Shares of Apple plummeted 9.83 percent in afterhours trading on Wednesday afternoon following Apple’s disappointing quarterly earnings report which revealed that the tech giant is facing slower growth.
Investors were disappointed after Apple CEO Tim Cook announced that quarterly profits rose less than 1 percent to $13.1 billion, or $13.81 a share, in the quarter ending on Dec. 29th. That is barely on par with the $13.1 billion, or $13.87 a share, in the same period a year earlier, even despite the fact that the latest quarter had one less week than the previous year.
Expectations were high that Apple would have sold close to 50 million iPhones during the final December quarter which accounts for holiday spending, led by its new iPhone 5 with 4 inch retina display. Apple sold 47.8 million units of the iPhone, the largest source of revenue for the company, even despite some publicized glitches with Apple Maps.
Revenue for the quarter was 54.5 billion compared to 46 billion, an increase of 8.2 billion year-over-year and new records for iPhone and the iPad sales.
On a sequential basis, iPhone sales grew 78% over the September quarter’s results. “That’s over 3.5 times IDC’s latest published projection for sequential growth of the overall market resulting in iPhone market share growth” said Peter Oppenheimer, Apple CFO during the conference call.
In the U.S. Kantar Worldpanel Comtech estimates that iPhone shares of smartphones sales increased from 45% in the year ago quarter to over 51% in the current year quarter.
Apple sold 22.9 million iPads for the quarter, higher than estimates of 22.4 million. Apple previously sold 15.4 million iPads in the year ago quarter.
iTunes generated record results with revenue of $2.1 billion for the quarter. The App Store had a record-breaking December quarter with over 2 billion downloads during the month of December.
Apple sold 4.1 million Mac computer units in the quarter compared to 5.2 million in the year ago quarter.
Apple sold 12.7 million iPods compared to 15.4 million in the year ago quarter.
iPod’s share of U.S. market for MP3 players was over 70% in the December quarter based on the latest data published by MPD. The iPod continued to be the top selling MP3 player in most countries tracked based on the latest data published by GFK.
One of the concerns that many analysts raised ahead of yesterday’s quarterly earning results centered on Apple’s production problems from releasing many new products last quarter ranging from the iPhone 5 to the iPad mini to new Macs.
CEO Tim Cook said in the conference call that iPhone supplies were short, and the company could have sold more of both the iPhone 5 and older iPhone 4’s if they had production working more effectively.
CFO Peter Oppenheimer admitted during the conference call that Apple couldn’t get the new iMac desktops out before December.
Apple has a reputation for giving conservative forward guidance. CFO Oppenheimer said Apple expects sales of between $41 billion and $43 billion in the current quarter, ending in March, which is lower than analysts’ estimates of $45.6 billion. As a reference point, Apple had 39.2 billion in revenues during the same year ago March quarter.
Adapting For Change
Apple consumers have become accustom to seeing Apple products on the cutting edge of technological advancement, due in large part to the legendary drive and vision of deceased Apple co-founder Steve Jobs.
Some Apple investors are now questioning in a post Jobs-era whether Apple is still capable of innovating and releasing ever new popular technological products that are capable of transforming lives in the same way that Apple’s products did in the span of the last 30 years.
“Apple is a product-story company, this is not about valuation. The way we think about this is what is coming in the future” said Gene Munster, analyst with Piper Jaffray, aired on yesterday’s Bloomberg West.
With Google’s Android OS becoming ubiquitous on several different smartphones and Samsung gaining ground across international markets, Apple executives are left questioning whether they should develop less expensive smartphones to make it easier for Apple to better compete against a growing host of lower cost hardware smartphone markers that are all maneuvering for ways to expand their reach in growing markets across Asia.
As smartphones are becoming saturated in the U.S., hardware smartphone makers such as Apple are looking at new ways to expand in growing markets like China and India which both have a rising middle class that are becoming wealthier and more interested in technology.
For the quarter, Apple’s revenues in China were $7.3 billion and up over 60% year-on-year. In the year ago quarter, Apple had 6 store in China. Now they have 11 stores.
Even with those impressive gains, Apple is hoping to better compete against Samsung and lower-cost Chinese smart-phone hardware companies such as Lenovo and Huawei that are gaining market-share and operate on Android OS which has gained 90.1 percent of the market, a year-over-year increase from 58.2 percent, according to Analysys International.
According to IDC, Apple had under 10 percent of China’s mobile phone market during the third quarter 2012.
In China, the demand is high for lower cost smartphones.
An iPhone 5 costs well over $700 in China and consists of high-end hardware components.
The iPhone 5′s high price tag in China keeps it out of reach for the majority of Chinese, especially considering the iPhone 5 is not subsidized by wireless carriers in China as it is in the United States by carriers like Verizon and AT&T which reduces the retail price to as low as $200 with a 2 year contract.
Lower cost phones to increase Apple’s profits
Piper Jafray analyst Gene Munster believes that Apple is preparing to expand their global footprint through Apple iOS by producing a lower cost smartphone that could eventually lead to higher revenues for the company.
“For the stock to work, they need to have increasing and accelerating profits. And there is a huge market that they’re not addressing right now which is the sub $400 dollar smart phone market, it’s about 65 percent of overall smartphones” said Gene Munster on Bloomberg West aired yesterday.
“So Apple is leaving a lot on the table by not going after that market and ultimately we think they will. So the simple takeaway is this: we think there is a cheaper phone coming and while investors are not talking about that right now at this minute, we think they will over the next quarter which should be positive for shares” Munster added.