Apple profit down despite higher sales

In one of the more closely watched technology earnings, Apple Inc. said Monday that profit for the fourth fiscal quarter dropped despite higher iPhone sales. Let’s take a look at the coverage.

The Wall Street Journal has a mostly positive lead, pointing out pricing and sales were stabilizing:

Apple Inc. reported a third consecutive quarter of declining profits, but showed signs that both prices and profit margins are stabilizing despite heightened competition for its iPhone and iPad.

The company said it sold 33.8 million iPhones in the fourth fiscal quarter, ended Sept. 28, up 26% from the same period a year earlier.

The average selling price of an iPhone declined 6.6% from a year earlier, but less than 1% from the preceding quarter.

Revenue from the iPhone rose 17% from a year earlier and represented more than half of Apple’s quarterly total of $37.5 billion, which was up 4.2% from a year earlier. Apple released two new iPhones near the end of the quarter instead of one as in past years.

Those sales couldn’t stem a third consecutive slide in profit from a year ago for the Cupertino, Calif., company. Profit fell nearly 9% to $7.5 billion.

The New York Times story reported that most other companies would be thrilled to earn $7.5 billion – over a lifetime:

Apple’s profit remains the envy of the tech industry — and most other industries. But the slowdown of its growth has become a concern for some investors. Apple is counting on new products to improve its bottom line, especially during the coming holiday season, the most lucrative time of year for hardware makers. In September, the company released two new iPhones, and last week, it introduced new Mac laptops and two new iPads, the company’s popular tablets.

On the earnings call, Timothy D. Cook, Apple’s chief executive, said: “It’s going to be an iPad Christmas.”

And there is little doubt that iPads will sell in huge quantities in the next quarter. But there is doubt about which iPads will sell best — the new iPad Air, which is the larger and more expensive model, or the iPad Mini.

The Mini has become a popular choice among consumers since it was first released last year. But the device has a smaller profit margin than its more expensive cousins, and its high sales may be part of the reason behind a 13 percent decline in overall iPad revenue.

That decline in revenue, combined with flat sales, is particularly troubling at a time when the tablet market is still young and growing quickly. Apple sold 14.1 million iPads over the quarter, up barely from 14 million in the quarter a year ago. That is far from the pace of the market: manufacturers are expected to ship 184.4 million tablets in 2013, up from 120 million last year, according to Gartner.

The Financial Times reported on comments made about cash allocation as activist investor Carl Icahn pushes for more buybacks:

Apple said more than $36bn had been returned to shareholders in the past five quarters through dividends and share buybacks, as the company comes under pressure from activist shareholder Carl Icahn to scale up its cash return programme to $150bn.

Mr Cook said the board was engaged in an “ongoing” discussion about capital reallocation, and would “actively seek” feedback from investors on its future plans. “We will announce any changes to our programme in the first part of the new calendar year,” he said.

Apple said that with more than three-quarters of its cash now held offshore, its domestic cash reserves that are available for paying dividends and buying back shares have “stopped accumulating”.

“We have invested essentially all of the increase in net cash since the beginning of our capital return programme in 2012,” said finance chief Peter Oppenheimer.

Apple gave guidance on revenues for the crucial Christmas quarter of $55bn to $57bn, ahead of Wall Street’s current expectations, but with gross margins of 36.5 per cent to 37.5 per cent, on the lower end of analysts’ expectations.

Its stock initially fell 4 per cent in after-hours trading but then recovered to gain as much as 1 per cent, as Apple explained that margins would be closer to 38.5 per cent if not for the deferred revenues from its software giveaway.

The Forbes headline said that earnings failed to impress but led with the fact that they beat analysts’ expectations:

After reporting earnings that topped analysts estimates on demand for the iPhone and a forecast for the holiday shopping season that disappointed investors, Apple CEO Tim said the company expects that redesigned iPads will help deliver an “iPad Christmas” and said it still expects to release products in new product categories.

“If you look at the skills Apple has from hardware, software and services and an incredible app ecosystem— these set of things are very, very unique,” Cook said today when asked about plans to enter new markets. “We obviously believe that we can use our skills in building other great products that are in categories that represent areas where we do not participate today.”

Apple is being pressed to step up the pace of innovation and roll out new products to fend off new offerings by rivals including Samsung and Google. So far this year, it’s updated its MacBook notebooks, iMac desktop, iPhone, iPad tablets, Mac Pro high-end workstation as well as the software that powers those devices and computers. That software, including the iOS 7 and Macintosh operating systems, and iLife and iWork apps, are now available free to customers, a move that Cook said is aimed at making sure users have the latest version of its programs.

And it’s that ability to innovate that investors are seeking, especially as companies look to holiday sales to boost numbers. Earnings may have been down, but they’re still strong and Apple has room to capture more market share. No matter how you look at it, $7.5 billion is a lot of money.