Apple profits drop 18%- first decline in 10 years

24/04/2013

Apple has posted its first fall in profits for nearly 10 years, dropping 18% as the electronics giant struggles to keep up with growing competition from the likes of Samsung and Google in the smartphone and tablet market.

Watch this video from the Daily Telegraph's Matt Warman, dicsucssing the challenges Apple faces ahead.

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Apple profits fell to $9.5bn for the first quarter of 2013, down from $11.6bn in the same period last year, marking a drop of £1.38bn.

However, results were better than many had expected, as strong iPhone and iPad sales boosted revenues to $43.6bn.

"Though we've achieved a credible scale and financial success, we acknowledge that our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012," Tim Cook, chief executive of Apple said.

The company said it sold 37.4 million iPhones worldwide in the three-month period.

In contrast, Samsung is expected to shift 65million phones over the same period – up from 41million last year.

Soon after announcing the profit fall, the Apple board cleared the way to buy back $100bn worth of shares by 2015.

It is rumoured that higher component prices and the lower costs of some of its products were what ate into its profit margins, alongside stronger competition in the smartphone and tablet markets.

Weaker demand - largely because of the competition issue - has been blamed for the 40% drop in Apple's stock value since September last year.

The company sold 37.4m iPhones in the quarter, compared to 35.1m in the same quarter the year before. It sold 19.5m iPads compared to 11.8m in the previous year. Sales of Macs were down, too. Apple shares fell below the $400 (£262) mark last week for the first time since December 2011.

Despite the fall, the markets responded positively, buoyed by the fact that the results were not worse than expected and off the back of the sales results.

Apple leapt 5.5% in after-hours trading, also boosted by the buy-back plan.

Autumn launch for next iPhone?

Apple's CEO Tim Cook told investors and analysts at the company's annual earnings conference call that the follow up to the iPhone 5 will be coming before the year is out, alongside a tablet.

This information would tally up with more recent rumours, dictating the iPhone 5S has been delayed, possibly until September.

Meanwhile, a cloud was lifted from the iPhone on Monday night when the US International Trade Commission threw out a Motorola Mobility patent claim that threatened to block the import of some iPhone models into the US.

The commission dismissed a complaint by the Google-owned firm which accused Apple of infringing technology that makes touch screens ignore fingers when people are holding smartphones to their ears for calls.

Analysis

Commenting on the Apple results, Jan Dawson, chief telecoms analyst at Ovum argues that Apple beat financial analysts' estimates and its own guidance could work againstthe electronics giant.

“In some ways, beating guidance was the worst thing Apple could have done, after it had said last quarter that it would provide more realistic guidance and aim to hit rather than beat it. A large part of the problem with Apple's share price is that it has trained analysts to expect two things: ever-increasing revenues and profits, and that it will beat its own guidance consistently. This quarter illustrated that expecting revenues and margins to continue to grow is unrealistic, but also undermined its promise to provide more realistic guidance. While beating guidance is a positive thing in its own right, it is likely to lead to continued overheated estimates from analysts, which is not in Apple's longer-term interest.

“Average selling prices for iPhones and iPads both fell, which suggests that much of the growth has come from lower-priced models like the iPhones 4 and 4S, and the iPad Mini. That's a sign of things to come, as Apple has to pursue secondary markets for both of these products as primary markets become saturated, and that in turn will have an impact on margins. One of the other issues for Apple is seasonality in its results, which spike hugely in the fourth quarter of the year and then drop off for the rest of the year. The problem is that Apple is always supply-constrained in the first one or two quarters following the launch of a new iPhone, and ironically right when supply matches demand, demand starts to drop because Samsung's new device launches and iPhone buyers have been trained to expect a new device later in the year. Apple really needs to do something to break this seasonality and solve these issues, ideally staggering multiple device launches through the year to even out the supply issues and counter the momentum Samsung gains in the middle part of the year.

“More broadly, Apple saw good strength in the Mac line. At a time when other PC makers are really struggling with falling sales, Apple maintained consistent sales year on year, and increased average selling prices significantly due to the launch of the Retina Display MacBook models. This is a sign of the 'halo effect' Apple is able to achieve across its product lines through the increased adoption of iPhones and iPads among traditional Windows PC makers, and the difference between the performance of high-end computers when contrasted with lower-priced machines priced at levels similar to the iPad, which is causing significant cannibalization in PCs.

“Lastly, the plan to return more cash to shareholders is clearly a response to the poor performance of the share price, which Tim Cook said on the call was enormously frustrating to the leadership of Apple. Unfortunately, it is unlikely to solve the underlying problem with the share price, which is more due to skepticism among analysts that Apple can continue to deliver strong growth without new products to complement sales of iPhones and iPads. As iPad and iPhone shipments, and especially revenues, grow more slowly, it needs new products to continue to deliver the sort of overall revenue growth it has historically produced, and it is not yet clear what those new products will be.”

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