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"We're Winning": iPhone Sales Up, Margins Hit

By Oonagh Reidy | Tuesday | 29/10/2013

Apple beats analyst expectations, but thinning margins leave investors worried

Shares fell after hours in trading, as Apple announced fiscal quarterly earnings for Q4 2013, with gross margins down to 37%  (-3%) and net profit fell to $7.5bn - down $0.7 bn.

The result was a "strong finish to an amazing year", Apple CEO Tim Cook declared at an earnings call. 

"Apple business is stronger than ever. We're winning with our products" in customer satisfaction, usage and loyalty, he added, with colourful iPhone 5c, "forward thinking iPhone 5s" and "dramatically thinner, lighter" iPad Air.  

Cook says Apple is targeting all segments of the market with iPhone 4S at entry level, 5c at mid tier and iPhones 5s targeting premium end. 

Apple's $37.5bn revenue for Q4 - up 4% - its highest September sales ever -  at the high end of guidance range. It predicts revenues for Q1 2014 of $55bn- $58bn.

Gross margin fell to 37% - down 3%, and margin is also predicted to be lower - forecast at between 36.5%- 37.5% for fiscal first quarter 2014. 

"Guidance was disappointing as better revenues were not enough to offset gross margin pressure," said analyst Peter Misek, Jefferies & Co. 

"We think gross margin pressure is short-term/one-time in nature and would use stock price weakness as a buying opportunity." 

Lower margins were blamed on higher deferred revenue relating to software, a richer mix of new higher cost iPads and iMacs at lower price points, according to Peter Oppenheimer, Apple's CFO.

iPhone

150 million iPhones were sold in total during fiscal 2013, Apple revealed today.

33.8 m sold in Q4 - up 26% "ahead of our expectations", said Oppenheimer - with growth in developing markets including Latin America, Russia and India. 

Demand in China has been "especially strong" and Apple is leading smartphone maker in US, he said. 

Apple still sees large potential in the mobile market, citing current global smartphone penetration at just over 50%, which is expected to grow to 1.7bn in 2017. 

14.3 m iPhones were in channel inventory, at the end of the quarter. On supply of iPhone 5s, Cook said Apple is "doing well on supply," admitting demand is robust but is "confident" Apple can ramp up demand. 

Apple CFO also took a swipe at Google Android (which is making massive gains on iPhone), insisting Apple loyalty is "much higher than the competition", and users spend longer on their phones than Android users. 

iPad

He also said iOS penetration is growing in enterprise, and iPad demand exceeded expectations in q4 - with "robust" sales in Japan, Middle East, and back to school demand in US and Canada, although sales rose 100,000 to 14.1 million. 

iPad accounted for 90% of tablet activations, he added.

Cook also cited the "huge" tablet market opportunity, predicted to grow to 400 m units by 2017. "I think it's going to be an iPad Christmas", he added referring to the new iPad Air. 

However, Apple is "unclear" whether it will meet demand for the iPad mini with Retina. "It's unclear whether we will have enough for the quarter or not. We know how many we will have, but you really don't know the demand until you start shipping."

However, global PC market fell 10%, so was Cupertino was happy with 7% fall in Mac sales. 

iOS enterprise penetration remains strong - companies like Dr Pepper and Japan Railway use iPads and has 94% penetration in the education market, which is "unheard of", says Cook. 

"We see significant opportunities ahead of us in current product categories and new ones", Cook said.   

"We believe we can use our skills to enter other products categories". 

Apple Stores

Apple Store sales rose 6% to $4.5m - with very strong iPhone sales, up 36%. There is now over 410 Apple stores, 162 of which outside US. 

In fiscal 2013, 49 new Stores opened, and projects 30 new store openings in 2014 fiscal - two thirds of which will be outside US. Apple is also focusing on its China retail footprint, Cook said. 

Average revenues per Apple store were $10.9 m, with 18,500 visitors per week, on average, crossing the threshold. 

Cook also claimed Apple is making substantial contributions to society improving working conditions, which is a bit rich considering Apple's third party suppliers have a horrendous record when it comes to labour rights in China. 

Apple's operating cash flow $54m - completed 15 strategic acquisitions during the quarter. 

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