Apple rides iPhone 5C and 5S to quarterly sales record, profit remains down

Apple gives up $900m in deferred revenue to make Mavericks, other software free.

Apple's iPhone 5C. Credit: Andrew Cunningham

Apple has released its financial results for the fourth quarter of fiscal 2013, and the news for the company is mostly good: it reported $7.5 billion in profit on $37.5 billion in revenue compared to $8.2 billion in profit and $36 billion in revenue in the fourth quarter of 2012. This beat Apple’s guidance from last quarter, which predicted revenue of $37 billion for the fourth quarter.

The short summary of this quarter is very similar to the last one: Apple sold 33.797 million iPhones (up from 26.91 million in the year-ago quarter), riding the release of the iPhone 5C and iPhone 5S to a new quarterly sales record. However, its profit margins overall are down from 40 percent to 37 percent.

Breaking out other individual product lines shows that the iPhone was by far Apple’s strongest seller, both in terms of total units sold and relative to last year. Macs were down by a little over seven percent, falling from 4.92 million units sold last year to 4.57 million units this year. Apple CEO Tim Cook noted that this beat the 10 percent slump seen in the wider PC industry, but it is nevertheless the fourth consecutive quarter of year-over-year decline for the Mac.

The iPod line also continues its ongoing (and, likely, terminal) decline, selling just 3.5 million units instead of the 5.34 million units of the year-ago quarter. It’s worth noting that Apple last released an all new iPod lineup in September of 2012 and didn’t change the lineup at all this year. Mac sales have outpaced iPod sales this quarter for basically the first time since the iPod became popular, demonstrating just how far the media players have fallen in the face of modern smartphones and tablets.

That iPod line hasn’t fallen below the Mac line in years.

Finally, iPad sales were effectively flat compared to this quarter last year, which Cook and CFO Peter Oppenheimer were actually pleased with—Q4 of 2012 was the second quarter of availability for the third-generation iPad, while both the fourth-generation iPad and the iPad mini were coming to the end of their product cycles this year. Apple seems confident that the iPad Air, the Retina iPad mini, and the first-generation iPad mini’s new $299 starting price will help drive sales forward in the first quarter of next year.

Apple’s guidance for next quarter is much higher than this one. The company expects revenues between $55 and $58 billion with 36.5 to 37.5 percent gross margins, higher than the $54.5 billion in revenue that the company made in Q1 2013. The holiday quarter is a big one for Apple, and the company expects the new iPads to drive much of that growth. Cook also noted that the company’s flagship desktop, the iMac, was effectively removed from sale in the month or so between its announcement and its availability. Combined with the new Retina MacBook Pros, this should drive Mac sales up year-over-year for the first time in several quarters.

One of the more interesting tidbits dropped during the call was the cost of giving Mavericks and the iLife and iWork apps away for free. Apple is giving up $900 million in deferred revenue for those sales, effectively lowering the gross margins on its hardware—the total hit is somewhere between $15 and $25 for iOS devices and about $40 for Macs (up from $20, pre-Mavericks). As has been said many times since last week, Apple’s cushy hardware margins are subsidizing its ongoing software development. The company continues to work to reduce its component costs, and margins for Q1 of 2014 are expected to hold even despite the loss of the deferred revenue.

Cook also commented on Apple’s supply chain, noting that both DRAM and NAND prices were up this quarter. He expects NAND prices to stay flat going forward while DRAM prices rise and other components steadily decrease in price. On the subject of iPhone 5S supply, Cook noted that there was a “backlog” but was confident that supply was improving and will continue to improve. He was more guarded when talking about supplies for the upcoming Retina iPad mini, saying only that he knew how many Apple would be able to make but that availability for the tablets would depend on demand.

Readers interested in listening to the earnings call in its entirety should watch Apple’s Investor page. Apple generally posts these recordings by 5pm Pacific on the day of the call and leaves them available to download for about two weeks.