Bloomberg News

Apple Falls After Wait for IPhone Causes Missed Estimates

October 19, 2011

(Updates with closing shares in fifth paragraph.)

Oct. 19 (Bloomberg) -- Apple Inc. fell in U.S. trading after profit missed analysts’ predictions for the first time in at least six years, evidence that customers delayed iPhone purchases before the release of the latest model.

Profit was $6.62 billion, or $7.05 a share in the fiscal fourth quarter, compared with $4.31 billion, or $4.64 a share, a year earlier, Cupertino, California-based Apple said yesterday in a statement. That missed analysts’ predicted profit of $7.31 a share, the first disappointment from Apple in at least 26 quarters.

Apple sold 17.07 million iPhones, less than the 20 million projected by analysts surveyed by Bloomberg, as consumers held out for the iPhone 4S, released after the close of the period that ended Sept. 24. The shortfall underscores the growing importance to Apple for the iPhone, which was introduced in 2007 and accounted for 39 percent of revenue last quarter.

“The market was expecting very strong iPhone sales going into the product launch,” said Giri Cherukuri, head trader at Oakbrook Investments LLC, which holds Apple shares. “It stands to reason that a lot of people were waiting for the new iPhone to come out.”

Apple shares fell 5.6 percent to $398.62 at the close in New York. The stock has climbed 24 percent this year.

Sales of the smartphone are rebounding this quarter, and the decline in Apple shares represents a “buying opportunity,” said Cherukuri, whose firm is based in Lisle, Illinois.

Steve Jobs

The results were the first announced since the Oct. 5 death of Apple co-founder Steve Jobs. New Chief Executive Officer Tim Cook said the world has lost “a creative genius and an amazing human being.”

“Steve was a great leader and mentor and inspired everyone at Apple to do extraordinary things,” Cook said yesterday on a conference call. “His spirit will forever be the foundation of Apple, and we are dedicated to continuing the amazing work that he loved so much.”

Apple said that while iPhone sales fell off last quarter, the holiday quarter will be its best yet. First-quarter per- share earnings will be about $9.30 on sales of about $37 billion, Apple said in the statement.

That surpassed analysts’ projections, suggesting that iPhone sales are bouncing back with the release of the iPhone 4S, which set a record with debut-weekend sales of 4 million.

“In our wildest dreams, we couldn’t have gotten off to as great a start as we did with the iPhone 4S,” Cook said on the call. The drop in demand for iPhones in the second half of last quarter was “substantial,” said Cook.

Smartphone Rivals

The new touchscreen handset is vying with new smartphones from companies including Samsung Electronics Co. and HTC Corp., which use Google Inc.’s Android operating system.

Back-to-school shopping helped propel fourth-quarter Mac sales to a record 4.89 million, above the 4.4 million predicted by analysts. The lineup of desktop and laptops is gaining share as demand diminishes for rivals’ personal computers, according to research firm Gartner Inc.

IPad sales of 11.12 million also set a record, signaling Apple is fending off competition from companies such as Samsung and Research In Motion Ltd. that have introduced rival tablets. Amazon.com Inc. debuts its new Kindle Fire tablet on Nov. 15. Analysts had predicted iPad sales of 11.5 million.

Apple’s fourth-quarter revenue was $28.3 billion, below the $29.6 billion predicted by analysts. Missing expectations caught investors by surprise since the company has so consistently beaten predictions. During the previous 19 quarters, Apple had exceeded profit estimates by an average 28 percent, according to Piper Jaffray Cos.

‘Clueless’

“Shame on me and other investors who got lulled into complacency based on how much they’ve beaten estimates in the past,” said David Rolfe, chief investment officer at Apple investor at Wedgewood Partners Inc.

Apple had said in July that it expected sales and profit to fall because of changes to its product lineup.

“It’s not the company that missed, it’s the people who follow Apple that are clueless,” said Trip Chowdhry, an analyst at Global Equities Research in San Francisco.

Analysts may revisit projections that Apple will continue to grow at a record rate and exceed estimates, said Michael Obuchowski, chief investment officer at First Empire Asset Management.

“That the company can maintain the growth rate that some of the analysts envision is not very realistic,” he said. “There will be a reevaluation of the analysts’ expectations.”

China, Thailand

Apple added to its balance sheet. Cash and investments now total $81.6 billion. Asked why the company hasn’t returned some of that money to shareholders in the form of a dividend or buyback, Cook said the cash is used for acquisitions, purchasing components and opening stores.

Still, Cook said he’s “not religious” about holding on to the money. Whether to return some is a regular discussion among the company’s board of directors.

Gross profit margin, the percentage of sales left after deducting production costs, was 40.3 percent last quarter, compared with 36.9 percent a year earlier, Apple said.

China is becoming an increasingly vital region for Apple, said Cook, with the area generating $4.5 billion in sales last quarter. Apple is opening stores, conducting marketing campaigns and partnering with third-party retail outlets to reach customers in China, Cook said.

Apple also has seen supply chain snags as a result of flooding in Thailand, Cook said. The factories affected are mainly supplying components for the company’s Mac computers, he said.

--With assistance from Sarah Gill in New York and Peter Burrows in San Francisco. Editors: Tom Giles, Marcus Chan

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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