Special: Behind The Apple Machine

There's still a lot of growth left in Apple, despite the break out results for the company's second quarter reported this week.

But whether it will be worth more than $US600 a share, or more than $US700, as some US analysts are starting to claim, is questionable.

The growth this quarter was fantastic, but will we be seeing similar increases in sales and profits in a year's time?

That's very doubtful as the company continues to raise the performance bar, making it tougher to beat previous records.

Apple is a company whose growth characteristics remain unknown to Australian investors.

The closest we have come are the huge surge in revenues and profits seen by BHP Billiton in 2009 to 2011 as its revenues jumped past $US50 billion a year and operating profits surged to a peak around $US35 billion.

But Apple's results will be three times that this year.

They are hard to get your head around, especially when the company is forecasting a fall in sales and revenues for the current quarter simply because the company had such a blowout quarter it reported on this week.

The forecast for the fall in sales and revenues was made this week and available at the company's website.

It made no impact on the market, unlike in Australia where downgrades from the likes of Seven West Media and Newcrest this week saw their shares sold down heavily.

Apple CEO Tim Cook told a briefing that sales of the new iPhone would be lower because the early launch in more than 100 countries in January brought forward demand from later this year.

As a result, Apple predicted a 13% fall in revenues compared with the first three months of the year, with gross profit margin falling by six percentage points (to around 41% from 47% in the latest quarter) as sales of the highly profitable iPhone fell.

Apple says it will sell 10 million fewer high-margin iPhones in the June quarter. It sold 35.06 million in the latest quarter.

The company earned $US11.6 billion in the quarter, a jump from the profit of $US6 billion, as revenue roared to $US39.2 billion from $US24.7 billion.

After sinking 13%, from the all time high of $644 a share set earlier this month, Apple shares rebounded strongly, jumping $US57.58 to $US615.17 on Wednesday following the latest earnings announcement.

China, iPads, iPhones and the company's retail stores were all significant to Apple in the latest quarter, and remain the key to its future prospects (that assumes no new product launches in the next year, although several are rumoured).

From the company's statement and briefings, China in particular is where the next big growth spurt will come from, once it can get a copyright brawl sorted out over the iPad.

CEO Cook said total revenue in China in the quarter more than tripled to $US7.9 billion, and noted that the new iPad has not yet shipped in Greater China.

He told analysts "it's mind-boggling that we could do this well" in China.

iPhone sales in Greater China were five times the level of the same period last year, helped by launch of iPhone 4S in the country in January.

Mr Cook said that during the latest quarter Apple "surpassed 365m iOS cumulative device sales with iPhone, iPad and iPod touch".

"There are more than 600,000 apps in the App Store, 200,000 for the iPad, iCloud user numbers rose from 100 million to 125 million."

iPad sales jumped 151% in the quarter and is now available in more than 40 countries.

"We sold more than two iPads for every Mac to our US educational customers in the quarter," according to Mr Cook.

Analysts say that's a new growth sector emerging for the company.

The outsized profits added another $US12.6 billion to Apple's mountain of cash and investments, taking the total to $US110.2 billion.

Remember that in March the company announced it would pay an annual dividend of $US2.65 a share, starting later this year and that it would start a $US10 billion share buyback program.

The $US12.5 billion rise in cash in the latest quarter has paid for that largesse to shareholders, meaning whatever cash is earned this quarter and next and in the final three months of this year will drop straight into Apple's bank accounts.

Apple held $US74 billion of its cash outside of the US and is playing a waiting game with the rest of corporate America about bringing it back at the cheapest tax rate.

The Company sold 35.1 million iPhones in the quarter, up 88% over the same quarter in 2011; 11.8 million iPads were sold, up 151%, 4 million Macs during the quarter, up 7% over the year-ago quarter. Apple sold 7.7 million iPods, down 15% from the year-ago quarter.

In the last quarter of 2011, worldwide Apple sold 37.04 million iPhones, up 128% on the last quarter of 2010. It sold 15.43 million iPads during the quarter, up 11% over the December quarter of 21010.

The company sold 5.2 million Macs during the December quarter, a more sedate 26% increase, and interestingly the 15.4 million iPods sold was down 21% from the final quarter of 2010.

And then there's the company's retail business, which sits outside the other sales channels.

It continues to steal business from retailers large and small in dozens of countries, including Australia.

Mr Cook said two new stores were added in the quarter, making 363 in total.

They were visited by 71 million people in the quarter, up from around 69 million a year.

Each store was visited by 18,000 people a week, which would make many larger retailers green with envy.

In the latest quarter the stores lifted sales 38% to $US4.399 billion, from $US3.191 billion a year ago.

Earnings surged to $US1.149 billion from $US782 billion.

For the first half of the year, Apple's retail business generated sales of $US10.515 billion (earnings of $US3.003 billion) compared with sales of $US7.038 billion a year ago, with earnings of $US1.788 billion.

The accounts give us a further idea of the size of Apple's retail business.

The company said the retail business accounted for 11% and 13% of total net sales in the second quarter of 2012 and 2011, respectively, and 12% and 14% of total net sales for the first six months of 2012 and 2011, respectively.

"With an average of 361 stores and 323 stores open during the second quarters of 2012 and 2011, respectively, average revenue per store increased 23% to $12.2 million in the second quarter of 2012 compared to the second quarter of 2011.

"Average revenue per store increased 33% to $29.2 million for the first six months of 2012 compared to the same period in 2011.

"Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses.

"Capital asset purchases associated with the Retail segment since inception totaled $3.1 billion through the second quarter of 2012," the company said.

As of March 31, 2012, Apple said the retail segment had approximately 42,200 full-time equivalent employees and had outstanding lease commitments associated with retail space and related facilities of $2.8 billion.

These are the characteristics of a significant retailer.

In fact Apple could be compared with some of the luxury brands groups, such as LVMH rather than the likes of Harvey Norman or Best Buy.

By the end of the current year in September, Apple's retail businesses could have sold more than $US18 billion worth of products and made profits of more than $US5.5 billion.

There are few retail businesses around the world with those sales margins and it's why the likes of Harvey Norman and JB Hi-Fi and their ilk in other countries (Best Buy in the US) are struggling.

And Asia Pacific is where Australia and China sit in the Apple universe.

The region is the growth future for Apple once the ongoing copyright problem over the iPad names use in China can be sorted out.

Sales more than doubled (by $US5.4 billion actually) to $10.153 billion. They rose 83% or $US8.1 billion for the half year to $US17.85 billion.

Earnings soared to $US4.77 billion in the latest quarter and almost doubled to $US8.078 billion in the six month period.

During the second quarter of 2012, net sales in Asia-Pacific increased $5.4 billion or 114% compared to the second quarter of 2011.

The Asia-Pacific segment accounted for 26% and 19% of the company's total net sales for the second quarter of 2012 and 2011, respectively, and 21% and 19% of total net sales in the first six months of 2012 and 2011, respectively.

And keep an eye on the growth of iPad sales into education.

Remember the quite realistic idea the federal government had for installing computers across the country's education systems to improve the digital capabilities of students.

The iPads are clearly the new machine on the block and don't be surprised to see this sector emerge in Australia very soon.