Apple is learning the hard way that eventually, even the most market-dominant companies can't outrun lofty expectations.
The results of its just-completed third quarter show a company very much moving in the right direction — revenue of $35 billion U.S. or $9.32 per share, and net income of $8.8 billion, represented increases of 22.5%, 19.6%, and 20.5%, respectively over the year-ago quarter when the company cleared $7.3 billion, or $7.79 per share, on sales of $28.57 billion. That growth also fuelled a cash pile that grew $7 billion to $117.2 billion.
Unfortunately for Apple, blockbuster performance is inevitably accompanied by blockbuster expectations. Year-over-year growth is proving to be difficult to maintain: It's down from 75% six months ago to 25% in Q3. The company, well-known for issuing conservative guidance, then blowing past it when the final numbers are in, had earlier estimated earnings of $7.65 per share on $34 billion in revenue. Analysts had anticipated an average of $38.03 billion in revenue and $10.23 per share, according to Thomson Reuters. The final numbers, good as they were, were simply not enough, especially coming off a blowout Q2 where Apple raked in $11.6 billion — or $12.30 per share — on sales of $39.2 billion.
Tablets take off while smartphones sag
The middling results reflect divergent results from Apple's product lines. Sales of the iPad, the latest generation of which was released in March and just completed its first full quarter of sales, surged to 17 million, nearly double the 9.25 million sold in the year-ago quarter. Torrid tablet sales weren't enough, however, to offset slowing smartphone growth.
The company moved 26 million iPhones — down from 35.1 million the previous quarter and well below analyst estimates that ranged between 28 million and 29 million— as some consumers held onto their cash in anticipation of the iPhone 5's launch, now expected in September or October. Weak as the unit sales may seem, they're still up 27.8% over the year-ago quarter's 20.34 million — but well below the 183% year-over-year increase recorded in the Q3 2011 period. Apple has traditionally experienced drawdowns in demand in advance of a major product refresh, but this suppression is more pronounced than usual, signalling that the limitless growth bloom, at least as far as the iPhone is concerned, could apparently, finally, be off the rose.
Things aren't much better internally, either. Gross margin was 42.8%, up from the year-ago quarter's 41.7% but below the 43.68% expected by analysts and well off the spike of 47.4% in the previous quarter. That's largely due to lower-than-expected average selling prices for the iPhone — the lowest since 2010 — and the iPad, which hit its lowest levels ever, as consumers increasingly turned to Apple's entry-level offerings.
Regional analysis shows a number of other alarming weak points. Asia-Pacific region revenue — which does not include Japan — was down 22% compared to the previous quarter. Europe was down 6%, while the Americas were off 3%. In Q3 2011, the Americas, Europe and Japan enjoyed sales growth between 63% and 71%. During that same period, Asia-Pacific was up 240%.
Even China, long a core area of growth responsible for two-thirds of Apple's revenue in the entire region, wasn't immune from the jitters. Revenue of $5.7 billion was up 48% over the year-ago quarter, but down from $7.9 billion in Q2. Although iPhone sales doubled year-over-year, inventory issues that dogged smartphone availability for the entire period were singularly responsible for the $2.2 billion shortfall.
Invulnerability is no guarantee
Despite the huge runup in global iPad sales, even the iconic tablet's long-term dominance isn't assured. While unit sales continue to multiply, its market share, according to Yankee Group, has dropped below 60% as the market that Apple legitimized opens up to a growing list of increasingly capable competitors — including Google's recently announced Nexus 7. Still, Cook told analysts gathered for the earnings call that he isn't overly concerned.
"We've seen many different tablets, hundreds of them in the past year," he said. "I've yet to see any really gain any real traction at all. We have over 225,000 apps (that are written specifically for the iPad) and customers say they aren't looking for a tablet, they're looking for an iPad. I think we'll have a very strong business going forward."
Beyond tablets, Apple shipped 4 million Macs — on par with its year-ago and pervious-quarter performance but down from a peak of 5.2 million in the quarter ended December 2011 — and announced it will make the next version of its Mac OS X operating system, known as "Mountain Lion" available for download on the Mac App Store for $19.99 U.S. on Wednesday.
As competition from Samsung and Google intensifies and economic worries in Europe and closer to home ripple out, the new normal for Apple could be growth rates that may never again see the heady heights of years past. Consider this last quarter a sign of things to come.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. firstname.lastname@example.org