By Daisuke Wakabayashi
After a series of blockbuster earnings that blew past even the
most optimistic of Wall Street expectations, Apple Inc. felt the
sting of falling short of its own high bar.
Apple said Tuesday its profit surged 38%, aided again by strong
demand for the company's latest iPhones and robust growth in China
where sales more than doubled.
But while Apple sold 35% more iPhones in the fiscal third
quarter compared with a year earlier, those sales missed some
analysts' estimates. Apple also indicated its revenue in the
current quarter could come in below Wall Street projections.
The iPhone is Apple's most important product, accounting for
nearly two-thirds of Apple's revenue in the quarter ended June 27
versus less than half three years ago. Any signs that iPhone growth
is reaching a peak is a major cause of concern for investors.
In an interview with The Wall Street Journal, Apple Chief
Executive Tim Cook said he has heard repeatedly that the company
can't sustain its growth rates, but it has proved doubters wrong in
the past.
"I refuse to accept that type of thinking," Mr. Cook said. "I
don't see the ceiling being very close."
Within minutes of the earnings report, Apple's shares fell as
much as 7% in after-hours trading, erasing about $60 billion in
market value.
Strong sales of the larger-screen iPhone 6 and 6 Plus are
driving Apple to record earnings, while defying a sales-growth
slowdown in the smartphone industry. Apple has pried open the door
to largely untapped markets like China and enticed consumers to
switch from smartphones running Google Inc.'s Android operating
system.
The fiscal third quarter is traditionally weaker for iPhones as
consumers hold off on purchasing new models until the fall when
Apple typically introduces them. Analysts noted that iPhone unit
sales of 47.5 million fell by about 23% from its fiscal second
quarter, a steeper rate of decline than the previous two years when
quarter-on-quarter sales fell by 19% and 17% respectively.
Apple said part of the shortfall was the result of it lowering
iPhone inventory by 600,000 units during the quarter, a sign that
it sold more phones than it manufactured.
Abhey Lamba, a senior technology analyst at Mizuho Securities,
said iPhone sales falling short of some analysts' estimates hurt
the bullish view of some investors that the iPhone 6 and 6 Plus
could defy seasonal slowdowns the iPhone had experienced in the
past.
"It deals a blow to that thesis," Mr. Lamba said.
The iPhone now overshadows the rest of Apple's businesses. While
Apple has refreshed several product lines in the past year and
introduced an entirely new category with a smartwatch, the iPhone
accounts for an increasingly larger share of Apple's revenue.
On a call with analysts, Mr. Cook brushed off a question as to
whether Apple needs to move beyond its reliance on the iPhone. "We
think the phone has a lot of legs to it," he said.
In the latest quarter, iPhone sales made up about 63% of Apple's
overall sales, compared with 53% in the year ago period and less
than half three years ago. Apple has benefited from selling its
iPhones at high prices at a time when smartphone prices are
sliding. The average selling price of iPhones rose by more than
$100 to $662.42.
The latest iPhones are especially popular in China. In greater
China--defined by Apple as China plus Hong Kong and Taiwan--revenue
more than doubled to $13.23 billion. For the iPhone, sales rose 87%
in greater China compared with 5% growth in the overall market,
according to Apple.
Mr. Cook said the company had the highest rate of switchers from
Android phones ever during the quarter. "The gap is widening
between us and our competitors," he said.
It isn't yet clear whether Apple's sales will greatly benefit
from the Apple Watch, the company's first all-new hardware product
since it introduced the iPad in 2010. Apple didn't provide a
breakdown of the Watch's sales, which began during the June
quarter, lumping the product's sales in with the iPod, Apple TV and
Beats accessories in the "other products" category. Sales of that
segment rose 49% to $2.64 billion.
Mr. Cook said the Watch's sales beat the company's own internal
projection, although he didn't provide those estimates. He said the
"sell-through" of the Watch was better than the iPad and iPhone at
the same period of time. He also noted the Watch is still only
available in 680 retail locations, or less than 1% of the locations
where the iPhone is sold.
Apple's profit in the quarter rose to $10.7 billion from $7.74
billion in the year-ago period. Revenue jumped 33% to $49.61
billion.
Gross margin--a closely watched measure of profitability
reflecting the percentage of revenue that remains after
manufacturing costs--was 39.7%, above its estimated range of 38.5%
to 39.5%.
Apple's forecast for revenue in the current quarter came in
slightly below Wall Street's expectations. For the current quarter
ending September, Apple said it expects a gross margin of between
38.5% and 39.5%. It sees revenue coming in between $49 billion and
$51 billion. Analysts had expected revenue of $51.13 billion,
according to a consensus of estimates compiled by Thomson
Reuters.
In contrast to the iPhone's success, iPad sales continued to
slump. Apple's tablet sales fell about 18% in unit terms, marking a
sixth-straight quarter of year-over-year declines. The iPad and
tablet computers, in general, are facing an existential crisis:
They aren't quite as essential as the smartphone but not quite as
functional as a notebook computer. Moreover, early iPad users don't
see a huge reason to upgrade to more recent models.
Apple has struck deals with International Business Machines
Corp. and other companies to position the iPad as a device for the
workplace. So far, those efforts have done little to stem the
iPad's slide.
Another bright spot is the Mac business. Apple said Mac sales
rose 9% in units, compared with a 9.5% decline in shipments for PCs
globally in the second quarter, according to research firm Gartner.
While still one of the smaller players in terms of shipments, Apple
has steadily gained market share on competitors.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com
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