Decelerating Growth
In the last quarter, Apple Inc. (NASDAQ:AAPL)’s total revenues grew 11% Y/Y to $43.6 billion, and its net income was $9.5 billion, which represents a net income margin of 22%. Apple Inc. (NASDAQ:AAPL)’s net income a year ago stood at $11.6 billion, and this decrease in 2QF’13 was largely attributable to the company selling more low-end phones which have lower ASPs. In the most recent quarter, Apple Inc. (NASDAQ:AAPL)’s gross margins stood at 37.5% which was a decline of almost 10% compared to a year ago gross margin of 47.4% for the iPhone maker.
Apple Inc. (NASDAQ:AAPL) had been growing its iPad unit sales to a solid 19.5 million units, which brought in revenues of $8.7 billion, representing a 40% Y/Y increase. But the increase in iPad revenues was overshadowed by the only 3% growth in iPhone revenues and no new announcements of a significant product launch.
Lowering prices; competition is rampant
Apple has been trying to make the iPhones more affordable in developing countries in Asia. The company has been selling more of the older generation iPhone 4 and iPhone 4S units relative to the newer handsets in the Asian markets. As a result of the price cut, Apple’s overall average selling price trickled down by roughly $28 in the last quarter, compared to 1QF’13.
In line with the iPhone, Apple has been slashing the prices of the iPad as well. Apple’s lower priced iPad Mini gained sales momentum, and trickled down the average selling price of iPads by roughly $18. If Apple can continue to grow the unit sales of its iPhone and iPad product lines throughout the rest of 2013, the company will be fine with lowering its prices further.
The company continues to face a lot of competitive pressures in the mobile devices market especially from Google Inc (NASDAQ:GOOG) Android devices. Google Inc (NASDAQ:GOOG) is increasingly becoming a hardware device player with its Nexus product line, and Motorola Mobile as well. And also the company’s Android OS leads the smartphone industry by a big distance. Android OS had a 75% market share in smartphone shipments, and Apple’s iOS had only 17.3% piece of the pie in the first quarter of calendar year 2013, according to IDC.
As a result, Apple has to cut down prices of some of its handsets to stay competitive with Google Inc (NASDAQ:GOOG) and Samsung. If the company can drive up its unit sales across the globe and strike up carrier partnerships in China, the company can afford to lower its margin profile, but bring in more dollar profits.
Product pipeline
Speculations about Apple’s product introductions have been rife, and vary widely. And recent news of the company has been suggesting that Apple has been ordering larger screen prototypes of its iPhone and iPad devices to keep up with competitors. Apple’s biggest rival, Samsung has been performing very well and is now the top smartphone maker with 33.1% market share, whereas Apple had 17.9%, according to Strategy Analytics.
And finally Apple is reportedly taking measures to test larger-screen phones which has been very popular among consumers. If Apple can come up with bigger screen sets than the 4 inch iPhone 5 and the 9.7 inch iPad, the company can reinvigorate its product line-up and win over more customer groups.
Guidance and Consensus
The recent weakness in Apple’s stock was partially attributable to the company’s outlook for the June quarter, which was lower than what many investors were expecting. In the June quarter, the company expects its top-line revenues to come in between $33.5 billion and $35.5 billion, which is pretty much flat from the year ago quarter. And the company expects its gross margins to trickle down to 36%-37%, which is a slight sequential decline from 37.5%.
Many analysts and investors have stated their disappointment in Apple’s weak guidance, which reduced the expectations from the firm in the near-term. The sell-side estimates have an EPS consensus of $7.31, on revenues of $35.09 billion for Apple’s June quarter. If Apple can surpass the consensus estimates, the stock can move upwards as the company has been receiving a lot of pessimistic views.
The Bottom Line
Apple Inc. (NASDAQ:AAPL) still has a large and installed fan-base for its products and services which will aid in bringing newer devices to the market. The company has been slow to react to some of the consumer demands in the smartphone marketplace, and if Apple can manage to build newer and innovative products the company can grow its top and bottom line in the long-run. And patient investors will be rewarded handsomely, irrespective of the short-term earnings miss or hit.
The article Apple Earnings: Can it Deliver? originally appeared on Fool.com and is written by Ishfaque Faruk.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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