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iPhone 5 fail fans doubt on growth

24 January 2013, 13:32

San Francisco – Apple 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% to $463 in after-hours trade, wiping out some $50bn 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% 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," Sterne Agee analyst Shaw Wu said.

"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 $41bn to $43bn in the current, second fiscal quarter, lagging the average Wall Street forecast of more than $45bn.

Fiscal first-quarter revenue rose 18% to $54.5bn, below the average analyst estimate of $54.73bn, 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 $13.07bn was virtually flat with $13.06bn 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% from 44.7% previously.

"You can't just keep rolling out iPhones and iPads and think that everybody needs a new one," Jeffrey Gundlach, who runs DoubleLine Capital LP, the bond firm, said.

"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% from its September record high and the company has lost about $227bn in market value.

Shares of several of Apple's suppliers crumbled. Chip suppliers Skyworks and Cirrus Logic both fell more than 6%. Qualcomm slipped 1.8%.


Intense competition from Samsung's cheaper phones, powered by Google's Android software, and signs that the premium smart phone 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 $7.3bn, up 60% from the year-ago December quarter.

"These results were okay, 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," Dan Niles, Chief Investment Officer of AlphaOne Capital Partners, LLC said.

"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."

- Reuters


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