Apple's Growth Scorecard for third quarter 2012

In the parlance of developers Apple keeps “throwing exceptions.” This quarter the iPad surprised with a significant decline in sales growth. I placed a table showing the sales growth for this quarter as well as the previous 22 quarters at the bottom of this post.

Here is a quick review of each line:

  1. The iPhone returned to a more customary growth rate (which I rate as Very Good–above 50%). The quarter was bound to be quirky due to it being both a transition quarter and a launch quarter. The launch of the iPhone 5 came quite late but not too late to make a contribution. It was also widely rumored and anticipated so there was slowing of the previous generation product. I expect growth to accelerate further in the last quarter of the year.
  2. The Mac turned in a commendable 6% revenue growth (1% unit growth) on the back of the new 15″ Retina screen MacBook. The average sales price increased sequentially and the mix of portables to desktops reached a new high of above 80%. More about the Mac will be written in a future post.
  3. The iPod continued its decline. The 26% sales decline was in-line with other non-launch quarters. The company tipped its hand and let us know that iPod touch now makes up 60% of iPod volumes. At 3.2 million iPod touch units, it’s a significant iOS contributor but still a declining number.
  4. The iPad was painfully underperforming. With only 9% revenue growth, it was a complete reversal of the torrid growth of the last two years. Management blamed both anticipation of a new product and a reduction of inventory ahead of refresh of the larger screen retina. The only silver lining was that the average price decline was moderate (down about $3/unit). Overall, I’m very disappointed with the pause in the product but the new mini could change the character of the product dramatically in a way similar to how the iPod mini turbo-charged the iPod line.
  5. iTunes had a very good quarter. It’s the perennial growth engine with the most consistent performance throughout the time period shown. It was the second fastest growing line item firmly in the “High” growth bracket.
  6. Peripherals, including Apple TV had a moderate quarter. Management revealed that about 5 million Apple TV units shipped in the fiscal year. That adds up to a half-billion dollar revenue business. Peripherals had $2.8 billion over the same time frame so Apple TV was about 18% on a yearly basis. This does not include content revenues.
  7. Software had a modest growth of 22% but has come to be the high end of the range. Since changing the way it prices OS X updates, the era of Apple software windfalls is over. Still, at nearly $1 billion per quarter it’s nice pocket change, especially as it’s nearly all margin.
  8. The overall top line (net sales) was a bit improved sequentially (+4 points of percent) but still in the “transition quarter” range of moderate growth. The company may be shifting its launch cycles and as a result we’re seeing a break in pattern. As pricing for iPhone and iPad did not change very much the slowing of top line growth is entirely due to a unit shipment reduction. Again, the primary cause is transitions in multiple lines simultaneously.
  9. The bottom line (earnings) followed the same pattern as top line (slight sequential increase in growth). There was a slight attenuation of margins (gross margins are down to 40%).

Overall, the quarter was not up to the recent level of performance for Apple. Growth was overall “moderate”.

  • vpwinner

    WOW! Excellent analysis and eye-popping graphics. You say so much in such a small space. Thank you.

    • You are new here? This is lame compared to what The Horace can do with some magic. 😉

  • crustyjusty

    Horace: Apple revved almost their entire product line over the last 2 months…a seemingly new strategy from prior years. This seems to imply a rather unpredictable product launch calendar for next year. I’m thinking this implies new product lines for next year…because the calendar is pretty clear for the 1st half of the year, assuming no iPad rev. I guess I’m excited, but I’m uncertain how they’re going to tackle the 1st half of the year…also makes modeling tough.

    • Two possibilities exist: there is a new category launch (in the TV space for instance) or they are going to a 6 month refresh cycle (or both). Of course they could just sit on their hands for a year, but I don’t think that’s how they work.

      • neutrino23

        I think the iPad refresh is an anomaly. Between changing screen vendors and the connector from the 30 pin to lightning connector this seems to be more in Apple’s interest than a benefit to the customer. It would have been awkward to have the iPad mini use the lightning connector while the iPad used the old 30 pin connector. This had to to be in the works when the new iPad was launched. Maybe that is why they didn’t call it iPad 3?

