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Apple Faces Old Question of What’s Next Even After Record Profit

Apple Inc., after posting its best fiscal third-quarter profit ever, is facing fresh questions over whether it can keep making hit products.
Apple Watch | Photo: Courtesy
  • Bloomberg

SAN FRANCISCO, United States — Apple Inc., after posting its best fiscal third-quarter profit ever, is facing fresh questions over whether it can keep making hit products.

Even though iPhone sales climbed 35 percent to 47.5 million units in the period that ended in June, the result fell short of the 48.8 million shipments projected by analysts. That, plus a revenue forecast for the current period that missed estimates, triggered the steepest post-earnings drop in Apple’s shares since January 2013, when Chief Executive Officer Tim Cook was under scrutiny over his ability to keep up Apple’s pace of innovation and sales growth.

While Cook has succeeded in introducing an entirely new category with the Apple Watch, sales remain modest, indicating that Apple will have to keep relying on the iPhone to fuel growth. The company probably shipped at least 1.9 million smartwatches since it debuted in April, short of the 3 million to 5 million projected by analysts, according to data compiled by Bloomberg.

“Investors are asking how much earnings upside is left in the next year,” said Gene Munster, an analyst at Piper Jaffray Cos. “What’s next?”

Apple shares fell as much as 8.8 percent in extended trading. The stock declined 1 percent to $130.75 at the close in New York, leaving it up 18 percent this year.

Cook said on a conference call with analysts on Tuesday that the iPhone “has a lot of legs to it” and that 73 percent of old iPhone owners still haven’t upgraded to the new device, which was introduced last September.

“We view that as a very bullish sign on the future that there’s a lot of head room left for upgraders,” Cook said. “We also are incredibly happy to see the highest Android switcher rate that we’ve observed.”

China Growth

Katy Huberty, an analyst at Morgan Stanley, pushed back against those assertions during the call, saying the company is facing some large comparisons. Apple sold a record number of iPhones in the final three months of 2014, the all-important holiday shopping season.

One growth area is greater China, where revenue more than doubled to $13.2 billion. Sales of the iPhone rose 87 percent in China in the third quarter, Luca Maestri, Apple’s chief financial officer, said in an interview.

“We remain very confident” in China, Maestri said.

Cook has said he expects China to eventually become Apple’s largest market, and the company is rushing to double the number of retail stores in the country by the middle of next year.

Sales in the Americas region rose 15 percent to $20.2 billion, the Cupertino, California-based company said in a statement.

Foreign Exchange

The new larger-screen iPhones, especially the 5.5-inch version, are helping improving the average selling price by $99, or 18 percent, from a year ago, Apple said.

Total revenue, which rose 33 percent to $49.6 billion compared with a year ago, would have been 8 percent higher, Maestri said.

“FX has been a significant hit in many ways,” he said.

Net income in the fiscal third quarter, which ended in June, was $10.7 billion, or $1.85 a share, marking the best April-through-June period since 2012.

Analysts on average had forecast third-quarter profit of $1.81 a share on sales of $49.4 billion. The gross margin was 39.7 percent, topping the company’s outlook for 38.5 percent to 39.5 percent.

Apple forecast continued growth, saying it may have revenue of $49 billion to $51 billion in its fiscal fourth quarter, which ends in September. That was short of the average estimate for $51.1 billion, according to data compiled by Bloomberg.

New IPhones

Apple has sold 183 million iPhones in the first three quarters of this fiscal year, up 41 percent from the same period last year. Apple’s suppliers have already started initial production of new iPhone models, in the same sizes as the 6 and 6 Plus with similar exteriors, people familiar with the matter have said. The company typically brings out new iPhones in September.

“The investor focus should turn squarely to the new iPhone and whether they can top the record breaking December quarter of 2014 when they sold 74.5 million phones,” Walter Piecyk, an analyst at BTIG LLC, said. “We’re going to have this, as we always do, this September lag quarter as everyone waits for the new iPhone product launch, which is still the largest driver of whether company grows earnings or not.”

Apple Watch

Apple didn’t break out unit sales of the Apple Watch, which was introduced in April. Still, revenue in the category containing the device rose by about $950 million during the past quarter compared with the first three months of the year. If the Apple Watch had an average selling price of $499, the average estimate of five analysts surveyed by Bloomberg, that would suggest the company may have sold at least 1.9 million watches. That figure, however, doesn’t factor in revenue generated by customers buying multiple watch bands or other changes in the segment, such as iPod sales declining, according to Maestri.

“We looked back at similar periods for iPhone and iPad when they were originally launched, and we’ve actually sold more Apple Watches than we sold iPhone and iPad at the time,” Maestri said in an interview.

IPad sales continued to suffer, with tablet shipments falling 18 percent to 10.9 million, marking the sixth straight quarter of declines and matching analysts’ average estimate. Apple is working on a new larger-screened version of the iPad that could appeal to corporate customers looking to use the device as a replacement for a laptop computer, people familiar with the plans have said.

Mac shipments climbed 8.7 percent to 4.8 million, matching projections.

By Tim Higgins, with assistance from Beth Mellor. Editors: Jillian Ward, Reed Stevenson.

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