1. Apple’s IPhone Disappointment Fans Doubt On Growth
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SAN FRANCISCO (Reuters) – Apple Inc missed Wall Street’s revenue forecast for the third
straight quarter after iPhone sales came in below expectations, fanning fears that its dominance
of consumer electronics is slipping.
Shares of the world’s largest tech company fell 10 percent to $463 in after-hours trade, wiping
out some $50 billion of its market value – nearly equivalent to that of Hewlett-Packard and Dell
combined.
On Wednesday, Apple said it shipped a record 47.8 million iPhones in the December quarter,
up 29 percent from a year earlier. But that lagged the 50 million that analysts on average had
projected.
Expectations heading into the results had been subdued by news of possible production
cutbacks by some component suppliers in Asia, triggering fears that demand for the iPhone,
which accounts for half of Apple‘s revenue, and the iPad could be slowing.
But some investors clung to hopes for a repeat of years of historical outperformance, analysts
said.
“It’s going to call into question Apple‘s dominance in the space. It’s still one of the strong
players, the others being Samsung and Google . It’s still a two-horse race, but Android
continues to grow rapidly,” said Sterne Agee analyst Shaw Wu.
“If you step back a bit, it’s clear they shipped a lot of phones. But the problem is the high
expectations that investors have. Apple‘s conservative guidance highlights the concerns over
production cuts coming out of Asia recently.”
Apple is forecasting revenue of $41 billion to $43 billion in the current, second fiscal quarter,
lagging the average Wall Street forecast of more than $45 billion.
Fiscal first-quarter revenue rose 18 percent to $54.5 billion, below the average analyst
estimate of $54.73 billion, though earnings per share of $13.81 beat the Street forecast of
$13.47, according to Thomson Reuters I/B/E/S.
Apple also undershot revenue targets in the previous two quarters, and these results will
prompt more questions on what Apple has in its product pipeline, and what it can do to attract
new sales and maintain its growth trajectory, analysts said.
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2. Net income of $13.07 billion was virtually flat with $13.06 billion a year earlier on higher
manufacturing costs. The year-ago quarter also had an extra week compared to this year.
Gross margins consequently slid to 38.6 percent, from 44.7 percent previously.
“You can’t just keep rolling out iPhones and iPads and think that everybody needs a new
one,” said Jeffrey Gundlach, who runs DoubleLine Capital LP, the $53 billion bond firm. “The
mini? What is that all about? It is a slightly smaller iPad – so what? So that is our new definition
of innovation?”
“There are plenty of competitors like Samsung and other legitimate competitors like them,”
added Gundlach, one of the highest-profile Apple bears. He maintains a $425 price target.
Taking into account the drop in shares in Wednesday’s after-hours trading, Apple‘s stock is
now down 34 percent from its September record high and the company has lost about $227
billion in market value.
Shares of several of Apple‘s suppliers crumbled. Chip suppliers Skyworks and Cirrus Logic
both fell more than 6 percent. Qualcomm Inc slipped 1.8 percent.
CHINA IS NEXT BIG GROWTH DRIVER
Intense competition from Samsung‘s cheaper phones – powered by Google’s Android
software – and signs that the premium smartphone market may be close to saturation in
developed markets have also caused a lot of investor anxiety.
Meanwhile, sales of the iPad came in at 22.9 million in the fiscal first quarter, roughly in line
with forecasts.
On the brighter side, Chief Financial Officer Peter Oppenheimer told Reuters that iPhone sales
more than doubled in greater China – a region that Apple Chief Executive Tim Cook has vowed
to focus on as its next big growth driver.
The company will begin detailing results from that country going forward. Revenue from the
region totaled $7.3 billion, up 60 percent from the year-ago December quarter.
“These results were OK, but they definitely raised a few questions,” said Shannon Cross,
analyst with Cross Research. “Gross margin trajectory looks fine so that’s a positive and cash
continues to grow. But I think investors are going to want to know what Apple plans to do with
growing cash balance.”
“And other questions are going to be around innovation and where the next products are
coming from and what does Tim Cook see in the next 12 to 18 months.”
ADDRESSING PRODUCTION RUMORS
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3. In an unusual move for Apple, which typically does not respond to speculation, Cook
addressed the production cutback rumors at length on the conference call and questioned the
accuracy of rumors about its plans.
Media reports earlier this month said the company is slashing orders for iPhone 5 and iPad
screens and other components from its Asian suppliers.
“Even if a particular data point were factual, it would be impossible to accurately interpret the
data point as to what it meant for our overall business, because the supply chain is very
complex,” he said, adding that Apple has multiple sources for components.
“Yields might vary. Supplier performance can vary. The beginning inventory positions can
vary. There’s just an inordinately long list of things that would make any single data point not a
great proxy for what’s going on,” he said.
Apple‘s initial iPhone and iPad mini sales were hurt by supply constraints, but Cook expects
supply to balance demand for the iPad mini this quarter. He also acknowledged that iPad was
cannibalizing its high-margin Macintosh computers, but said it was a huge opportunity for the
company.
“On iPad in particular, we have the mother of all opportunities here, because the Windows
market is much, much larger than the Mac market is,” he said. “And I think it is clear that it’s
already cannibalizing some.”
In another departure from tradition, Apple intends to tweak the way it both reports results and
publishes forecasts.
Apart from breaking out results from China, the company also will no longer provide a single
revenue or gross margin outlook. From Wednesday, it began providing the range it expects to
hit, rather than the often-ludicrously conservative estimates that Apple was once notorious for.
The new policy took many by surprise.
“Before people could always ignore the guidance,” said Dan Niles, Chief Investment Officer of
AlphaOne Capital Partners, LLC. “Apple is telling investors that they need to pay attention to the
guidance and you can’t ignore it, which is basically what we all did in the past.”
(Additonal reporting by Alistair Barr and Alexei Oreskovic in San Francisco and Jennifer Ablan
in New York; Editing by Bernard Orr, Edwin Chan and Ryan Woo)
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Apple’s IPhone Disappointment Fans Doubt On Growth
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