        I suspect we’ll still see a feature update in the spring.

      • Tatil_S

        It feels unlikely for A7 to get ready so soon after A6. It’ll be difficult for Apple to launch a new iPad with the same CPU and the same thin retina screen and create any type of excitement. If what they just launched was a slight refresh of iPad3 with the new connector and updated LTE circuitry, a spring launch of a new gen iPad would be more likely. Some new software features could turn out really nice, iOS7 will probably not arrive before summer. I doubt we will see a Spring refresh.

      • neutrino23

        It’s a great question. What else can be added to the iPad hardware to indicate a generational change? Maybe that is why there is no number designation. Maybe, as James suggests above, they will simply put out new versions with slight changes whenever they are ready.

        What else can be added to the hardware? A very precise digitizer improving drawing and note taking would be great. Improvements in weight, speed and battery life are always appreciated. Stereo cameras on the back? Front facing stereo speakers? Biometric ID system? A larger version of iPad?

        Most other features could be accomplished in software – payment systems, more extensive multitasking, etc.

      • James Katt

        The iPad 4 is what the iPad 3 should have been. But the A6X processor was not available yet.

        Apple – per Steve Jobs – got out of showing new products at expos since it wants to only show products when they are ready to ship.

        The iPad 4 was ready to ship. Thus Apple showed it. Showing it is not an anomaly at all.

      • neutrino23

        We are in agreement. I called it an anomaly because this doesn’t have any obvious user differences like adding a thunderbolt port or a different case design. For those in the know the A6 should provide some speed improvement. It may also help with the heat issue. There may be other improvements we don’t know about. My guess is that if the mini hadn’t been introduced now Apple could have waited till spring to introduce these changes.

      • MarkS2002

        They also have a history of launching just prior to the competition–I am thinking of iPad 2 causing a redesign of the Galaxy Pad, just before Samsung was launching. Given that the mini Pad was not going to apply pressure to Surface, perhaps this is a reminder of what kind of developments Winworld will miss out on by buying the msPad.

      • 6 month refresh would be great. Particularly for iPhone and iPad. I could see June release of iPhone 6 with a subsequent price drop for iPhone 5 to $99, and 4S free. Extremely hard for Android to match that price for performance.

    • A lot of their software are in serious need of updates – iLife, iWork, Aperture, Logic Pro, iTunes are long in the tooth. Apple is still weak in cloud services compared to MS & Google so they need to invest more resources there.

      • crustyjusty

        Agreed. I am truly worried that the firm still doesn’t “get” cloud computing / big data, and that they don’t have the passion for it like Google, Amazon and Microsoft.

      • I don’t doubt that Apple has the passion, it’s just they’ve always been a device-drive company. Cloud computing / big data was just never in their DNA compared to Google, Facebook, Amazon and MS. They have their NC datacenter, and building more in Oregon, Reno, & Hong Kong but those won’t be done for another 3 years so they have a lot of catching up to do (with the exception of iTunes).

        Cloud computing / big data is where the ecosystem system war will be won long-term. And cloud computing is extremely hard work.

      • rational2

        I don’t think MS has cloud computing in their DNA either. Anyone can throw billions at a problem, but proof that they “got it” arrives when you have profits to show for it. Throwing money at a business venture is not the same as being profitable.

      • Apple has over 400 million iTunes accounts with credit cards and 190 million iCloud “active” users and 200 million iOS 6 users (including new maps). The not getting it is getting out of hand.

      • crustyjusty

        I think these are two different skill sets. One skill set is online commerce and server storage. The other is analytics & automated intelligence (big data). They are unparalleled in the first. In the second, the amount of downtime with iMessage, siri and even icloud tells me the firm could learn from their competitors.

      • Don’t forget to add Game Center to that list.

      • It is important not to get carried away by hype. Or, to put it differently, it is worth being aware of history.

        Twenty years ago THE hot topics were things like network-transparent objects (DSOM and suchlike) and “active” documents (OLE and suchlike). Both of these are essentially dead. As always, they live on in some form, but the animating vision turned out to be a solution in search of a problem (or, to put it differently, network transparency was actually a terrible idea; you could do a lot more a lot better when you actually accepted the existence of the network and engineered for it).

