Davidson Kempner and Apple
Davidson Kempner added new positions in Omnicom Group Inc. (OMC), Alpha Natural Resources Inc. (ANR), JPMorgan Chase (JPM), Brunswick Corporation (BC), and Vitamin Shoppe Inc. (VSI). It exited positions in Perrigo Co. Plc. (PRGO) and Apple Inc. (AAPL).
Davidson Kempner exited a position in Apple Inc. (AAPL) that accounted for 2.19% of the fund’s 4Q portfolio. Hedge fund manager D.E. Shaw also trimmed its position while activist investor Carl Icahn adding to his existing position in Apple last quarter.
Apple designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players. It sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. Its business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. Its strategy also includes enhancing and expanding its own retail and online stores and its third-party distribution network. Apple believes a high-quality buying experience with knowledgeable salespeople can enhance its ability to attract and retain more customers.
Shares fell after 1Q14 earnings in January due to lower than expected iPhone sales and a weak outlook. This raised concerns over future revenue increase as analysts cited reasons including falling profit margins and the absence of technological innovation.
Apple to foray into wearable devices, smart homes
Recent reports have speculated that Apple will be announcing a new product in the wearable devices category. According to a report from the Wall Street Journal, Apple could launch multiple versions of its smartwatch, called the iWatch, by October this year. For more information, please read Why it’s important for Apple to enter the wearable devices market.
Shares went up after the company’s recent Worldwide Developers Conference (or WWDC), where Apple unveiled iOS 8, OS X 10.10 Yosemite for Mac laptops and desktops, and iOS 8 SDK with more than 4,000 new application programming interfaces (or APIs). New features included home automation apps, health apps, and the cloud storage service iCloud Drive. Apple also introduced a new programming language called “Swift” and said the new iOS will support third-party keyboards. However, there were no announcements over an iPhone 6, iWatch, or smart TV.
A report on 9to5mac.com also said the company is eyeing a foray into “Smart Home hardware.” At WWDC, Apple introduced a robust framework HomeKit that will make “home automation a reality.” HomeKit delivers a common protocol, secure pairing, and the ability to easily control individual or groups of devices throughout the house including integration with Apple’s Siri.
Apple acquires Beats
Apple announced on May 28 that it has agreed to buy the subscription streaming music service Beats Music and Beats Electronics, which makes headphones, speakers, and audio software, for a valuation of $3 billion. The Beats brand will remain separate from Apple’s brand. This has been Apple’s largest acquisition until now. Beats was founded by hip-hop artist Dr. Dre and record producer Jimmy Iovine. The deal has yet to be confirmed by Apple. Beats competes with popular streaming services like Pandora (P), Spotify, Deezer, Rhapsody, and Rdio. It’s expected to add to Apple’s existing music products portfolio such as iPods and the top music retailer iTunes store. Apple also launched its iTunes Radio service last year. Reports noted that digital music sales are declining because of streaming services and Apple is seeking exclusive content from music labels. According to Nielsen SoundScan, U.S. digital sales declined 13.3% in 1Q14.
Robust iPhone sales drive growth in 2Q, but the iPad sees a decline
Apple beat estimates and posted 2Q14 revenue of $45.6 billion, up 7% year-over-year (or YoY), and net profit of $10.2 billion—or $11.62 per diluted share. Gross margin improved to 39.3% compared to 37.5% in the same quarter last year. The growth was driven by iPhone unit sales, which increased 17% to 43.7 million. Apple said the YoY growth in iPhone net sales and unit sales in the second quarter and first six months of 2014 resulted from strong customer acceptance of the iPhone 5s and 5c, continued demand for the company’s entry-priced iPhone, and expanded distribution. iPad unit sales dropped 16% in 2Q14, primarily due to changes in iPad channel inventory. It also reflected a slight decline in iPad unit sell-through to end users. Apple’s iOS devices have been seeing competition from the lower-cost Android devices.
International Data Corporation (or IDC) said earlier this month that worldwide tablet plus two-in-one shipments slipped to 50.4 million units in the first calendar quarter of 2014. Apple maintained its lead, but market share fell to 32.5% from the previous quarter’s share of 33.2%. Samsung (SSNLF) grew its worldwide share from 17.2% last quarter to 22.3% this quarter. Other players in the top five include ASUS (5%), Lenovo (4.1%), and Amazon (1.9%), IDC said in its release.
Greater China net sales increased 13%
International sales accounted for 66% of the quarter’s revenue, especially in China, Hong Kong, Taiwan (Greater China), and Japan, with the segments reporting double-digit YoY growth, while net sales in the rest of Asia Pacific segment declined YoY. Greater China net sales grew 13% to $9.2 billion. Growth in iTunes and App Store revenues has also been robust in China—more than doubling over the last year. Apple has benefited from its China Mobile deal, as Apple Insider noted that about half of the 2.8 million 4G subscribers on China Mobile’s network are iPhone users.
Shares soared on buyback increase, stock split
Apple saw its shares soar in April after it expanded its share repurchase program to $90 billion from the $60 billion level announced last year. The company said it expects to use a total of over $130 billion of cash under the expanded program by the end of calendar 2015. The board also approved an increase of approximately 8% to the quarterly dividend and declared a dividend of $3.29 per common share. From August, 2012–March, 2014, Apple said it’s spent $66 billion in cash on its capital return program. The board also announced a seven-for-one stock split. An April release from Apple said each Apple shareholder of record at the close of business on June 2, 2014, will receive six additional shares for every share held on the record date, and trading will begin on a split-adjusted basis on June 9, 2014.