Expectations for Apple have grown so high that the company finds it hard to satisfy investors, despite delivering a record quarter in terms of revenue, it announced on Jan 23. Shares in the technology company dived over 10 percent in after-hours trading due to lower guidance and flat earnings growth.
“No technology company has ever reported these kind of results,” said Apple CEO in a call with investors, Jan 23. The Cupertino, Calif., company had just announced record revenues of $54.5 billion for the first quarter of 2013, up 18 percent over the same quarter a year ago.
Yet the stock market had expected $54.9 according to consensus estimates, a miss of less than 1 percent. Earnings per share also shrank 0.4 percent to $13.81, down from $13.87 a year ago, but a bit higher than expectations of $13.53.
“The growth was fueled by record iPhone, iPod and iTunes sales,” says Apple Chief Operating Officer Peter Oppenheimer about the record revenues.
The market was still disappointed, as shares fell more than 10 percent in after-hours trading to $460 at 18:19 p.m. EST. Analysts had expected that earnings were not going to grow this quarter. Apple had guided toward a much lower operating margin compared to a year earlier.
The company said it expected the margin to come in at 36 percent, compared to 44.7 in Q1 of 2012. It actually managed to beat that guidance by 2.6 percent, as the actual gross margin was 38.6 percent. Why didn’t the stock rally?
Apple’s Track Record is Too Good
Part of the reason is that Apple has been very good at providing low guidance and managing market expectations in order to surprise to the upside later. This is the reason that investors often expect Apple to crush its own guidance and official market expectations, which wasn’t the case this time.
IPhone sales, for example, set a new record, rising 29 percent over Q1 2012 to 47.8 million units. But that was just as much as the market had expected, so not enough for spoiled Apple investors.
“We are producing our best products ever and the execution of our engineering and sales teams … is phenomenal,” said Oppenheimer in the conference call to assuage investor concerns over cuts in orders for iPhone parts and pressure from competitors such as Samsung. “The iPhone continues to be embraced by government agencies and businesses across the globe.”
Apple’s CEO Tim Cook went even further to dismiss speculation about decreasing iPhone sales based on reports that Apple slashed orders for component parts in recent weeks.
“I would suggest it’s good to question the accuracy of any kind of rumor that they’ll plant. Even if a particular data point were factual, it would be impossible to accurately interpret that data point as to what it meant for our overall business,” he said in the call with investors.
Some Data Indicates Real Issues
Yes, some of the data released indicated that Apple could have a rough year in 2013. First, the company itself guided toward much lower revenue in the second quarter of 2013, which it expects to come in at $41 billion–$43 billion. The gross margin is further expected to decline to 37.5’38.5 percent, partially because of the iPad mini.
In terms of units sold, the iPad mini has been a big success, and Apple had trouble meeting demand last quarter. “We could build enough iPad minis to come to a demand balance,” said Tim Cook looking ahead to the upcoming quarter. Sales of the iPad increased 48 percent year-over-year to 22.9 million units, 2 percent higher than expectation. The problem is that the iPad mini is far less profitable than the normal iPad or Apple’s other products.
“IPad Mini gross margin is significantly below the corporate average,” says Peter Oppenheimer, which is reflected in the numbers. As shipments increased 48 percent, revenue for the total iPad category only increased 22 percent.
Other negatives included collapsing sales of iMacs and iPods, which were down 21 percent and 18 percent respectively compared to the first quarter of 2012.
“We were significantly constrained with respect to the new iMacs and were only able to ship them in the final month of the December quarter. We believe our Mac sales would have been much higher absent those constraints,” says Oppenheimer. He also points out that the first quarter of 2012 was a tough comparison as it included 14 weeks, whereas the first quarter of 2013 was only 13 weeks long.
Tim Cook, however, is not worried about the future, as Apple is in for the long haul. “We aren’t interested in revenue for revenues sake. We could put the Apple brand on a lot more things and sell a lot more stuff. That’s not what we are here for. We want to make the best products.”
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