Apple will report its quarterly earnings on Tuesday night amid concerns of slowing iPhone growth and declining margins. With the stock at $424.95 it's a long way below Apple's 52-week high of $700 last September, the pinnacle of Apple year as the stock market darling.
Apple is predicted to report third-quarter (April – June) revenue that is on a par with what it was a year earlier (in Q3 1012, Apple posted quarterly revenue of $35.0 billion and quarterly net profit of $8.8 billion). If this proves to be the case, and about half of Wall Street analysts expect to happen, it will be the worst sales performance in ten years (in 2003 revenue declined 1.3 percent).
In April Apple reported its second-quarter (January-March) earnings, with revenue of $43.60 billion, versus $12.30 a share on $39.19 billion a year earlier. It was the company's first profit decline in a decade.
It is thought that the declines are due, predominantly, to slowing iPhone sales.
What do analysts expect from Apple's earnings report?
Nobody is expecting Apple's to announce great results for the quarter. Of the analysts polled, earnings estimates were down across the board, notes Fortune.
Most expect that revenues will be flat or down slightly. The lowest prediction of $32.8 billion for the quarter comes from Susquehanna's Caso compared to $38.3 billion predicted by the Braeburn Group's Ilari Scheinin. The average expectation is $35.24 billion. Apple's Peter Oppenheimer announced expectation of £33.50 billion for the third quarter when announcing the second quarter results.
As for profits, the estimations of analysts have fallen over the past three months. Wall Street Cheat Sheet notes that the average estimate for next quarter’s earnings has fallen from a profit of $10.48 to a profit of $8.15.
Gross Margin is estimated at a high of 38.6% and a low of 36%. Apple's Peter Oppenheimer said he expected 36% to 37%.
How many iPads, iPhones, Macs did Apple sell last quarter?
Fortune has a table showing the individual analyst estimates.
- The highest estimate for iPhone sales this quarter is 30 million, the lowest 25 million. Average: 27 million.
- The highest estimate for Mac sales this quarter is 5.37 million, the lowest 3.41 million. Average 3.85 million.
- The highest estimate for iPad sales this quarter is 22 million, the lowest 14.49 million. Average 18.05 million.
- The highest estimate for iPod sales this quarter is 5.60 million, the lowest 25 million. Average 4.90 million.
How much is Apple making from iTunes and the App Store?
Apple reclassified its revenues in January and consolidated iTunes, Software and Services into one line item. As a result we can now view iTunes as a large and fast-growing business in its own right. Analysts are making the following predictions for that part of Apple's business.
- The highest estimate for iTunes sales this quarter is $5.35 million, the lowest $3.30 million. Average $4.14 million.
So, is Apple going down?
Just because it's not growing at the rate it used to doesn't mean Apple is unsuccessful. The company is still expected to post $35 billion in sales and $6.9 billion in profit. In addition, Apple is the sixth largest US company measured by revenue, and its sales are expected to grow by 9% in 2013, writes CNN Money.
What's going wrong for Apple?
However, the fact that Appe's business is no longer propelling it to the heights it has seen can't be ignored. There are a number of suggestions as to why the company is seeing less success in 2013.
1. The smartphone market has peeked
Smartphones have reached saturation point. These web-surfing phones generated $293.9 billion in sales last year and are now used by more than 1 billion people around the world.
"With more than half of mobile users in the US and developed countries owning a smartphone, and consumers in emerging markets including China and India gravitating toward cheaper models, demand is slowing for high-end devices," writes Bloomberg.
Even Topeka Capital Markets Brian White has faced up to the declining market for the iPhone (it was White who was last year calling for Apple's share price to hit $1,000). According to White, weaker iPhone sales are the primary reason behind Apple's slowing growth, but the profit cycle decline should hit a bottom this quarter.
White told CNBC: "The way I look at Apple ... the high-end smartphone market has hit a wall. They have essentially one phone that they put out a refresh of every year and it caters to the high end of the market and they can't grow anymore because that market is fully penetrated. ... Apple, as well as investors, did not see this wall."
2. The price of smartphones is too high
The other thing that is happening in the smartphone market is that the average price is declining. According to IDC estimates, the average price of a smartphone has plunged to $375 from $450 since the beginning of 2012, writes Bloomberg.
Akin to what happened in the personal-computer industry in the late 1990s when people started to snap up cheap PCs driving the price down. Price wars can quickly lead to industrywide carnage, writes Bloomberg.
"The market is becoming less about speeds and feeds, and more about price," IDC analyst Kevin Restivo told Bloomberg.
But it's not just Apple that is suffering from the declining market. Samsung lost over $25 billion from its market capitalization in June and HTC missed analysts’ estimates for its second quarter following disappointing sales of its HTC One handset. Even BlackBerry’s poor-selling Z10 has had a price cut.
3. Apple is failing to address emerging markets
There's another reason for declining prices. The less-expensive phones, such as those from Huawei, have been gaining market share. These cheaper phones are considered necessary to gain market share in emerging markets, the one area where there is still room for smartphone growth.
For example, currently India holds a 3% of the global smartphone market. According to data from IDC, by 2017, India is expected to have a 10% of the smartphone market – making it the third-largest smartphone market. (By contrast, IDC researcher Manasi Yadav claims that 120,000 iPhones were sold in India between January and March). There is still room for growth here.
