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Anything Google can do, Apple can do four times better

Think Google’s $50bn annual revenue figure was a reason to celebrate? What would happen if your company could surpass that figure in a single quarter? Your investors would be jumping up and down with joy, surely? Not so with Apple, who missed the ambitious targets set by financial analysts.

Apple yesterday announced financial results for its first quarter trading for fiscal 2013, which covers the all-important holiday period ending December 29. Despite negative speculation as to whether or not Apple had lost its way after Jobs and that customers were no longer as enthralled by its products, the company posted record quarterly revenue of $54.5bn and record quarterly net profit of $13.1bn.

Still, it wasn’t good enough for the financial analysts, who had expected even better news. This time last year, revenue was $46.3bn and net profit $13.1bn. The erosion of Apple’s margin was one of the factors that disappointed ‘those who know best’. Its gross margin fell from 44.7 per cent to 38.6 per cent year-on-year.

Shares dropped 10 per cent at one point in after hours trading, although they are currently up 9 per cent on the day.

There are plenty of hopelessly ill-informed blogs and reports out there, many of them reporting in hysterical terms that Apple is doomed. But there are some nuggets of commonsense if you dig deep enough. It does become tiring when you read all this negativity – just consider this: Apple has several market-leading product lines, each generating billions of dollars of revenue, remains hugely profitable, and it gives its investors dividends (unlike others; we’re looking at you, Google and Amazon).

But Apple has long since evolved from being a cool niche player challenging the establishment. It’s now sitting at the top of the pack and as such must face the inevitable consequence that anyone or anything successful the gets attacked and derided – it’s human nature, unfortunately – we like to destroy what we create.

So much for the headline financials, let the markets do what they want. They think a company that creates more revenue in a single quarter than Google does in an entire year is doomed? They have more faith in knackered companies like RIM and Nokia rising from the ashes? Then there is no reasoning with them. So let’s move on and look at what’s really important.

What about its products? According to Apple, in Q1 it sold a record 47.8m iPhones, compared to 37m in the year-ago quarter. It also sold a record 22.9m iPads during the quarter, compared to just 15.4m in the year-ago quarter. Apple’s traditional device business didn’t fare so well though, in line with most other PC vendors. It sold 4.1m Macs, compared to 5.2m a year ago.

Apple CEO Tim Cook held an earnings call after the results were announced. Thankfully there is a strong Apple media out there ready to pounce on every word, and so we recommend you visit Macworld for an edited transcript. Some key points raised though were that iPhone sales outside the US increased 70 per cent from the previous quarter, with “triple digit” growth in China. He also said that sales were constrained for much of the quarter for the iPhone 5 and 4, as well as the iPad Mini, and dismissed speculation about component order cuts.

These same production constraints, he added, were a reason that Mac sales were down. Apple had well-documented delays on its flagship 27-inch iMac, and Cooks said sales would have been “materially higher” otherwise. He conceded though that the market overall for PCs is weak.

On the subject of the iPhone 5 and LTE support, Cook said there are currently 24 carriers around the world that provide LTE support for iPhone 5. Next week, Apple will be adding a further 36 more carriers. And in the age of OTT messaging, Apple’s iMessage service is now accounting for over 2 billion messages per day.

So did the iPhone 5 help Apple with market share? Despite a jump in sales of 78 per cent from Apple’s truly disappointing previous quarter (explained by the fact that the iPhone had only just come out, so customers were waiting before upgrading or switching), that gives Apple an estimated market share of the global smartphone market of around 20-22 per cent, depending on who’s calculations you follow. That’s about the same smartphone market share as a year ago.

Is it possible therefore, for Apple to grow this share? Does it even want to? It is looking increasingly likely that the only way to do this is to broaden its product range, with the obvious conclusion that it must introduce a lower-cost model. But that risks damaging Apple’s high-cost, high-quality, high-spec brand image. It may be that the company feels this is a risk it is not prepared to take. Rather, it may look at opening up another product line – not smartphones or tablets, but something new. TV is the obvious answer, but it could be anything that involves connected intelligence.

For what it’s worth, I would be very surprised if Apple decided a low-cost, stripped down iPhone was the way to go. Anything cheap (yet still reasonably Apple-like) will result in lower margins, and we have seen today how the financial markets hate a fall in margin. Maybe Apple thinks the smartphone market (or at least the high-end segment) is unlikely to grow in terms of the overall mobile market– in which case it can maintain its market share. The smartphone market is projected to account for 710-720m devices at year end 2012, once all the numbers are in.

Tricky call. If iPhone sales are peaking, then it might well introduce its ‘Nano’ branding to extend product life, as it did with its MP3 players. It’s reason for introducing the ‘Mini’ brand to the iPad was not to do with pricing and declining sales, but a need for a different form factor. Popping back to the earnings call, Cook commented that:

“The most important thing to Apple is to make the best products in the world that enrich customers’ lives. That’s our high order bit. That means that we aren’t interested in revenue for revenue’s sake. We can put the Apple brand on a lot of things and sell a lot more stuff, but that’s not what we’re here for. We want to make only the best products.”

He also said that Apple TV sold over 2m units in the quarter, which represents its highest ever sales. Cook confirmed that Apple TV “is an area of intense interest for us, and it remains that”.

So new class of smart device appears more likely than low-cost iPhones, and more in keeping with Apple’s style. What that could be though is anyone’s guess. An extension of Apple TV, or something entirely different? Who knows.

Apple said that it is expecting Q2 revenue to be between $41bn and $43bn, with gross margin dipping slightly further to between 37.5 per cent and 38.5 per cent. A final comment from Tim Cook, who announced a cash dividend of $2.65 per share:

“We’re thrilled with record revenue of over $54bn and sales of over 75m iOS devices in a single quarter. We’re very confident in our product pipeline as we continue to focus on innovation and making the best products in the world.”

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