Apple’s results impress, but growing risk looms

By any measure, Apple’s quarterly financial results were blockbuster. But there’s a but coming.

Revenue of US$37.4 billion was up 6 per cent over the year-ago period, and set a new all-time, third-quarter record high for the company, but came in short of analyst expectations, sending shares down 0.8 percent to $94 in after-hours trade.

Profit rose 12 per cent to $7.75 billion, while earnings-per-share spiked 20 per cent, to $1.28 per share. Continued strength in iPhone sales – 35.2 million, another Q3 record – and an 18 per cent bump in Mac sales to 4.4 million units in a contracting global PC market, fuelled the growth.

Sales of iPad tablets hit the skids, down 9 per cent to 13.3 million from the 14.6 million sold during the year-ago period. Despite growth in emerging regions like China, India and the Middle East, softness in developed markets and intensifying competition from Android-based devices and larger-screened smartphones and phablets continued to challenge Apple’s tablets barely four years after they were first introduced.

Still, CEO Tim Cook, speaking during yesterday afternoon’s analyst call, said the company has sold 225 million iPads to-date, and isn’t overly concerned.

“It’s a larger number than anyone would have predicted at the time, including ourselves, quite frankly,” he said. “We still feel the category as a whole is in its early days, and also there’s significant innovation that can be brought to the iPad, and we plan on doing that.”

As Apple’s focus shifts from the previous quarter to the rest of the year, its existing and planned product categories take centre stage. Here’s a quick look at the key things to watch for:

iPhone

With three devices – the high-end 5s, midrange 5c and low-end 4s – accounting for $19.8 billion in sales, or nearly 53 per cent of Apple’s revenue during the quarter, a lot is riding on Apple’s smartphone business, and its next smartphone chapter could be its most crucial one yet. The company is expected to release two next-generation devices in September, and the 4.7-inch and 5.5-inch phones will likely drive the company’s iPhone reliance even higher.

The bottom line: Launch execution will be key to ensuring continued revenue growth into 2015, but longer-term, greater diversity among revenue contributors will reduce competitive risk as lower-cost handsets drive intensified global competition.

iPad

Cook told analysts he still sees ample room for growth in the tablet market, citing Gartner’s prediction that sales of 350 million by 2018 will surpass PCs. He spoke directly to the recently announced partnership with IBM to develop business-focused apps and sell Apple-based mobile solutions directly to the tech services company’s corporate clients. Cook told analysts while iPads are being used in 99 per cent of Fortune 500 companies, their penetration remains relatively low. Aligning with IBM primes Apple to dig deeper into the enterprise space.

“We think there’s a substantial upside in business,” he said, adding this was a key rationale behind the IBM hookup. “We think the core thing that unleashes this is a better go to market, which IBM totally brings to the table.”

The bottom line: Apple needs to move quickly to lock in business-centric revenue streams from its IBM partnership and quell growing doubts over future overall tablet sales growth.

iTunes

Online content sales remain vulnerable to the industry shift away from purchase-and-download models and toward subscription-based streaming. This rationale drove the recently-completed Beats Electronics deal, and underscores how quickly Apple needs to move to capitalize on its largest-ever acquisition.

The bottom line: Newly minted Apple execs Dr. Dre and Jimmy Iovine have their work cut out for them. iTunes has the most to lose if it doesn’t embrace the streaming mantra, and it’s up to the Beats founders to architect both the technology and the culture of what promises to be a fundamental rethink of one of the content industry’s most storied sub-brands.

iWatch, iTV, iAnything

Cook continues to promise great things later this year, telling analysts, “We have an incredible pipeline of new products and services that we can’t wait to show you.”

With barely five months left in the calendar year, time is running out to make good on repeated promises to expand Apple’s sub-brand universe and reduce Apple’s growing vulnerability to slowdowns in maturing product lines. Whatever Apple has in its pipeline, it needs to move quickly to bring them to market with sufficient notice to impact the upcoming holiday shopping season.

The bottom line: With the iPhone 6 launch looming, Apple will be hard-pressed to get another net-new product line like a smartwatch off the ground before the end of the calendar year. But investors have been waiting for something new for a while, and they won’t wait indefinitely. It’s time to finally pull the trigger.

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