Thankfully, Apple Inc. (NASDAQ:AAPL)‘s earnings weren’t a complete disaster. It certainly could have been better, but expectations were low going into the quarter. Because of this, Apple Inc. (NASDAQ:AAPL) was able to slide through second base without getting out.
Earnings demographics
Source: Apple
I believe that the second quarter highlighted a lot of issues that the company is currently facing, but a lot of opportunities for growth, as well. The greater China segment reported a 14% year-over-year decline in revenue. The falling revenue was due to difficulties in attracting demand for high-end devices. After all, most of China does not have 4G, so 4G LTE capable devices are almost unnecessary.
I think that Apple Inc. (NASDAQ:AAPL)’s strategy will eventually improve in China. The issue with high-end devices and the lack of a contract with China Mobile should eventually be addressed. The weaknesses in this segment might disappear once Apple launches a low-end device that can be sold in greater quantities.
Apple will also have to address the issue of knock-offs, but gaining political support in China to do this could be difficult. However, the company’s enforcement of intellectual property against Chinese rip-offs is likely to be more successful than Apple’s ongoing lawsuits against Samsung.
The company is experiencing difficulty in its European segment, which reported an 8% year-over-year decline in revenue. The European economy may eventually recover going into 2014 (most forecasts assume flat GDP growth). However, don’t hold your breath; most of Apple Inc. (NASDAQ:AAPL)’s growth will have to come from new product releases and a successful roll-out of low-end devices in emerging markets.
Financial results
Source: Apple
Apple reported 27% year-over-year decline in its iPad segment. Unit shipments also fell 14% year-over-year. The demand in this segment is being affected by phablets (smartphones with screens larger than 5”). In classical microeconomic theory, demand falls in anticipation of new product releases. Therefore, this drop in demand for tablets is cyclical, and until the iPad 5 is released going into the third quarter, year-over-year growth is unlikely.
The year-over-year demand for iPhones was up 15%. This jump in revenue was largely driven by the release of the iPhone on T MOBILE US INC (NYSE:TMUS). The demand for iPhone was strong, and it helped increase iOS market share in the United States by 3%.
What was slightly disappointing was the tapering in demand for iTunes and software in the past quarter. But, without any significant gains in the install base, this shouldn’t have been too surprising for analysts.
The company reported earnings of $7.47 per share (diluted). Analysts were anticipating diluted earnings per share of $7.32. Apple Inc. (NASDAQ:AAPL) beat earnings estimates by a fairly narrow margin, but a beat is still a beat on the bottom line.
Analyzing guidance
The company issued revenue guidance in the range of $34 billion to $37 billion for the next quarter. The guidance range is pretty large, but most analysts are going to anticipate the company to report at the higher end of the range. The good news is that the revenue guidance is above the previous year’s reported results of $36 billion. It seems that the management team is well on track to releasing the next generation iPad and iPhone device in the third quarter, which helped ease rumors of supply chain issues.