        Compare with the cloud today. There is a tidal wave of hype behind the cloud pushed by, what a surprise, companies that stand to benefit from it. But the question is: what are the ACTUAL user problems that are solved by the cloud? The trivial answer is to say: move all your (multi-TB?) storage to the cloud, and the reality is that this is inane — it results in vastly lower performance for little obvious benefit. It’s the equivalent of the mindless “if local objects are good, network transparent objects are better”.

        What I see Apple doing is a rather more thoughtful analysis of one specific problem after another that is helped through a cloud solution. Specifically, the problem Apple cares about is “how do I keep certain state in sync across my devices”. This is a different problem from “how do I store my file system in the cloud, so I don’t need to buy a new hard drive”; it is a more interesting, subtle, and REAL problem.

        It’s easy to complain that Apple is not doing certain things, but most of those complaints boil down to “why doesn’t Apple do something that other people already do well”. It’s not clear to me what the advantage is to Apple OR to it’s users of, for example, copying DropBox. Dropbox exists, and works well. The only reason for Apple to duplicate its functionality would be to somehow weave it into the OS in ways that go beyond what Dropbox does now — which gets back to my point that Apple is interested in “what are the actual problems we can solve”, beyond the simple “how can I duplicate in the cloud what is already done on the desktop”.

        An example of the sort of thing that Apple is already doing which is a lot more interesting than just file system in the cloud, consider that they generate their map traffic speed data by aggregating info from many iOS devices. That’s big data right there, and it’s a small part of Maps which, for all the whining, is a pretty amazing rev 1.0 product.

        Bottom line is (IMHO) for most people, for most purposes, a cloud solution (eg streaming music) is a crappier solution than a local storage solution. It costs more (cell bandwidth isn’t free), and works in fewer places. Apple is right to use it as little as possible, rather than to push it where it isn’t needed.

      • It’s only natural that most companies place resources in areas where they can earn profits.

      • rj

        Perhaps a tacit acknowledgement that the current App Store is such a terrible model for pro apps like Aperture and Logic that even Apple can’t make money on them? Their no-demo version, no-paid upgrade approach simply doesn’t work for apps like that.

  • 3rd Quarter or AAPL Q4 is always the weakest quarter of the year for Apple. There is no news there. Apple starts with the strongest and ends with the weakest. The real news is big 3 i.e. AT&T, Sprint and Verizon sales before the iPhone 5. This tells us that the iPhone 4 and iPhone 4S are doing as they are supposed to do and better. Of course the star is the iPhone 5 that I have to wait for another 3 to 4 weeks. Tim Cook explained the iPad behavior, but there is more… “Apple sold out of iPad mini White&Silver U.S. pre-order stock in 17 minutes”. I am very disappointed if Tim Cook can’t at least triple the output of the Apple Moneymaking Machine by spending lots of money to increase the production. That is something that we have learned from somewhere else? Could it be site called Asymco or something? Apple has absolutely no competition at all. The only competition is that can the Apple meet the demand? The answer is that yes it can, because the Tim Cook is the CEO of the Apple. He is the new master.

  • I share your disappointment about iPad growth. But here’s something interesting. There were 5 quarters of unprecedented growth between the launch of the iPad and this quarter with (9% growth). That’s almost the identical pattern with the iPhone! Following its launch, there were 5 fantastic quarters of growth (Q208-Q209), followed by a tepid quarter (Q309) at 5% growth, the only single-digit growth quarter in the history of the iPhone.

    I’m not sure why this is the case, but I think it’s a mix of anticipated product upgrades, anticipated tablet launches from other companies, and the intrinsically long iPad shelf life, where relatively few owners are looking to replace their original iPad.

    • “I share your disappointment about iPad growth.” You should not do that. We have no idea what are the return rates for the competition after iPad 3,9″ came out. We have no idea of the sales rates are for the competition.. only guesses from the analysts. Competition is cruel when you can’t compete and you can’t tell what you have done, because you are so ashamed.

    • yep, i have an ipad 2 and no plans to upgrade. might buy an ipad 4 as a second unit but the 2 is still good
      nothing in the app store requires an A6 CPU

    • The 5% for the iPhone was because of a weird comparable the year before. But yes, there are some patterns to consider.

