Apple's iPhone disappointment fans doubt on growth
By Poornima Gupta
The Apple logo is pictured at the company's flagship retail store in San
Francisco, California January 23, 2013. Apple results are due after
market closes around worries about the profit potential in the tech
sector, increased amid questions about waning demand for Apple Inc
products and a weak outlook from Intel Corp last week. REUTERS/Robert
Galbraith (UNITED STATES - Tags: BUSINESS LOGO)
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.
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
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."
(Additional 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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