, you’d rightly conclude that Apple’s gross margin dropped: For the quarter, it was 36.9 percent, versus 42.8 percent on the year-ago quarter. That’s because Apple’s most popular products now have lower margins than the top-sellers a year ago.

Apple says international sales accounted for 57 percent of its revenue for the quarter.

The company also says it has issued $18.8 billion in cash to shareholders through dividends and buybacks.

While Apple generally keeps a tight lid on future product announcement, company officials did reiterate a point made during its second-quarter earnings announcement in April—that the company plans to roll out new products starting this fall and into the next year. “We are laser-focused and working hard on some amazing new products,” CEO Tim Cook said in an statement accompanying Apple’s earnings announcement.”

Apple says it sold 32.2 million iPhones—a record for the June quarter. That’s up from 26 million iPhones in the year-ago period. For the U.S., iPhone sales rose 51 percent year-over-year, Apple says.

“iPhone 5 remains by far the most popular [phone], but we’re also very happy with sales of iPhone 4 and 4S,” chief financial officer Peter Oppenheimer told analysts during a Tuesday conference call. Those older phones, of course, are lower-margin devices, since Apple charges customers $200 or $100 less for those phones, respectively, compared to the iPhone 5.

Oppenheimer said that iPhone sales remain ahead of expectations, and that Apple is particularly pleased with the iPhone’s strong year-over-year growth in both developed and emerging markets. Apple says that ComScore shows the iPhone holds the top spot in the U.S. market for the three month period ending in May, with a 39 percent share. And the iPhone is the top-selling smartphone in Japan, and the top or second-best selling smartphone in most markets IDC tracks.

With government, business, and education, iPhone holds a 62.5 percent share of the U.S. commercial market.

Cook suggested that Apple is at least open to the notion of trade-ins for smartphones. “I like the environmental aspect of it,” he said, though he stressed that Apple hasn’t announced any plans on that front. Cook pointed out that “residual value of iPhone stays high, and there’s so much demand around it. So that makes the trade-in program very lucrative.”

The picture was less rosy for iPad sales, but Apple has a perfectly reasonable explanation for the 14 percent drop in tablet sales from last year’s third quarter. A year ago, Apple introduced the third-generation iPad and enjoyed a full quarter’s worth of sales to the tune of 17 million units. This quarter, sales fell to 14.6 million iPads.

Still, Apple has plenty of reason to remain bullish on the iPad. Oppenheimer said that the iPad ranked tops in a 2013 U.S. tablet satisfaction survey by JD Power and Associates. And during the quarter, the company inked a deal with the Los Angeles Unified School District, the second largest district in the U.S., to roll out iPads to 640,000 students.

In fact, the iPad got the bulk of the credit for a strong quarter of sales to U.S. schools. According to Oppenheimer, the last three months generated the highest quarterly revenue ever for Apple’s U.S. education institution business.

Mac sales also fell in the quarter, down 7 percent from last year to 3.8 million units. Still, Oppenheimer pointed out that the 3.8 million Macs sold beat Apple’s own expectations. And Apple’s sales still were ahead of the total PC market, which saw sales contract by 11 percent according to estimates from research firm IDC (which is owned by the same company that owns Macworld). By Apple’s math, the Mac gained market share during the quarter.

The Mac was one of the few product lines to see any changes during the quarter, with Apple updating its MacBook Air lineup at the beginning of June by adding new Intel processors. Company executives had little to say about any impact those new laptops had on overall Mac sales, but Oppenheimer did call it the most successful MacBook Air launch to date, adding that customer response was great.

But during the call, executives implied that there were better things to come. Oppenheimer noted that June’s Worldwide Developers Conference included previews of both the Mac Pro and the next version of OS X, code-named Mavericks.

The iTunes Stores—which includes the App Store, Mac App Store, iBookstore, and the music, movies, and TV sections of iTunes—generated $4.3 billion in billings, Oppenheimer said, culminating in the best week and best month ever for App Store. That translated to quarterly revenue of $2.4 billion, up 29 percent year over year. Total quarterly revenue from iTunes, software, and services generated $4 billion in revenue.