  • Jurassic

    “Overall, the quarter was not up to the recent level of performance for Apple. Growth was overall “moderate”.”

    This growth would have been considered “spectacular” if it was any other company.

    I don’t understand why people are selling off AAPL, and why the stock price has continued to drop so radically after record-breaking performance, and the introduction of a bunch of innovative new products.

    • They are not selling it (We The Owners). There are people who short the AAPL. You do not need to own any of the Apple Stock to do that (Thanks Mr Idiot Bush). Then again.. this is a buying opportunity..

    • rational2

      Great growth, but considering Apple’s marketcap, it appears the market has indeed valued it fairly. I think the market is sensing a change in pace as competition ratcheted higher this year. Apple may continue to sell tons of devices, but competition will force it to accept lower margins (e.g ipad mini vs ipad). Note, I am not concluding that Apple’s profits will be lower — merely pointing out that there is a chance that could happen.

      • Don’t believe the margin story spun by Oppenheimer. He talks margins down every quarter. In reality the company’s margins are increasing.

      • What’s the motive for talking them down?

      • Management is subject to shareholder lawsuits for overstating the opportunity and no penalty to understating it.

      • Max

        Can you elaborate on this? Didn’t margins come down and won’t they be lower in the future as iPads sell for lower prices? The margin on an iPad mini is surely lower than on and iPad4, isn’t it? And wont’ the mix be towards more Minis? Thanks.

      • The margin on the iPad mini is not necessarily lower than on the iPad 4. Don’t forget that the iPad mini sells in many configurations, many of which are far more profitable. The margin on additional memory and cellular capabilities is huge. It also gets bigger economies of scale (assuming it sells in bigger numbers). It also has the same accessories revenue per device as the bigger siblings and those accessories add margin. Overall Apple’s margins are expanding as the iPhone increases as a percent of total units. iPad margins are not as strong but they are not as influential as the growth in iPhone. The lower margins have been expected for years as the iPhone was going to lose exclusivity. The opposite has happened.

  • Great work! Would love to see gross margin and operating margin lines in your table.

    • That discussion will come, however if you want to see previews you can watch my twitter stream. Margins data has already been posted.

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  • poke

    My feeling is that the 3rd gen iPad is an under-performer. It updated the display, but I’ve found conveying what the retina display is and why you’d want it very difficult to casual users (and even experts in some cases). Everything is the same size, only visual acuity is improved. Most people were satisfied with their displays. It’s really only something you can appreciate by comparing the two side by side. Even then, you can get the lighter, thinner iPad 2 for $100 less! I think mobility (thickness and weight) is the most important dimension of improvement for the iPad. Added to that is a confusing naming scheme where they’re offering customers either an iPad or a thinner, lighter iPad 2. The 4th gen iPad does nothing to improve this situation. I think the iPad mini will outsell it.

    • James Katt

      The new iPad 4 should answer this problem – it is twice as fast in both graphics and CPU speed and it has twice the memory of the iPad 2. Crashes are less frequent with the iPad 3 and iPad 4. Twice as fast is a new generation of product. And we’re heading into Christmas.

    • Tatil_S

      iPad3 may not be good enough to attract iPad2 owners, but that does not explain why it does not attract new customers or iPad1 owners. Average selling price stayed the same, so it seems like customers who actually bought did not pick the cheaper iPad2. Thus, it seems general attraction of iPad was stagnant during the last quarter. Maybe, this market is a lot more price conscious or people do not think a 10” screen is all that necessary for a tablet. The critical number for this quarter should be the number of new customers into 10” platform. Even if iPad numbers jump, but if iPad4 buyers are mostly upgraders, that may not bode well for future growth of 10” Apple tablets.

      • rational2

        There are only so many people who can spend $500+ for a gadget. They still need a smart phone and a pc/mac if they need a “computer”. When we bought the ipad 3 in our household, it replaced the aging desktop pc. It was wonderful to throw out a pc with a huge footprint and replace it with a sleek ipad. Of course we have other pcs at home (notebooks), so it was easy to get rid of the aging desktop. Considering the long running (jobs) recession, I am surprised the pricey gadgets sold as many as they already did.

