Apple earnings: Low-price 5c dragging the franchise down

Pity the iPhone 5c. It’s barely a month old and it’s already being accused of threatening the family’s future.

The lower-end device, introduced alongside the 5s last month in a radical-for-the-company move to preserve market share amid intensifying competition from Google, isn’t selling as well originally projected. As Apple on Monday released its financial results for its fiscal fourth quarter of 2013, its reported iPhone sales are showing uncharacteristic signs of weakness for a franchise that, alongside other iOS devices like the iPad, is responsible for 70 per cent of its earnings.

The company earned a net profit of US$7.5 billion – or $8.26 per diluted share – on $37.5 billion U.S. in revenue. Both figures exceeded consensus estimates. While revenue was up 4 per cent over the year-ago period, earnings were down 8.5 per cent, the third consecutive quarter where Apple’s earnings have dropped year-over-year.

Sputtering engine

Apple sold 33.8 million iPhones, a record for the September quarter and slightly above analyst projections. While this represents an increase of 25.7 per cent from the 26.9 million iPhones sold in the year-ago quarter, concerns over the underperforming 5c drove a selloff in the company’s stock, which was down 2 per cent in after-hours trading.

A report by Localytics shows the iPhone 5c currently accounts for approximately 1.7 per cent of all active iPhones currently in use, less than half of the 3.8% notched by the 5s (at 40 per cent, the iPhone 5 is currently the most-used Apple handset.) Although Apple sold 9 million iPhones in their first three days of availability – nearly twice the 5 million recorded by the iPhone 5 when it was launched in 2012 – the company hasn’t broken down how much it sold of each. Piper Jaffray analyst Gene Munster claimed in an interview with Bloomberg that the real sales number to consumers came in much lower, at 5.5 million, with the remaining 3.5 million 5c units bought by carriers but still sitting in the channel.

Reports from multiple sources, including the Wall Street Journal, have surfaced this month claiming Apple is scaling back 5c production and ramping up 5s production. An NPD DisplaySearch blog entry says its channel checks confirm that 5c orders are being cut by 35 per cent while 5s manufacturing is being boosted by 75 per cent. In an extraordinary move for a brand-new product from Apple, Best Buy earlier this month temporarily cut the price of the 5c on a two-year contract from $100 to $50. Apple has been criticized for not opening up more pricing room between the 5s and the 5c, with consumers increasingly deciding the feature-packed 5s is worth an extra $100 or so over the life of a two-year contract.

A psychological hit

Despite all the attention being paid to the new iPhones, their actual impact on the just-reported figures is relatively limited. Because they hit store shelves September 20th, they were on sale for only eight days in the quarter. Still, the hint of flattening demand and the rare misfire on the low-margin 5c are both prompting growing questions whether the iPhone juggernaut is starting to run out of steam.

Apple is under increasing pressure to maintain market share and margin amid a full-on assault from Google’s Android-running partners. IDC figures released in August for the April-through-June period showed Android smartphones taking a record 79.3 per cent global market share, compared to 13.2 per cent for the iPhone. Tepid iPad sales – at 14.079 million units, flat year-over-year and down slightly from last quarter – only add to the weight now sitting on the iconic smartphone’s shoulders as the company heads into the all-important holiday season.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own.