LONDON – Mr Market is rather confused about Apple Inc’s quarterly results released in California last night. Although the company beat Wall Street’s pre-results expectations, the effect of a first annual sales decline since 2001 put our erratic friend into a funk. Even though the sales decline was well telegraphed, Mr Market has been excited about Apple shares in the last five months, pushing the price up by almost a third. But in post-results trade last night, the stock lost a couple percentage points triggering “Apple disappoints” media headlines.
Disappointing is hardly what those who own the stock will be thinking today. There’s plenty of encouragement in the numbers for investors, i.e. those who buy into the company vision, rather than traders speculating in the share. There was always going to be a point where growth in sales of Apple devices would slow or even reverse. And after three successive quarters of revenue declines, it’s not like that is news anymore.
Although Tim Cook’s team has teams innovating in developing industries like artificial intelligence, television content and driverless cars, the real game for Apple Inc is growing its business from selling into the eco-system of around a billion devices now owned worldwide. That’s the “Services” line in the Apple accounts; the high profit margin number which is now second only to sales of the mighty iPhone; and the one that is up 24% to $24bn for the year to end September. Cook says the target for the Services division to be the size of a Fortune 100 company by next year – a goal it is on it track to achieve.
Right now Apple has still the best of all worlds with an expanding eco-system of world-beating products where users are catching on to seamless services like Apple Pay (transactions up 500% year on year – watch out banks); Music streaming (up 22% yoy – watch out terrestrial radio); Cloud storage and the App Store. Apple also has more than $200bn in unallocated cash to keep dividends flowing and fund moonshots that could move the needle. These are the bull factors that excite long-term investors like Warren Buffett’s team at Berkshire Hathaway, voracious acquirers of Apple stock in recent quarters. Â
So instead of watching how quickly iPhone sales recover in China, I’ll be taking note of tomorrow’s media event in Cupertino where insiders expect Apple to launch a new version of the iMac featuring a revolutionary iPhone-like touchscreen. Another incremental breakthrough that will kickstart the sale of millions more devices into an already massive interconnected pool of consumers for bespoke Apple service products. Which is the real brilliance of the Steve Jobs strategy. – Alec Hogg  Â
By
(Bloomberg) — Apple Inc. investors expected the iPhone maker to take advantage of Samsung Electronics Co.’s weakness in the smartphone market and issue a robust holiday sales forecast. When the revenue projection was barely higher than analysts’ estimates, shares fell as much as 3.1 percent in extended trading.
“There was expectation for better guidance in the context that Samsung isn’t doing so well and these guys should be winning market share,” said Abhey Lamba, an analyst at Mizuho Securities in San Francisco.
Faith in Apple’s growth prospects — already rattled by lower-priced competition and saturation in the smartphone market — was shaken further Tuesday after the world’s most valuable company reported its first annual sales decline since 2001. The company’s revenue in China, the driving force behind stronger sales in 2015, declined 17 percent in this fiscal year, prompting analysts on a conference call to raise questions about the source of further expansion.
Apple forecast sales of $76 billion to $78 billion for the last three months of 2016, compared with analysts’ average estimate of $75.4 billion. The numbers don’t seem to account for Samsung’s decision earlier this month to stop manufacturing the Galaxy Note 7 after the phones and some replacement models overheated and caught fire. Samsung’s most expensive handset was intended to compete with Apple’s iPhone 7 for customers’ holiday spending.
Apple Chief Financial Officer Luca Maestri embarked on a vigorous defense of the earnings forecast after facing repeated questions on the topic in a conference call with analysts.
Apple 1st decline in qtly earnings for 10 years – income $46.9bn – profit margin 38% – iPhone sales -5.3%, iPad -6.8% – shares down 2.9%
— David Buik (@truemagic68) October 26, 2016
Efforts to outperform last year’s $75 billion in holiday quarter sales are rendered harder by a $548 million patent infringement payment Apple received from Samsung a year ago as well as the dollar’s gains, Maestri said. Pent-up appetite for the larger screened iPhone 6 Plus and 6S Plus had also accounted for much of the demand from China, which has now been at least partially satisfied, he added. Those factors will make it more difficult for a year-to-year comparison, Maestri said in a telephone interview.
International sales accounted for almost two-thirds of Apple’s $46.9 billion fiscal fourth-quarter revenue, the company reported.
Apple said its gross margin forecast, a closely watched measure of profitability, will be 38 percent to 38.5 percent in the three months through December. That compares with analysts’ forecasts of 38.9 percent.
The guidance implies that profit next quarter will also disappoint, said Toni Sacconaghi, an analyst at Sanford C. Bernstein. The “stock has had a good run, so perhaps some hope the guide would be stronger,” he said.
Apple shares gained 22 percent in the past three months, closing Tuesday at $118.25, before the earnings were announced, the highest price since December.
The average sales price of the iPhone fell to $619 in the fiscal fourth quarter from $670 a year earlier as some customers opted for the cheaper, smaller iPhone SE over the higher specification 6S and 7, which was introduced Sept. 16. The average price should recover by the end of the holiday quarter, Maestri said.
Even as Apple sold 45.5 million iPhones in the quarter, more than analysts’ projected, Maestri and Chief Executive Officer Tim Cook said that the company had been unable to manufacture enough of the new iPhone 7.
“Demand is outstripping supply in the vast majority of places, particularly in the iPhone 7 Plus,” Cook said, referring to the larger screen version of the new handset. “We’re working very hard to get them into customers’ hands as quickly as possible.”
