Despite missing a number of Wall Street's expectations, Apple posted record iPhone, iPad and Mac sales along with powering all-time high quarterly revenues, but it wasn't enough to buoy the stock, which slipped 8 per cent in after-hours trade.
For the three months ending December, the company booked a record US$57.6 billion in revenue, $13.1 billion in profit and $14.50 in earnings per share. The results came in above analyst consensus of $57.46 billion in revenue and $14.09 EPS, and were toward the upper range of Apple’s initial guidance of between $55 billion and $58 billion.
Numbers up across the board
The company sold 51 million iPhones – up from 47.8 million in Q1 2013 – and 26 million iPads in the quarter, compared to the 22.9 million sold during the year-ago period. While the iPhone numbers were below consensus of 54.6 million, iPad sales exceeded pre-reporting estimates of 24.9 million. Mac sales of 4.8 million topped the year-ago quarter’s 4.1 million, and all figures were all-time quarterly records for the company. Sales from iTunes-related software, content and services increased 19.3 per cent from 3.7 billion in Q1 2013 to $4.4 billion in the most recent quarter.
“We are really happy with our record iPhone and iPad sales, the strong performance of our Mac products and the continued growth of iTunes, Software and Services,” CEO Tim Cook said in a statement.
The company’s cash position increased from $147 billion to $159 billion over the quarter. CFO Peter Oppenheimer said Apple generated $22.7 billion in cash flow from operations and paid an additional $7.7 billion back to shareholders in dividends and share repurchases. The board declared a $3.05 per share cash dividend. Apple issued guidance for Q2 2014 of between $42 and $44 billion in revenue – compared to $46.05 billion consensus – and a gross margin between 37 and 38 per cent.
Record sales, but slowing growth
The company’s first fiscal quarter of 2014 coincided with the all-important holiday season, and showed strong consumer demand for the iPhone 5c and 5s, iPad Air mini, and updated MacBook Pro models. Still, the record numbers couldn’t mask growing fears that the growth engine is showing signs of longer-term weakness. iPhone sales, which had risen 29.5 per cent between Q1 2012 and Q1 2013, were up only 6.7 per cent in the past year. Likewise, iPad growth of 8.4 per cent this year was down from 48 per cent in the previous annual period. Its legacy iPods continued their slow fade to irrelevance, with sales of 6 million tumbling 53 per cent from 12.7 million in the year-ago period.
Apple’s slackening growth is largely due to increasing competition from smartphones and tablets supporting Google’s Android operating system. Samsung, the largest member of Google’s mobile partnership, has aggressively attacked Apple with a broad array of high- and lower-end devices. The Korean giant this week signed a 10-year patent licensing agreement with Google that should effectively end punishing litigation between them – and position both companies more strongly against Apple.
The growth slowdown places added pressure on Tim Cook to bring the company’s next category-defining product line to market. Despite rampant speculation that Apple’s next big thing could be a watch, a television, or an automotive- or home automation-related platform, Apple has steadfastly refused to confirm where it’s going next. The iPhone accounted for 56.4 per cent of Apple’s total revenue in the quarter, and the iPad tallied another 19.9 per cent – a reliance level that makes investors nervous as growth for these legacy product lines continues to ebb.
Higher competition, lower margins
The miss on iPhone sales wasn’t the only piece of potentially worrisome news. Gross margins slipped to 39.7 per cent from 38.6 per cent in the year-ago quarter, suggesting greater headwinds in mature markets and rising marketing costs as competitors catch up with the company’s once-untouchable product lines.
“I think you’ll see the underlying performance of our business is stronger than the guidance might imply,” Oppenheimer said. “We continue to invest heavily in the future and remain confident in our product pipeline.”
Cook told analysts on the call that Apple refuses to play the market’s numbers game, and insisted the company will continue to follow its own playbook.
“Our objective is to make the best, not the most,” he said, “and we feel we’re doing that.”
Waiting for China
Despite Apple’s recently announced deal with China Mobile to begin selling iPhones through the world’s largest carrier, a lack of truly low-end options for emerging markets and a thriving grey market for iPhones and knockoffs in China could blunt growth opportunities there, as well.
During the after-hours analyst call, Oppenheimer called China “an incredibly important market to Apple and iOS devices already account for 57 per cent of all mobile web browsing in China,” but with iPhones going on sale there only on Jan. 17th, observers will have to wait another quarter before assessing the deal’s true impact.