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Tim Cook Puts His Stamp on Apple

Posted on Friday, Jul 25th 2014

According to IDC, total smartphone shipment volumes are expected to reach 1.2 billion units in 2014, up 19.3% year over year and a dramatic fall from the 39.2% growth seen in 2013. However, the research firm adds that the lower growth rate for 2014 should not be interpreted as a sign that the market has come as far as it can – Apple’s entry into China is only the start of where it has yet to go.

The most exciting new development, however, is Apple’s recent deal with IBM, which empowers its enterprise mobility strategy and has added an interesting twist to the space.

Apple’s Financials
Apple’s (Nasdaq: AAPL) third quarter revenues grew 6% over the year to $37.4 billion, falling short of the Street’s estimate of $37.93 billion. Profit was $7.75 billion or $1.28 per share, ahead of the market’s forecast of $1.23 per share. Gross margin was 39.4% compared to 36.9% in the year-ago quarter.

The revenue growth was driven by strong sales of iPhones and Macs. During the quarter, Apple sold 35.2 million iPhone units, up 13% and slightly below the market estimate of 36 million. Apple sold 4.4 million Macs, up from 3.8 million a year ago and ahead of the market estimates of 3.9 million. Revenues from iPhones grew 9% to $19.8 billion. Revenues from iTunes, Software and Services segment grew 12% to $4.5 billion. Revenues from Macs increased 13% to $5.5 billion.

iPad sales were, however, disappointing. Apple sold 13.2 million iPads, down 9% and short of market estimates of 14.4 million. Revenue from iPad sales fell 8% to $5.9 billion. iPod revenues also fell 40% to $0.4 billion. Retail revenues grew 1% to $4.1 billion.

The slump in iPad sales triggered a lot of discussion over its challenges and future. One challenge was that it isn’t as portable as a smartphone nor as useful as a computer for serious work. Some also pointed out the slower replacement cycles for iPads or tablets in general. However, CEO Tim Cook said it was still early days for tablets and there was potential for more growth. While demand was sluggish overall in North America and Europe, there was strong demand in emerging markets. iPad sales grew year-over-year 64% in the Middle-East, 51% in China, and 45% in India. He was also upbeat that the IBM deal will help them increase the iPad penetration rate in enterprises.

By region, Apple saw the strongest growth from China where revenue grew 28% to $5.9 billion. Revenue from the Americas grew 1% to $14.6 billion, Europe grew 6% to $8.1 billion, Japan grew 1% to $2.5 billion, and Rest of Asia Pacific grew 6% to $2.2 billion. The company said that tax increases and the regulatory environment affected smartphone sales in Japan.

For the current quarter, Apple forecast revenue between $37 billion and $40 billion, compared to the Street’s estimates of $40.4 billion. Gross margin is expected to be 37% to 38%, in line with analyst estimates.

Apple’s Acquisition Spree Continues
Apple has always had a special place in the entertainment industry. However, streaming services such as Spotify and Pandora Media have overshadowed Apple’s iTunes service. Apple had recently launched its own free music-streaming service, iTunes Radio in September 2013 and has 40 million US users. Pandora’s free, ad-supported service has more than 70 million active users and it had 3.3 million paying subscribers in March. Spotify, which entered the US in 2011, now counts 10 million paying subscribers world-wide.

To regain its position, Apple has acquired Beats Electronics LLC for $3 billion. The deal will provide Apple with a music-streaming service, high-end headphones, and music-industry connections. Beats’ co-founders, rap star Dr. Dre and music mogul Jimmy Iovine, will be joining Apple. Beats started its $9.99-per-month subscription music-streaming service in January and has 250,000 paying subscribers so far. Apple says it will continue to use the Beats brand.

Apple’s Focus on Enterprise Mobility
Last week, Apple and IBM announced a strategic partnership to transform enterprise mobility through a new class of business apps that will bring IBM’s big data capabilities to the popular iPhones and iPads. The landmark partnership will focus on developing  more than 100 industry-specific enterprise solutions including native apps, developed exclusively from the ground up, for iPhone and iPad and optimizing unique IBM cloud services including device management, security, analytics and mobile integration for iOS. The deal also includes a new AppleCare service and support offering tailored to the needs of the enterprise as well as new packaged offerings from IBM for device activation, supply, and management.

John Delaney, Associate VP, Mobility, IDC comments on the deal

“Apple’s need to develop the enterprise market for iPhones is imperative – and the same applies to iPads, albeit to a lesser extent. The consumer market for these devices mainly comprises affluent people in developed economies, and that is now a mature and highly competitive smartphone market. In search of additional markets, Apple cannot look to developing economies, or to the mass-market in developed economies, without making mid-price and low-price iPhones. This is a move that Apple has resisted so far, and that would run counter to its very successful product strategy. Therefore, for future iPhone sales growth, Apple will rely increasingly on enterprise customers…

The market for mobile enterprise management (MEM) is evolving, as IT departments move into a more mature phase in their approach to mobility. Rather than the heavily device-centric approaches that have predominated so far, enterprises’ mobility developments are becoming increasingly application-centric.”

Clearly, Apple is doing the right thing by focusing more on the enterprise market – on developing  industry-specific applications for this market rather than new device features. The emerging market strategy would only work for a few more years, but the IBM deal makes its future much more promising. It would be interesting to see how well it executes this and how its rivals Samsung and Blackberry react. Following the announcement of the Apple-IBM deal, Blackberry’s stock plunged 12%.

Apple generated $10.3 billion in cash flow from operations and returned over $8 billion in cash to shareholders through dividends and share repurchases during the third quarter. It is currently trading at $97.19 with a market cap of $582 billion. It hit a 52-week high of 97.88 this week.

Chart forApple Inc. (AAPL)

Tim Cook’s Apple is turning out to be quite different from the company that Steve Jobs ran. Gone are the frenzied excitement around new products that reinvented key categories like music, computing, and communication. Enter a collaborative era that is low on the ego side, strong on business acumen, and steady in its execution.

The market likes Tim Cook.

So do I.

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