Is Apple's lineup beginning to rot?

January 28, 2014 04:07 AM
Apple Lineup Reaching Ceiling Puts Pressure on CEO Tim Cook

Apple Inc.’s roster of devices is hitting a sales ceiling, underscoring why it’s crucial for Chief Executive Officer Tim Cook to deliver the company’s first new products since 2010 to revive growth.

Apple shares dropped after the Cupertino, California-based company reported iPhone sales for the holiday season that missed analysts’ estimates, in what is typically the most lucrative period of the year for the device maker. Apple also projected revenue in the current period may fall from a year earlier, in what would be the first quarterly sales decline since 2003. Last year, Apple posted its first profit drop in more than a decade.

The figures indicate that demand may be ebbing for Apple’s devices -- which were once reliable growth engines -- as competitors flood in with their own smartphones and tablets. Cook said sales in North America were weaker than the company expected, partly because the less-expensive iPhone 5c released last year wasn’t as popular as the higher-end iPhone 5s. The stagnating growth is adding pressure for the company to release new hit products, be it a wearable computer or a way for paying for things with an iPhone or a television.

“What we have gotten over the last year or so is impressive products, but they are really enhancements of current products and not necessarily the next new thing,” said Jack Ablin, chief investment officer with BMO Private Bank. “Apple investors want the next new thing -- that’s the catalyst that people are waiting for.”

Shares Fall

Apple fell 8.7% to $502.20 at 9:30 a.m. in New York.

For its fiscal first quarter ended Dec. 28, Apple said it sold a record 51 million iPhones, missing analysts’ estimates of 54.7 million handsets. Even after releasing the iPhone through the world’s largest carrier, China Mobile Ltd., this month, Apple also said revenue will be $42 billion to $44 billion in the current quarter, compared with analysts’ estimates of $46.1 billion. Anything short of $43.6 billion would amount to a sales decline from a year earlier.

Apple’s quarterly profit and revenue still beat projections. Profit last quarter was $13.1 billion, or $14.50 a share, little changed from $13.1 billion, or $13.81, a year earlier. Sales rose 5.7% to $57.6 billion. Analysts had predicted profit of $14.07 a share on sales of $57.5 billion, according to the average of estimates compiled by Bloomberg.

Smartphone Saturation

While Apple’s stores were crowded during the end-of-year shopping season, many consumers also are flocking to cheaper smartphones. Samsung Electronics Co. faces similar challenges and last week reported its slowest profit growth since 2011 as it battles Apple in high-end smartphones and inexpensive handsets made by Lenovo Group Ltd. and Xiaomi Corp.

“The high-end of the market is saturated,” said Van Baker, an analyst at researcher Gartner Inc. “Apple’s going to have to rethink its approach.”

Corning Inc., a supplier of glass to Apple, said sales volume for Gorilla Glass, the shatter-resisting material used to cover the iPhone, was weaker than the company had expected.

“That was a little bit of a surprise,” James Flaws, Corning’s chief financial officer, said in an interview.

Still, demand for Corning materials used in tablets remained strong, and Flaws anticipates that revenue from those devices will grow in 2015.

In a conference call with Wall Street analysts, Apple executives faced questions about whether iPhone sales have stalled and the outlook for the current quarter.

Product Updates

Cook said the company is growing in emerging markets and that new products are coming. In addition to an iPhone with a bigger screen, the company has been exploring the release of a wearable-computing device and an expanded mobile-payments system, people with knowledge of the plans have said. While Cook didn’t specify what’s in the pipeline, he said he’s “intrigued” by letting people pay for products with iPhones.

“We have zero issue coming up with things we want to do that we can disrupt in a major way,” Cook said. “The challenge is always to focus on the very few that deserve all of our energy.”

Apple hasn’t introduced an entirely new product since the iPad’s debut in 2010. The iPhone was released in 2007. Absent that, the company has been counting on updates to those existing product lines to fuel demand. The company released the iPhone 5s and 5c, as well as the iPad Air and iPad mini in time for the holiday shopping season last year.

Over the quarter, Apple sold a record 26 million iPads and also sold 4.8 million Mac computers.

‘Not Feasible’

Even so, sales of the iPhone, which is Apple’s biggest source of revenue, are now trailing global growth. IPhone shipments increased 13% in 2013, while the broader market rose 41%, according to researcher Strategy Analytics. The company’s share fell to 15% from 19% last year, while Samsung captured 32%, the firm said.

“To expect the kind of growth we saw years ago is not feasible,” said Channing Smith, who helps oversee about $1.1 billion at Capital Advisors Inc. in Tulsa, Oklahoma. “These are more expensive products, especially what Apple is selling, and that condenses the market opportunities.”

Apple’s forecast for the current quarter also raised questions as the numbers offer a glimpse of how sales are faring after the release earlier this month of the iPhone on China Mobile.

In a conference call, Cook said iPhone sales with China Mobile had had “an incredible start.” The smartphone is available in 16 cities in China and will be in more than 300 by the end of this year, he said.

Gross Margins

While sales in Greater China rose 29% to $8.84 billion, Apple said revenue in the Americas region fell 1% to $20.1 billion. Cook attributed the drop in part to new upgrade policies by carriers that led customers to wait longer to upgrade their devices. Apple also didn’t have the right mix of iPhones for sale between the 5s and 5c models, and the high-end 5s was more popular than expected, he said.

Apple also reported that gross margins, a measure of profitability that’s closely watched by investors, will be 37% to 38% for the current quarter, compared with analysts’ estimates of 37.3%.

Apple, which has been pressured to return more money to shareholders, also declared a cash dividend of $3.05 a share and said it had returned more than $43 billion in payments to date. Billionaire activist investor Carl Icahn last week increased his stake in the company to about $3.6 billion and has been pressing Cook to increase the buyback program to boost Apple’s stock price. Icahn’s proposal is slated to be considered at the company’s annual shareholder meeting next month.

About the Author