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
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
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
"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
"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."
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