7 Things to Know About Apple’s Record-Breaking Fourth Quarter

Apple CEO Tim Cook speaks about the iPhone 6 during an Apple special event

Justin Sullivan/ Getty Images

With the unveiling of the new iPhone 6 and iPhone 6 Plus, the introduction of the Apple Watch to the public, the launch of HealthKit, the rollout of Apple Pay, and the announcement of new iPads and Macs, it’s been an eventful fall for Apple. The excitement continues with the announcement of the company’s fourth quarter results. The numbers reported in Apple’s September quarter earnings results were strong, and gave investors and analysts some insight into how the fourth quarter of the year was even better than expected. Here are six things to know about Apple’s best September quarter ever.

Apple’s quarterly revenue beat analysts’ expectations

Apple reported quarterly revenue of $42.1 billion and net profit of $8.5 billion, up from revenue of $37.5 billion and net profit of $7.5 billion in the same quarter last year, and representing the strongest revenue growth rate in seven quarters. As The New York Times reported, a survey of analysts by Thomson Reuters found that they expected quarterly revenue of $39.9 billion. The company’s $1.42 a share profit also exceeded analysts’ expectations of $1.31 a share.

Apple’s gross margin in the fourth quarter was 38%, compared to 37% a year ago. The company reported shipments of 39.27 million iPhones — up from 33.8 million shipped in the same quarter last year — plus 5.5 million Macs and 12.3 million iPads. Growing iPhone sales helped the company offset slowing demand for the iPad — which has struggled along with the whole of the tablet market, despite expectations that it will eventually grow larger than the PC market.

The iPhone 6 and iPhone 6 Plus set new records

Although iPhone sales were strong, demand was even stronger. In the first weekend that the two new iPhone models were available for sale, Apple sold 10 million units of the iPhone 6 and iPhone 6 Plus, up from the 9 million iPhone 5s and iPhone 5c units sold during last year’s opening weekend. The company sold a total of 39 million iPhones in the September quarter, up from the 33.8 million it sold in the same quarter last year.

Even though iPhone sales have continued to grow, sales of smartphones are slowing in the U.S. and in parts of Europe, and for Apple, the iPhone represents about 70% of the company’s profits. Analysts wonder whether another of Apple’s products — perhaps the Apple Watch, which will launch next year — will eventually rival the iPhone in sales and profit. But Apple, and chief executive Tim Cook especially, seem happy with consumers’ love for the new iPhone models. According to The New York Times, Apple chief executive Tim Cook said, during the company’s earnings call with investors, that, “Demand for the new iPhones has been staggering. I’ve never felt so great after a launch before.”

Demand for iPhones currently outstrips supply — and likely will continue to do so

Demand for the iPhone 6 and iPhone 6 Plus is “far outstripping supply,” and Apple isn’t sure when it will be able to catch up. As AppleInsider reported, Apple was below its target of 4 to 6 weeks of channel inventory, and Cook said that Apple is “not nearly balanced” in regards to the pull of supply and demand for the new iPhone models. “We’re not even on the same planet.”

But Apple’s inability to meet the demand for the new iPhone models didn’t hurt the company, and its shipments of 39.3 million iPhones actually beat analyst expectations. Cook sees opportunity in selling to first time iPhone buyers and to those who are upgrading from previous models.

iPad sales beat expectations, but still declined with the rest of the tablet market

Apple sold 12.3 million iPads, down from 14 million in the fourth quarter of last year. Sales beat analysts’ expectations, and as AppleInsider points out, Apple continues to sell more iPads each month than the combined tablet sales of the other top five tablet vendors globally, beating Samsung, Asus, Lenovo and Acer. (That’s in spite of the fact that Samsung has been giving away tablets, and other players including Amazon, Google, and Microsoft have taken on expensive experiments in tablets without selling enough devices to enter the top five).

Cook also acknowledged that other Apple products might be winning out over the iPad, but seemed to consider that cannibalization a simple fact of how the market works, just like the longer replacement cycles with which manufacturers also have to contend:

“I’m sure that some people looked at a Mac and an iPad and decided on a Mac. I don’t have research to demonstrate that, but I’m sure of that just looking at the numbers. And I’m fine with that, by the way. I’m sure that some people will look at an iPad and an iPhone and decide just to get an iPhone. And I’m fine with that, as well.”

But Tim Cook is still optimistic about the iPad’s potential

As Quartz reports, Cook had a lot of positive things to say about the future of the iPad. He noted that Apple sold 237 million iPads in four years — more iPhones than were sold over the first four years of that product line. Cook preferred to look at the slowdown in iPad sales as “a speed bump, not a huge issue,” because in the past 12 months, Apple sold 68 million iPads, down from 71 million in fiscal year 2013.

He also doesn’t consider the market saturated, since figures on the top six countries for iPad revenue showed that between 50% and 70% of iPads were purchased by first time iPad buyers. Another consideration is the longer replacement cycle for tablets, which neither Apple nor analysts have yet been able to quantify. The enterprise market and emerging markets have both shown strong potential for iPad sales as well.

Cook takes a long-term view of the product line, and how the tablet market will change in the future.”Over the long arc of time, my own judgment is that iPad has a great future. How the individual 90-day clicks work out, I don’t know. But I’m very bullish on where we can take iPad over time.”

Without any major changes, Mac sales broke records

In the fall quarter, Apple’s Mac lineup saw its strongest sales ever, and Cook noted that the Mac’s market share is now at its highest since 1995. Apple sold 5.5 million Macs, up from 4.6 million in the same quarter last year, and growing by almost a million to reach an all time high. The U.S.’s back to school sales plus demand from emerging markets were both strong, and Mac gains were primarily attributed to portables, like the MacBook Pro and the MacBook Air. Cook noted that, “If you went out to college campuses right now, you would see a lot of new Mac notebooks, based on the sales.”

As AppleInsider points out, the record-setting sales are at least partially attributable to price cuts that Apple made to the product line, such as the $100 to $350 savings that the company offered on the MacBook Pro line in August. In April, the MacBook Air was priced at $899 for the first time ever, and a $200 price cut brought the base model of the iMac to $1,099.

Apple is predicting a huge holiday season — and strategizing over what happens after

Apple expects to make between $63.5 billion and $66.5 billion in revenue in its first quarter next year, compared with $57.6 billion in revenue in the same quarter a year ago. As Quartz notes, the question for next quarter will be whether Apple can sell 60 million iPhones in a quarter for the first time ever.

Apple is also already thinking about how it will present its next quarter’s results. Starting next quarter, Apple Pay revenue will be measured in the “services” category of the company’s financial reports. Sales of the Apple Watch will be included in the “other” category, along with the iPod and Apple TV. But contrary to speculation that the Apple Watch’s inclusion in the “other” category was indicative of low expectations, Cook said that the company chose to categorize the wearable with other products for competitive purposes. “I’m not very anxious in reporting a lot of numbers on Apple Watch and giving a lot of detail on it, because our competitors are looking for it.”

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