      • poke

        Well, each new generation has to have something that attracts a broader range of customers in order to create growth, and the the 3rd gen iPad has under-performed. My guess is that the key dimension in which the iPad needed to improve for greater adoption was mobility and it was actually a step back in that sense. Additionally, retaining the iPad 2 may have caused confusion. The overall impression given to non-consumers is that there’s nothing new. So I expect the mini to address the issue but I also think Apple needs to a 9.7″ iPad with an improved form factor ASAP.

      • Tatil_S

        A thinner 10” iPad with the same battery life requires either a battery with more energy storage per volume or much more efficient circuitry. I don’t see big improvements on either front coming by next spring.

      • With excitement of MS Surface off to a good start, Apple better hurry. Early reviews say that iOS feels dated in comparison to Windows 8 / RT.

      • TheEternalEmperor

        Not the reviews I read. The software and lack of apps is a problem.

      • Apps will come. The MS Marketplace is adding many apps everyday and many big names are already on there. As far as the OS not being polished, that’s nothing a software update can’t fix and MS has hinted they’ll be doing regular updates similar to what Apple does with iOS.

      • Tatil_S

        I’ve seen video reviews of Win8 RT. Just like its name, the OS was a mess. It did not even have a touch optimized settings “app”. You had to press little triangles to bring up drop down menus to change resolutions for example. You might ask why change the resolution. Well, the built-in office apps have really small menus and rectangles to hit comfortably with finger tips, so helpful people recommend changing the resolution of the screen when you need to edit Office documents (and change it back when you go back to non-Office tasks.) I could not believe MS did not bother optimizing Office apps even just a little bit for touch for times when the tablet is not paired with a keyboard and mouse. This is nothing like iOS that gets refined and adds features as time passes, but generally feels well thought out.

      • My assumption is that MS did not optimize Office for touch because they feel the majority of those using Office will be using it with a keyboard / mouse, which is probably why their Touch Cover keyboard figures prominently in their ads.

      • steven75

        Then why not buy a laptop?

      • Apps? Come back when Windows passes 100,000.

      • Vamsi

        I have had this question: when you make a choice b/w PC and Mac to you really look at how many applications each OS has or do you look at the ecosystem and utility etc. basically on platforms that are matured i don’t think number of apps would matter or at least for a long period of time. given the speed of development nowadays i think most used apps would come with Windows pretty soon and at that point the number of apps would not be a moot point.

      • Toward Lighter

        I agree with the poster who says the full-size iPad needs to go on a diet; I love my iPad 3, but it is a bit heavy. The thickness is fine, though. And while there may not be “big improvements…by next spring”, I suspect there will be gradual but persistent improvements with each iteration. That seems to be the way these things work. As long as the weight gets a bit better each generation, that should be fine. And we must remember, at a 44% sell-through rate, even if that is simply maintained, that’s a doubling every two years!

      • Not necessarily. Could also use a display, LTE radios, and CPU that use less energy.

      • Tatil_S

        I’d think LTE radio and CPU would be covered under “more efficient circuitry”. A7X sounds too early for Spring. I am not sure about the development cycle of LTE radios, but entry level model is WiFi only anyways. IGZO screens are supposedly more efficient, but I don’t know whether they have other drawbacks, as there is probably a reason why Apple has not switched, yet.

      • IGZO displays would remove a large part of the excess power draw in the iPad, and they are close to being available at both 7 and 10″ sizes. Sharp announced in Sept that they should be ready by Q4 2012. Of course with Sharp about to go bankrupt, who knows how this will play out.

        Even more interesting would be if Apple bought Sharp and moved display production in-house…
        I don’t know enough about the economics of display production, or why Sharp is doing badly (ie could the be saved by keeping everything except the top layer of management?) to know if this makes any sense, but it certainly would be a fascinating topic for Horace to look into.

      • Apple will not buy Sharp but it may buy Sharp’s assets.

      • iPad sales grew 44 percent in Q3

        Is 44% growth the new definition of stagnation?