Oppenheimer said that Apple now has over 320 million iCloud accounts, and 240 million Game Center accounts.

As for brick-and-mortar retail efforts, the Apple Store saw revenue of $4.1 billion for the quarter, virtually unchanged from the year-ago quarter. Oppenheimer reported that Apple saw 16,000 visitors per store each week.

For the quarter, Apple had an average of 405 stores, with average revenue per store at $10.1 million—down $1 million from the year-ago quarter. Apple opened six stores across five countries during the quarter, giving it 408 stores around the globe; 156 of those outlets are outside the U.S.

The company plans to open nine new stores during the September quarter, giving it 27 new openings during the 2013 fiscal year. It’s not just about new stores, however: Apple says that it relocated four of its stores to more appealing spots; it will complete 23 such relocations before the end 2013 fiscal year in September.

China has been a particularly critical part of Apple's business in recent years, but that took a hit in the third quarter. “China was weaker” in this quarter, Cook acknowledged, but maybe not as weak as it might seem at first blush, he argued. “Our sell-through in China was only down four percent from the year-ago quarter, when you normalize for channel inventory,” he said. Hong Kong drop was worse, though mainland China was up five percent year over year, “but that’s a lower growth rate than we have been seeing,” Cook added.

“I attribute that to many things, including [the fact that] the economy there clearly doesn’t help us there or others,” Cook said.

Still, China drove $4.9 billion of revenue—about 14 percent of the company’s earnings—Cook pointed out. “And a few years ago, that was within the hundreds of millions. We have a very strong market there.” He added that year-to-date, iPad sales are up 48 percent in China year over year, and half a million developers in China are working on iOS apps. He also said that Apple would double its number of retail stores in China “over the next couple years.”

Cook said that Apple will continue to work to boost iPhone and iPad sales, “both of which are currently lower then where we would like or need them to be. We’re doing that very cautiously, because we want to do it with quality.” He added that, “over the arc of time, China is a huge opportunity for Apple, so don’t get discouraged over the 90-day cycle with economic factors.”

Apple’s not done returning cash to investors. The company’s Board of Directors has announced another cash dividend, this one at $3.05 per share of common stock, payable on August 15 to any shareholder as of August 12.

For the next quarter, Apple is predicting revenue between $34 billion and $37 billion, with gross margins between 36 and 37 percent. That sales figure would put Apple’s performance in line with the $36 billion in revenue it reported in the fourth quarter of 2012. For the coming quarter, Apple also predicts operating expenses will be between $3.9 billion and $3.95 billion, with a tax rate of 26.5 percent.

That may dissatisfy some sections of Wall Street, where the focus is on growth and new products, but Apple’s Cook told analysts on Tuesday that he doesn’t think the company’s goals diverge from investors’ focus on profits.

“We’re here to make great products, and we think that if we focus on that and do that really well, the financial metrics will follow,” Cook said. “We don’t look at those two things as mutually exclusive.”

Intel Q2 profits down, but in line with expectations

Chip maker Intel has reported a second quarter profit of $2bn, down 29% from a year ago, roughly in line with average analysts’ estimates.

Revenues were also down to $12.8bn, slipping 5% on last year’s second quarter figure and just missing analysts’ forecasts of $12.9bn.

This is the fourth consecutive quarter of declining sales for the company, with sales suffering as the market has switched from traditional PCs to other form factors using chipsets from competitors.

According to Gartner Research, global PC shipments fell 10.9% to 76 million in the second quarter.
In the first quarter of 2013, sales of PCs in the UK dropped 16% to 2.5 million units, with a slower decline in the professional market cushioning the overall fall.

Consumer and business PC demand declined by 23.5% and 7.6% respectively, Gartner found.
Despite positive initial forecasts for the year, Intel has now reduced its expectations and plans to focus on selling chips for use in tablets and smartphones in a bid to regain lost ground.

