Quick Thoughts: iBlowout – iPad and iPhone Lead the Way


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–          Unlike Amazon and Google, Apple cares about margins and proved it in 1QFY12

–          Set up for a strong 2012 if expectations don’t get too out of hand

–          A successful transition to iCloud is the key to the next phase of Apple growth


After Apple’s odd earnings miss in its September quarter, the company gave bullish commentary for the coming Holidays and investors were left wondering whether the historic pattern of offering comically conservative guidance was over.  Well, it wasn’t.

There’s not a lot to add about the blowout 4Q numbers, which will be parsed ad nauseam by brokerage analysts in their flamboyant victory laps.  iPhone and iPad were huge sellers for Christmas, particularly overseas, where Apple is aggressively expanding its brand footprint.  Apple doesn’t have to deliver groundbreaking innovation to drive sales – the iPhone 4S was considered a mild disappointment by analysts expecting an iPhone 5, but it didn’t matter, even with hot products on the Android platform doing well in their own right.  More carriers, more stores, more revenues – in spades.  Apple, unlike its Internet-era running mates Amazon and Google, cares about its margins – read Adam Lachinsky’s “Inside Apple” for details of its unusual parsimony – and served up gross margins of 44.7%, up almost 600bp YoY.  Guidance for March is probably intended to be very conservative.  A new iPhone and iPad expected later this year will very likely be wildly successful, with fanboys camping out for first day bragging rights.

In the longer term, the big quarter doesn’t tell us much.  Management noted that 85 million users had signed up for iCloud, although critical reaction to the product has been mixed.  The success of iCloud – meaning active, committed users, not just sign ups – is crucial to the next phase of Apple growth.  Ultimately, the prize is establishing Apple as a comprehensive, integrated entryway to EVERYTHING that its users do on the Internet, with huge e-commerce, advertising, service fee, and transaction charge opportunities in the balance.  Over the next few years, the massive growth in tablet and smartphone sales will taper down and competitive products will erode iPad market share, just as Android smartphones have overtaken iPhone.  However, if Apple can establish iCloud, it won’t matter at all.

For our full research notes, please visit our published research site.

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