It's not just reducing the price of the iPhone that will help Apple win this lucrative market. Apple has been boosting sales of the iPhone in India recently via an aggressive pricing strategy that pushes monthly installment plans. According to Bloomberg Apple is also pushing its iTunes store in the Indian market.
However, while Apple is focused on India (and China) it has dropped the ball in Russia: The three biggest Russian wireless carriers have all recently stopped selling Apple's iPhone.
4. A low cost iPhone will hit Apple's margins
The issue with dropping the price of the iPhone is that it will negatively affect Apple's margins. The low prices and popularity of the iPad mini and older iPhone models are already hitting Apple’s profitability.
Over the past few years, Apple has been making a gross margin of more than 50% on the iPhone 5, however, the older models sold at lower prices leave Apple with a gross margin of 35% or less, ISI Group Brian Marshall told Bloomberg. As a result, in the second quarter Apple’s gross margin fell to 37.5% from 47.4% a year earlier.
This is one area where Apple will struggle to compete with Samsung. As one of the largest manufacturers of chips, displays and other smartphone parts, Samsung can reach lower price points more easily than rivals who must buy those components.
Apple will also meet competition from other companies that can keep margins low. ABI Research analyst Michael Morgan told Bloomberg: "It’s the Chinese companies who know how to survive on tiny margins that are ready for the fight that’s about to ensue."
5. Apple Maps was a bit of a disaster
Apple shares have dropped 39 percent from a record in September after iOS 6 launched and with it the fiasco that was Apple Maps. Now it looks like Apple is set to improve it's maps offering with the acquisition of HopStop and Locationary. HopStop provides directions to major transit systems and biking routes. Locationary collects and analyzes data to help create more precise maps. Google paid $1.03 billion last month to buy an Israel startup called Waze that relies on social networking to monitor local traffic conditions, notes AP.
6. Apple v Samsung – it's just getting started
Another issue that could be a challenge to Apple's ability to grow it's market share is the ongoing battle between it and Samsung. This is set to get interesting when, on 31 July the US International Trade Commission (ITC) gives a ruling on a second Apple v Samsung trade dispute.
This ruling may go in Apple's favour, with the ITC ruling that Samsung has infringed Apple patents, and leading it to block older Samsung products. However, in an earlier ruling back in June, the ITC ruled in favor of Samsung, stating that Apple infringed Samsung communications patents, and that case could lead to Apple products (like the iPhone 4) not being allowed into the US, notes Forbes. (The case is now under Presidential review).
So, on 31 July potentially, both of the world’s major smartphone and device makers could have products banned from the USA.
7. Blaming Apple's Lack of Innovation
Another issue effecting Apple's share price is a perceived innovation vacuum. Various reports suggest that Apple is working on a smart watch and even a television offering, but these are unlucky to emerge before the end of 2014.
Some point to the fact that Steve Jobs was a visionary leader while Apple CEO Tim Cook isn't.
What's going right for Apple?
Despite the challenges, Apple has a lot going for it. For example, Apple has an ecosystem of apps and accessories built up around its iPad and iPhone that the competition can only dream about. It also has music, media, software and services that it can offer.
What new stuff is coming from Apple?
Speaking of which, Apple is about to have its most innovative year ever, according to CEO Tim Cook. He claimed that Apple will launch a raft of new exciting products this autumn.
Reports suggest that Apple will release its next-generation iPhone (the iPhone 5S or iPhone 6) in the autumn, along with, potentially, a low-cost iPhone. We can also expect to see new Macs, including the new Mac Pro.
Along with the hardware updates, Apple has a number of software updates coming, including iOS 7 and OS X Mavericks. Of interest to some is the fact that Apple revealed that iWork (Pages, Numbers and Keynote) will gain new iCloud integration that will essentially make them into Apple's version of Google Docs as well as ramping up the competition with Microsoft Office (due to launch in 2014).
How Apple is keeping investors happy
However, it seems that what ever good work Apple does, the happiness of investors doesn't necessarily correlate. Over the past few months Apple has gone to great length to please investors. For example, in April Apple announced a 15% dividend increase and a 32-month, $60 billion stock buyback program, the lengths Apple went to in order to offer this are quite extreme.
Apple's bond sale
Despite having $145 billion in the bank, Apple decided to reach out to the debt market to offer $17 billion in bonds in order to pay money back to investors. The dividend increase resulted in an approximate 3% yield on the underlying stock price: "Admirable, respectable, but not earth-shaking," notes Fool.
It's not been great news for those who bought the bonds either. At the time, the yield on the US 10-year was 1.7%, and Apple was able to borrow at just 2.4%. But since then the yield on the US 10-year has surged to 2.41%. As a result, "Those who bought Apple bonds are getting slammed," wrote Business Insider.
Was Apple wrong to tie stock to its execs
Another move to appease investors was Apple's decision to tie the size (and value) of its upper management's stock option packages to S&P 500 performance. This is "tragic," according to Rocco Pendola for The Street. Pendola suggests that this is a rebuke of Steve Jobs way and "a perverse validation of Wall Street and the stock market".
"As if Wall Street should play any role whatsoever in determining how much anybody from the CEO to the cleaning crew at Apple makes, writes Pendola. "It's astonishing that anybody at Apple would go along with the notion of freaking Wall Street dictating how much somebody gets paid"