Apple: Ain’t What It Used to Be

Apple reported strong iPhone sales, but profit and growth worries persist

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Mike Segar / REUTERS

The world’s largest and most famous technology company reported profit and sales figures that beat Wall Street expectations, but fears over the company’s profit initially spooked investors, who pushed Apple’s stock price down more than 3% in after-hours trading. The company sold more iPhones and Mac computers — but fewer iPads and iPods — than analysts had expected.

For the three months that concluded at the end of September, Apple posted total sales of $37.5 billion, exceeding analyst expectations of $36.7 billion, and net profit of $7.5 billion, or $8.26 per share, also exceeding analyst expectations of $7.90 per share. As expected, Apple’s net profit declined from the same period last year, when the company posted net profit of $8.2 billion. And sales only ticked up slightly from $36 billion during the same period last year.

Apple’s revenue guidance for the holiday quarter — typically the company’s most lucrative period — came in at the high-end of Wall Street expectations, but the company’s forecast for gross margins — a measure of profitability — disappointed investors, and that was the main driver of the stock’s initial after-hours stock dip.

Apple’s gross-margin figure for last quarter was 37% compared with 40% in the year-ago quarter. Among the reasons for the apparently soft gross-margin guidance for the holiday quarter is the raft of new products with higher cost structures, lower prices, currency headwinds and an accounting change designed to defer an increased amount of revenue over the next two to four years.

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“We’re pleased to report a strong finish to an amazing year with record fourth quarter revenue, including sales of almost 34 million iPhones,” Tim Cook, Apple’s CEO, said in a statement. “We’re excited to go into the holidays with our new iPhone 5c and iPhone 5s, iOS 7, the new iPad mini with Retina Display and the incredibly thin and light iPad Air, new MacBook Pros, the radical new Mac Pro, OS X Mavericks and the next generation iWork and iLife apps for OS X and iOS.”

Apple said it sold 33.8 million iPhones last quarter, modestly beating Wall Street expectations, compared with 26.9 million in the year-ago quarter. But iPad sales came in flat, with 14.1 million units sold, compared with 14 million in the same quarter period last year, and below Street estimates of 14.5 million units. Apple sold 4.6 million Macs, compared with 4.9 million in the year-ago quarter, in the latest indication of the shift away from desktop computers and toward mobile devices. International sales accounted for 60% of Apple’s revenue last quarter.

For the holiday quarter, the company said it expects revenue between $55 billion and $58 billion, which is at the high-end of Wall Street expectations. But the company forecast gross margins of 36.5% to 37.5%, which was below the Street’s consensus expectation of 37.9%. That muted forecast helps explain why the company’s stock traded flat late in the after-hours session.

It’s worth noting that Peter Oppenheimer, Apple’s CFO, said during the postreport conference call that Apple’s gross margin forecast for the next quarter would have been higher — in the 38.5% range — had the company not decided to defer about $900 million in revenue over the next two to four years. Apple is doing this to account for the fact that it is making Mavericks and future OS X upgrades, as well as iLife and iWork, free to customers.

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Analysts pressed Apple executives for new details about possible new products, such as a breakthrough new TV device or possibly a wearable computing gadget like a smart watch to compete with Google Glass, the tech giant’s computerized eyewear. Company execs were tight-lipped, as usual, but there is a growing sense that new product categories could be announced next year, which could jump-start Apple’s stock price.

Looking forward, the recently announced iPad Air and the latest iPad Mini with the Retina Display are sure to be blockbuster sellers over the holiday season, and sales may only be constrained by Apple’s ability to manufacture enough of the devices to meet consumer demand, a familiar problem for the company. On the conference call, Cook addressed the supply issues, saying of the new iPad Air that “it may be that not everyone who wants one will find one.”

Apple also announced that its board of directors had declared a cash dividend of $3.05 per share payable on Nov. 14 to shareholders who own company stock as of the close of business on Nov. 11. “We generated $9.9 billion in cash flow from operations and returned an additional $7.8 billion in cash to shareholders through dividends and share repurchases during the September quarter, bringing cumulative payments under our capital return program to $36 billion,” Oppenheimer said in a statement.

6 comments
ArtemRotan
ArtemRotan

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mahadragon
mahadragon

The title of the article isn't explained at all. All Sam Gustin did was go over the quarterly results. He didn't analyze anything, didn't tell us why Apple isn't what it used to be. All we got was some deferred profits, iPads will be a blockbuster hit this holiday season, and if it weren't for the deferred revenue, AAPL would have blasted expectations. How is this explaining why Apple isn't what it used to be? Sam, if you're going to go back and edit your article you should edit your title too.

NickDubus
NickDubus

Only for apple is making 7.5 BILLION in 3 MONTHS a bad thing. 


alansky
alansky

Apple's biggest problem is the unbridled greed of the investment community, who wet their pants whenever Apple fails to match the unbelievable growth that the company enjoyed under Steve Jobs' guidance. No company can keep up that kind of growth forever; but greed is blind, and there you have the sordid tale.

PiMatrix
PiMatrix

Actually, Apple GMs are up. They decided to defer 1.58% ($0.9B) of revenue for free software updates for iOS and Mavericks that they will recognize over the next 2-4 years (increased from 15 to 25$ for iOS devices and from $20 to $40 for desktops).  Therefore their margins are back to growth mode.  The cash is earned and sitting in a deferred account.  This was explained during the CC and reason for the sharp reversal. You'll need to rewrite your inaccurate headline for tomorrow!  Apple basically blew away guidance and analyst estimates on Revenue, EPS, AND gross margins.



samgustin
samgustin

@PiMatrix This is an excellent point, thank you. I've gone back to the conference call and incorporated more color on the revenue deferral, and its impact on the company's gross margins, into the latest version of the story.