Bloomberg News

Apple Stock Drops on Missed Estimates After IPhone Lull

July 25, 2012

Apple Earnings

Workers apply an Apple Inc. logo to the exterior of the Moscone West Center in San Francisco. Photographer: David Paul Morris/Bloomberg

Apple Inc. (AAPL:US) shares fell 4.3 percent after quarterly iPhone sales missed analysts’ projections, underscoring the computer maker’s reliance on the smartphone.

The company sold 26 million iPhones in the fiscal third quarter, shy of the 28.4 million predicted by analysts surveyed by Bloomberg. That caused Apple to miss analysts’ quarterly sales and profit estimates for the second time since 2003.

Customers delayed purchases of existing iPhone versions while awaiting the next model. Samsung Electronics Co. releases several designs a year to defend its lead in the $219.1 billion smartphone market. That raises the stakes for Apple Chief Executive Officer Tim Cook, who relies on a once-a-year upgrade of the device that makes up half of the company’s sales.

“Pressure is mounting,” said Michael Obuchowski, a portfolio manager at North Shore Asset Management LLC, an owner of Apple shares. “Because everybody else has a much faster design cycle, Apple has to come up with a new phone that’s competitive not just when it comes out, but will stay competitive for a long period of time. That’s going to be increasingly difficult.”

Net income (AAPL:US) climbed 21 percent to $8.82 billion, or $9.32 a share, in the June period, Cupertino, California-based Apple said yesterday. Sales rose 23 percent to $35 billion. Analysts had predicted profit of $10.37 a share on revenue of $37.2 billion, the average of estimates compiled by Bloomberg.

Apple, the world’s largest company by market value, fell to $574.97 at the close in New York. The shares (AAPL:US) have gained 42 percent this year.

Slowing Growth

While Apple is outgrowing its closest technology-industry peers, the company’s sales climbed at the slowest pace since mid-2009. Apple said the results will be worse during the quarter now under way, as Chief Financial Officer Peter Oppenheimer said speculation about a new device “has caused some pause” in sales. Analysts are predicting a new iPhone will be released by October.

The company said sales in the quarter ending in September would fall to about $34 billion, and that profit would fall to $7.65 a share. That compares with predictions (AAPL:US) by analysts for sales of $38 billion and profit of $10.27 a share. Gross margins, the percentage of sales remaining after deducting the costs of production, will fall to 38.5 percent, from 42.8 percent in the third quarter, Apple said.

“We have become spoiled by Apple and what they have done in the past,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co. “It’s just inevitable that you’re going to have some numbers that disappoint people.”

Record Introduction?

The results demonstrate customer anticipation for the next iPhone that will make its debut one of the biggest consumer- electronics introductions ever, according to Brian Marshall, an analyst at ISI Group. He predicts that Apple will sell 50 million iPhones in the quarter ending in December.

“We’re gonna get the big lift in the December quarter when the iPhone 5 does come out,” Gene Munster, an analyst at Piper Jaffray Cos. in Minneapolis, said today in a radio interview on “Bloomberg -- The First Word” with Ken Prewitt. “This is clearly the largest product cycle in the history of mankind coming here and you’ve got to own it ahead of that. You’ve got to buy it on the bad news and today is a big opportunity.”

“We try very hard to keep our product road map secret,” Cook said on yesterday’s call. “That, however, doesn’t stop people from speculating or wondering.”

Shares of Asian suppliers of Apple, including Samsung (005930) and Toshiba Corp. (6502), fell after the results announcement.

Broader Decline

Toshiba, the world’s largest flash memory maker after Samsung, slumped 7.3 percent. Hon Hai Precision Industry Co., the assembler of iPhones and iPads, declined 4.3 percent.

Apple sold a record 17 million iPads in the first full quarter since the device was released in March, exceeding the 15.4 million projected by analysts. Oppenheimer said sales were particularly strong in education, with one school district in Texas alone buying 11,000 iPads for students and teachers.

Cook also said the company last quarter sold 1.3 million units of Apple TV, a set-top box that lets users play Internet video on a TV set. That was almost triple the number from a year earlier. The company continues to explore how it can do more in the television market, he said.

“It’s still at a level that we would call it a hobby, but we continue to pull strings to see where it takes us,” Cook said.

Apple sold 4 million Mac computers and 6.8 million iPods, compared with 4.3 million Macs and 6.6 million iPods projected by analysts in a Bloomberg survey.

Mountain Lion, the newest operating system for the Mac, is now on sale, Apple said yesterday.

Tablet Rivalry

The company hasn’t been immune to the weak global economy. Cook said sales were especially weak in Europe, where countries are grappling with high unemployment and a debt crisis. Sales in the Asia-Pacific region (AAPL:US), which includes China, slipped 22 percent from the previous quarter to $7.89 billion.

Cook is following through on a pledge to return to investors some of the company’s growing hoard of cash and investments, which rose to $117.2 billion at the end of the quarter. The company will pay a dividend of $2.65 a share to holders of record on Aug. 13.

No Jumping

Even as it missed Wall Street expectations, Apple’s growth still contrasts with that of other hardware makers, such as Hewlett-Packard Co. (HPQ:US), which are being hurt as customers opt for smartphones and tablets instead of new laptops. Apple’s net income compares with $2.83 billion reported by Intel Corp. last week and $1.92 billion Hewlett-Packard is predicted by analysts to report next month. Hewlett-Packard’s net income projection excludes one-time expenses.

With tablet sales predicted by research firm Yankee Group to overtake those of personal computers by 2015, Apple is preparing for challengers for its iPad. Microsoft later this year will begin selling its Surface tablet, while Google last month introduced its Nexus 7.

Apple’s iPad will account for 62.5 percent of tablet sales this year, according to IDC. The company also is preparing to introduce a model with a smaller screen, people familiar with the plans said earlier this month.

Apple also is battling Samsung for leadership in the global smartphone market. While Apple has debuted one new model iPhone every year, Samsung has released a variety of handsets, including the Galaxy S III released in May.

Apple’s next iPhone will have an overhauled look and include a larger screen, people familiar with the plans said in May. The device also is predicted by analysts to have a stronger processor and work with faster long-term evolution wireless networks.

Some investors are awaiting the release before issuing a verdict on Apple’s long-term health.

Said Jack Ablin, chief investment officer of Harris Private Bank in Chicago: “We’re not ready to jump out the window.”

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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Companies Mentioned

  • AAPL
    (Apple Inc)
    • $117.6 USD
    • -1.02
    • -0.87%
  • HPQ
    (Hewlett-Packard Co)
    • $37.63 USD
    • 0.13
    • 0.35%
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