Co-Written by Joma Jose
Edited by Vani Rao
Apple Posts Record Numbers, but Disappoints on Outlook
Apple (NASDAQ:AAPL) today announced the financial results for its fiscal 2014 first quarter ended December 28, 2013. The company posted record quarterly revenue of $57.6 billion and net profit of $13.1 billion, or $14.50 per diluted share. These results compare to revenue of $54.5 billion and net profit of $13.1 billion, or $13.81 per diluted share, in the year-ago quarter. Gross margins were at 37.9% compared to 38.6% in the year-ago quarter.
The Cupertino, California-based technology company said it sold 51 million iPhones in the first quarter, up 7% from the year-ago period, after the company introduced two new models in September 2013. Sales of iPhones, however, fell short of analysts’ expectations of 55 million units. Apple also sold 26 million iPads during the quarter, also an all-time quarterly record, compared to 22.9 million in the year-ago quarter. In addition, Apple sold 4.8 million Macs, compared to 4.1 million in the year-ago quarter.
Apple has also declared a cash dividend of $3.05 per share of the company’s common stock. The dividend is payable on February 13, 2014, to shareholders on record as on February 10, 2014.
Although Apple reported record sales of iPhones and iPads, it was not enough to satisfy Street expectations. Moreover, its sales forecast for the next quarter of $43 billion was well below the analysts’ consensus at $46 billion. Profits were essentially flat, though per-share earnings improved by about 5% to $14.50, ahead of estimates at $14.09 a share. Revenue increased just 6% to $57.6 billion, slightly better than the estimated $57.5 billion. Apple CEO Tim Cook alluded to company’s plans for new product launches without going into specifics. With the mobile segment witnessing a slowdown in recent months, Apple needs to find a way out to regain stock prices to the level of $700 that it once attained.
New deal with China Mobile to prop up growth
As part of its growth plans, Apple recently signed a contract with China Mobile Ltd, the world’s largest wireless carrier with more than 750 million subscribers. Mr. Cook said the full impact of the China Mobile deal may take time as the carrier extends its 4G wireless service from an initial 16 markets to 300 by the year end. Apple said sales in Greater China, which includes Hong Kong and Taiwan, rose 29% in the December quarter.
While Apple’s global market share may be falling, the company has been able to maintain profitability. The average selling price of an iPhone was $637 in the December quarter, compared with $577 in the previous quarter and $642 in the year-ago period.
Apple’s gross margins, a closely watched indicator that measures the percentage of revenue remaining after considering manufacturing costs, was 37.9% higher than the company’s estimated range of 36.5% to 37.5%. For the next quarter, Apple forecasts gross margins of 37% to 38%.
For the quarter under review, analysts had estimated earnings of $14.07 per share on revenue of $57.5 billion, according to Thomson Reuters. In October, Apple had projected revenue of $55-58 billion. However, Apple projected revenue of $42-44 billion, far below the $46.2 billion expected by analysts. This was mainly because Apple entered the quarter with fewer unfilled orders than a year ago, which had a negative impact on revenue flow. Also, the strong US dollar had hurt Apple’s revenue. The company said 63% of sales were from outside the US market in the December quarter.
Apple is not the only smartphone maker feeling the heat from intense competition. Last week, Samsung Electronics Co. Ltd. (LON:BC94) (KRX:005930), Apple’s main rival in the smartphone market, said that profits of its Mobile division fell in the December quarter due to a sharp increase in marketing expenses. The company forecast weak first half earnings after its fourth-quarter earnings showed a sharp decline.
Worst performance since 2011
Samsung reported operating profit of 8.3 trillion won in the three months ended December 2013. The Suwon, South Korea-based company lagged behind its performance of 9 trillion won in the previous quarter. Analysts were expecting the company to post an operating profit of 10 trillion won, but the profit decline was the first since the third quarter of 2011.
The world’s biggest smartphone maker by shipments said that earnings from its mobile division was flat compared with a year earlier as price competition intensified in the handset market. Its results for the December quarter were also pressured by currency fluctuations that hit its earnings by 700 billion won and a special bonus to employees.
Cellphones and telecom equipment accounted for 66% of Samsung’s fourth-quarter operating profit. Operating margins from the Mobile division fell to 16% from 17.8% a year earlier. The company has been spending heavily on marketing expenses to promote its new line of smartphones, the Galaxy S4 and the Galaxy Note 3, and its smartwatches. Samsung did not disclosed the amount spent on marketing, but said it would try better allocation of costs to lower the ratio of marketing expenses to revenue.
Galaxy S4 sales down
Samsung Galaxy S4 did not post impressive sales and lagged considerably behind iPhone 5S and iPhone 5C along with Chinese phone makers, who are selling smartphones for as low as $100.
Sales of Samsung Galaxy S4 declined to 13 million units in the fourth quarter from 17 million in the third quarter, according to a report from Daewoo Securities Co. Moreover, Samsung is also facing intense competition from manufacturers of low-priced smartphones with the latest features and functions.
LG goes into the red
LG Electronics Inc. said its mobile unit was mired in losses, hit by hefty marketing costs and price competition—a challenge that will likely persist in 2014. The company’s mobile division, the company’s second-largest business in terms of sales, swung to an operating loss of 43.4 billion won from an operating profit of 56.5 billion won a year earlier.
“Overall market competition will intensify due to diversifying consumer needs and intensifying price competition as a result of the expansion of mass-market phones,” LG said, adding that it plans to bolster its product line-up.
Smartphone shipments cross one billion in 2013
Global smartphone shipments topped one billion for the first time in 2013, IDC said on Monday. Smartphone vendors shipped slightly more than one billion units in 2013, a 38% increase over 2012, according to IDC. Samsung Electronics accounted for the largest smartphone market share of 31.3% in 2013, up from 30.3% in 2012. Volumes hit 313.9 million, an approximately 43% increase from the prior year. Apple shipped 153.4 million smartphones in 2013, up nearly 13% from 2012. The iPhone maker’s second-best market share slipped, however, to 15.3% from 18.7%.
Fierce Competition Eating into Profits
As per the IDC report, smartphone sales increased to 38% compared to 2012. However, the numbers do not reflect the beating that the companies are taking on profit margin. For instance, Apple earned $5.4 billion more profit (latest quarter) compared to Samsung ($13.1 billion vs. $7.7 billion). Apple has sold 35 million lesser smartphones than Samsung (51 million vs. 86 million).
The Global Smartphone sales have been in line with IDC’s forecast of 1.01 billion units for 2013. The aggregate sales of vendors surged by 38.0% in 2013 compared to the sales in 2012. In the Global Smartphone market, in the fourth quarter of 2013, vendors shipped a total of 284.4 million smartphones worldwide, which is a 24.2% increase from the 229.0 million units shipped in Q4 of 2012. As per IDC, the future volume growth will be driven by price decrease of the high-end smartphones. Pricing will be the key mantra for all the future sales.
One of the major trends being witnessed in the Global Smartphone market is that the emerging nations are driving the mobile phone subscriber growth. Moreover, mid-range and low-cost smartphones are expected to occupy the centre stage in the future. To ward off the intense competition in the market and retain profitability, high-end smartphone vendors are seeking to create product differentiation. They are also looking at breakthroughs in technology, such as new power source, flexible display, light field camera, and contextual computing. Vendors in the mid-range market are focussing on achieving economies of scale in their supply chain by entering into tie-ups with Own Design Manufacturers (ODMs) for the procurement of various components. More importantly, low-cost smartphone vendors are looking to expand their operations in China, India, and the Middle East due to its established mobile broadband environment.
This quarter has given the warning and smartphone makers must pay heed to it!