Apple announced a slew of solid numbers in its quarterly earnings report Monday, raising expectations for the crucial holiday shopping season and sending analysts racing to raise their price targets. Yet even as it raised optimism about its near-term profitability, it failed to quell lingering questions about its long-term growth.
The tech giant said it sold 33.8 million iPhones in the three months through September, up 26 percent from the same period last year. Sales across all its product lines totaled $37.5 billion, up 4 percent from the same period in 2012 and better than the $36.8 billion expected, on average, by analysts.
Despite those sales figures, Apple’s earnings once again slipped from year-ago levels, marking the third straight quarter of such declines after a decade of powerhouse bottom-line growth. Earnings per share, at $8.26, fell short of last year’s $8.67 but still beat analysts’ expectations of $7.92. Net profits, at $7.5 billion, slipped nearly 9 percent from 2012 levels.
Apple said sales in the current quarter – the first full quarter with the new iPhone 5S and 5C models on the market and the first when Apple will sell its new iPad Air, set to hit the market on Nov. 1 – would come in at $55 to $58 billion. Analysts and Apple-watchers were quick to note that would represent the slowest holiday-quarter sales growth in five years.
Yet the metric that mattered most, at least to analysts, was the company’s gross margin: 37 percent last quarter, up slightly from 36.9 percent last quarter but down from 40 percent in the same period last year. Declining margins have been a continuing concern as Apple faces a more saturated smartphone market in the U.S. and lower-priced competition globally. The average selling price of an iPhone slipped to $577 – still an astounding figure, but one that is trending lower as customers buy lower-end models. A year ago, Apple’s average price for iPhones was just under $620.
Investors had hoped that trend would soon turn with the runaway success of the high-end iPhone 5S, which early evidence suggests has been a bigger hit with consumers than the colorful, mid-tier 5C. But Apple projected margins would come in at 36.5 percent to 37.5 percent in the current quarter, which includes the crucial holiday shopping season – below the median estimate from analysts.
An accounting change clouded the margin picture. CFO Peter Oppenheimer explained on a conference call with analysts that margin projections for the current quarter were lower than they would otherwise have been because Apple will defer $900 million more in revenue over the next two to four years. It made that change to reflect the decision to make its Mac OS, iLife and iWorks software and future upgrades available for free. Oppenheimer also said margins would be squeezed some because of currency effects and a sales mix that features iPads and Macs that cost more to make but are priced lower than in the past.
“We’re really happy to be guiding gross margin flat not only because of the deferral but in addition to all of the new products that we’ve introduced with higher cost structures and lower prices,” Oppenheimer said, “No hard and fast commitments, but we’re going to work really hard to get down the cost curves as we have successfully in the past.”
In other words, flat is up when it comes to Apple’s margins. Without those increased deferrals, the margin guidance would have been for a healthier 38.1 percent to 39.1 percent – above analysts’ consensus – Shebly Seyrafi of FBN Securities noted in a research note.
Yet even if Apple’s has halted the dramatic erosion in margins it suffered over the last year and a half, analysts still expect margins will face long-term pressures as smartphones continue to gain popularity, particularly in the emerging world. “We continue to believe that iPhone gross margins will fall as/when Apple moves into lower price categories in order to retain developer relevance in emerging markets,” Nomura analysts wrote Tuesday. “As long as Apple continues to ignore this market, however, we still forecast reasonably stable gross margins but with lower unit growth.”
That’s why investors keep waiting for Apple to reveal its play in new product categories like watches and, in particular, television. If Apple is going to resume gangbuster profit growth, the iPhone and iPad won’t be enough.