      • Tatil_S

        Sorry, I posted that when I misunderstood and thought unit sales grew 9% yoy, while ASP stayed the same yoy. I admit my comment looks pretty dumb now. 🙂

      • It is just a single quarter

        Let’s all just take a deep breath. This was but a single quarter, which happens to be a quarter when the world economy is struggling even more than recently. It’s a bit premature to start writing the obituary for what has so far been the most successful product ever known to man.

      • “It’s a bit premature to start writing the obituary for what has so far been the most successful product ever known to man.”

        Correct me if I’m wrong, but doesn’t the iPhone still hold that title?

      • The iPad is growing at twice the speed of the iPhone.

  • I think the short life of the 3rd-gen iPad was probably simply due to timing issues with components. It was released when LTE needed to be part of the product, but the LTE chips weren’t really all there. Thus, I believe a need for “international LTE” and the Lightning connector upgrade drove the timing of the 4th-gen iPad launch.

    I’m a bit surprised at the A6X processor being included, since I’d assumed that the cutting-edge chip production would be dedicated to the iPhone5 for a while; I guess the A6 production ramped up more quickly than I’d expected. However, the A5X always struck me as being only barely adequate for the new Retina display in the 3rd-gen iPad; it looked like a compromise because they weren’t ready with the A6.

    Looking forward, I don’t see any obvious technology drivers for a 6-8 month iPad refresh again. My guess is that the next big iPad refresh will go for weight/thickness/power improvements, most likely by moving to a thinner and more transparent LCD that needs less backlight (i.e. IGZO or something similar). I don’t think there’s another CPU process shrink due for a while, and I don’t see a lot of need to mess with the radios again — LTE probably counts as “good enough” for some time into the future, though we may see some improvement in covering the plethora of worldwide LTE bands with fewer models. And Apple sure doesn’t need to replace the Lightning connector anytime soon. So my bet is on battery and screen, with the 5th-gen iPad new product story being mostly about weight.

    • “So my bet is on battery and screen, with the 5th-gen iPad new product story being mostly about weight.”

      That would be an excellent bet. And like you mentioned, I don’t doubt that IGZO displays from Sharp (when they’ve ramped up enough production) will play a role in that. They’re about 20% thinner and use 40% less power than the LCD IPS panel Apple is using right now.

  • Tatil_S

    Horace, if iPad unit volume is up by 26% yoy and ASP drop is minimal, how come iPad revenue only grew by 9%?

    • Nikhil

      Hmmm….makes you wonder if the iPad 2 is selling so well that it drags down overall revenue numbers

      • It is selling well, mostly to education sector and mostly in the second quarter. Tim Cook:
        “the 14 million exceeded what we had expected to do and the reason we had expected it to decline is that we believe, based on the two or three years of results, we would see a seasonal reduction… because K-12 heavily buys in the June quarter, K-12 doesn’t buy very much in the September quarter, [when] it becomes the Higher Ed kind of move and Higher Ed is still buying notebooks for the most part.

    • The change in price is measured sequentially (i.e. from $538 to $535, which I deemed to be minimal.) The change in units is 26% y/y but the change in value is 9% because a year ago the revenue was $617/unit.

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  • ralphel

    “4 The iPad was painfully underperforming. … Overall, I’m very disappointed with the pause in the product …”

    Are you sure you’re not suffering from the tech analyst’s version of the malady known in the financial world as “regulatory capture”? By all means tell us that you expect that _Apple_ are disappointed by this result, but surely as an analyst your business is to tell us what happened and why you think it happened, not to express your own personal emotions — it makes you sound as though you consider yourself a cheerleader (which, I’ve heard you say more than once on the podcast, that you do not).

  • buckterry

    After reviewing the AAPL analysts data page on under “products” I noticed that you are missing the June 2011 quarter . . . . the data listed for June 2011 is actually for the March 2011 quarter. All quarters prior to the June 2011 quarter are actually for previous calendar quarter. Thought you might want to know as you are probably going to update soon with the new results.

  • It’s kind of interesting how the negative iPod growth has been so consistent every quarter; it seems that the introduction of new models doesn’t even cause a temporary bump in sales. I wonder what the iPod numbers would look like for just the Touch alone.