Apple sees avenues for growth even as products age

FILE - JULY 10, 2013: It was reported

FILE - JULY 10, 2013: It was reported that U.S. District Judge Denise Cote ruled in favor of the U.S. government that Apple conspired to raise the retail prices of e-books July 10, 2013 in New York City. SAN FRANCISCO, CA - APRIL 23: The Apple logo is displayed on the exterior of an Apple Store on April 23, 2013 in San Francisco, California. Analysts believe that Apple Inc. will report their first quarterly loss in nearly a decade as the company prepares to report first quarter earnings today after the closing bell. (Photo by Justin Sullivan/Getty Images) (Credit: Getty Justin Sullivan)

Apple Inc. Chief Executive Officer Tim Cook, after making do with an aging lineup of phones and tablets last quarter, will need to look to updated devices and fresh ways to distribute its products to return to growth.

Apple, which hasn’t refreshed its iPhone and iPad since last year, managed to top analysts’ earnings projections in its fiscal third quarter, even as profit declined from a year earlier and sales were largely flat. The company reported earnings of $7.47 a share in the period, beating the $7.30 average estimate compiled by Bloomberg.

The challenge now is using new products and markets to get Apple back on the offensive. The company is slated to release updated versions later this year of its iPhone and iPad, Apple’s top-selling devices. Cook also aims to wring more revenue from Apple’s services, applications and 408-store retail network. Concern about the lack of a new hit product since the death of former CEO Steve Jobs and falling phone prices had helped push Apple’s shares down 40 percent from their record in September.

“They’re laying the groundwork,” Mark Moskowitz, an analyst at JPMorgan Chase & Co. in San Francisco. “The hardware is like the skeleton, and the content and services and apps are like the muscle.”

For now, Apple’s sales and profit remain mired in the biggest slump in more than a decade. Revenue rose 1 percent from a year earlier to $35.3 billion, narrowly beating the $35 billion estimated by analysts. Net income fell 22 percent to $6.9 billion. Analysts estimate that profit growth will resume in the March quarter, according to data compiled by Bloomberg.

New Markets

To get Apple growing faster, Cook mentioned a number of levers he can pull, regardless of whether new products prove as popular as the iPhone or iPad. The company can expand its retail store network, increase efforts to sell to businesses and emerging markets such as India, and boost the amount of software and services that consumers buy. While he didn’t rule out a cheaper iPhone -- something predicted by analysts -- he said Apple could win its share of price-conscious shoppers by continuing to push its older iPhone 4 model.

“What we’re going to see from here on out is numbers going up across the board for a couple of quarters,” said Brian Blair, an analyst at Wedge Partners in New York. “We’re going to see a product refresh and the kinds of things that get investors excited.”

Though iPhone sales topped estimates, the device’s average selling price fell 4 percent from a year earlier. Apple cited the popularity of older, lower-priced models, along with the effect of foreign-currency “headwinds.” The company said iPhone sales jumped 66 percent last quarter in Japan, where the yen fell about 5 percent against the dollar during the period.

Total revenue in greater China fell 14 percent to $4.6 billion. IPhone sales in mainland China rose 5 percent from a year earlier, Cook said on a conference call.
“That is a lower growth rate than we have been seeing,” Cook said. “I attribute it to many things, including the economy there.”

Apple was helped by lower investor expectations, said Keith Goddard, president of Capital Advisors in Tulsa, Okla., which owns 30,831 of the company’s shares. The previous four quarters, Apple’s stock has fallen after its results were released.
“Expectations of Apple’s growth have been reset to reasonable levels,” Goddard said. “It’s a good sign that the company can navigate through a period of slow innovation, and not disappoint the Street anymore.”

Stock Buybacks

Apple also returned a total of $18.8 billion in cash to shareholders last quarter in the form of dividends and stock buybacks.

“Buybacks were more than double what we expected,” said Peter Misek, an analyst at Jefferies LLC in New York, who has a hold rating on shares of Apple. “It was a good quarter.”

The company sold 31.2 million units of the iPhone, its best-selling and most profitable product. Analysts had estimated 26.1 million on average. Apple’s gross margin, the percentage of sales left after subtracting production costs, was 36.9 percent, compared with the company’s target of 36 percent to 37 percent.

IPad Sales

Sales of the iPad fell 14 percent from the prior year to 14.6 million. Consumers are holding off on purchasing the tablet as they wait for new models later this year, said Ben Evans, an analyst at Enders Analysis in London. Apple forecast sales of $34 billion to $37 billion for the current quarter, compared with an average estimate of $37 billion.

Slowing sales and profit growth also have put pressure on Apple to push into new product categories. The company has more than 100 employees working on a wristwatch-like device, people familiar with the matter said earlier this year. In addition, Cook has said the company is considering television products that go beyond its current Apple TV set-top box.

“We are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014,” Cook said in yesterday’s statement.
The company’s upbeat earnings came after some of its technology peers reported lackluster results. Intel Corp., the world’s biggest chipmaker, last week gave a disappointing forecast for third-quarter sales, and Google Inc. and Microsoft Corp. missed second-quarter profit and sales estimates.

Smartphone Market

Apple, which pioneered the market for touch-screen smartphones in 2007, has seen Google’s Android platform gobble up much of the market. Android captured 70 percent of global mobile operating-system sales at the end of first quarter, compared with 17 percent for Apple’s iOS, according to IDC. Samsung, Asia’s biggest technology company, was the No. 1 Android vendor with 41 percent of that market.

Capital Advisors’ Goddard said the company doesn’t have to be a competitor at the low end of the market -- something borne out by last quarter’s results.
“They don’t need to have half of the market. They need to be a highly profitable provider with 25 percent to 30 percent market share,” he said. “Apple should be the Cadillac of smartphones.” 

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