Intel's new chief executive Bryan Kraznich told investors that it plans to flood the tablet market with inexpensive devices, and that building "ultramobile" chips is now the company's highest priority.
Kraznich, who took over from predecessor Paul Otellini in May, admitted that Intel had been “slow to respond” to the ultramobile PC trend.

As part of that strategy, Intel will focus on its Atom line-up of mobile processors, but the company said PCs will continue to be core to the company's business.

Intel said its current quarter sales will be $13bn to $14bn, in line with analysts’ expectations of $13.72bn.

For the full year, Intel said it expects its revenue to remain flat, down from an earlier forecast of a low single-digit percentage increase.

Monty Python Members Lose 'Spamalot' Musical Profits Dispute

Mark Forstater, a producer on the 1975 film Monty Python and the Holy Grail, has gotten a U.K. high court to acknowledge that he's owed a larger share of profits from Spamalot.

The Tony Award-winning musical came out in 2005 and was penned by original Monty Python member Eric Idle. It's described in marketing as "lovingly ripped off from" the 1975 film about the Arthurian legend, and in his lawsuit, Forstater said that he was due money on "spin-offs" under a 1974 agreement between him and the Pythons, which along with Idle comprise Michael Palin, Graham Chapman, John Cleese, Terry Jones and Terry Gilliam.

During a trial late last year, Forstater's lawyer said his client was the "seventh Python" for purposes of profit-sharing, and that the other members couldn't unilaterally reduce his share. On Friday, a U.K. high court judge agreed with Forstater over contentions by the other Pythons that the producer was being ungrateful.

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According to the agreement that Forstater signed in 1974 to become a producer on Holy Grail, he got a £5,000 fee plus a share of profits. The contract included consideration of "merchandising" and "spin-off rights" but had some special provisions for instances when the Pythons contributed materially to the making of the work.

In certain of these special instances, 50 percent of revenue from exploitation -- the "Top Half" -- would first go to a film company set up by the Pythons, then the remaining money would be then put into a pot for division among all profit participants. In Forstater's lawsuit, he argued he was entitled to a one-seventh share of the Top Half generated by Spamalot, and that as a result of accounting moves, he should have gotten twice as much in money and only paid half as much in expenses. Forstater has estimated about $400,000 in damages.

In looking at the case, the judge had to rely on testimony about an agreement made nearly four decades ago.

Terry Jones was one of the two members (along with Gilliam) who once wanted Forstater's participation on the film, but also said that "Python is very jealous" and that he had no idea why Forstater would get a share of the 50 percent.

Eric Idle said he now disliked Forstater. The judge notes that the Spamalot writer "undoubtedly regarded Mr Forstater as ungrateful."

Michael Palin's recollection was "hazy," according to the judge, but Palin kept an invaluable diary during the making of Holy Grail that proved informative as well as funny as hell. For example, he wrote in October 1973 about the "seething jealousy and rivalry below the surface" among various producers fighting for their shares. Later, in November 1974, he recounted a meeting where as Forstater "ran through the clauses [of a contract], it was increasingly clear that we were being asked to sign away our copyright on the film – which is tantamount to signing away every bargaining counter Python ever had."

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Then, there is this gem from Palin's diary in the middle of 1975 where the Python member reacts to Forstater’s persistent requests for more money:

"… as we are a soft lot and not at all businesslike, I think it would be in the finest traditions of Python irrationality if we gave Mark an extra £1000 and a silver tray with some cut glass sherry glasses and told him to stop writing to us for more money. Beyond that even I am not prepared to go. Oh, all right, some cheese straws to go with the sherry glasses.”

Ultimately, after the judge recounts the maneuvering and bickering of Holy Grail participants in almost Pythonesque absurdity, he comes to his conclusion that in the mid-'70s, as opposed to now, "there was a consensus that Mr Forstater should be entitled to a 1/7th share of the Top Half."

The judge adds, "As I assess the evidence the Pythons continued at that point to be 'a soft lot and not at all business-like' and to be genuinely enthused at having secured the services of Mr Forstater; and Mr Forstater continued to be concerned that he got the maximum from his relationship with the Pythons and that what he had obtained should not be whittled away. So the consensus was intended to be recorded …"