Apple, Enjoying 'Prolific Year Of Innovation' With iPhone, iPad, May Report Muted Ear
Year of innovation” at the company, which has unveiled three new versions of the iPad, including the iPad mini, a slimmer, larger-screen iPhone, redesigned iPod media players, updated Mac notebooks and desktops, and new generations of its mobile and desktop operating systems.
But all that innovation comes at a price.
Customers, bombarded With mostly-accurate rumors about new products to come, held off buying current models as they waited for the next-great thing from Apple. And production constraints — Apple’s website still shows a three to four week wait for the iPhone 5 a month after the smartphone was released — is causing demand to outpace supply, which puts a damper on earnings.
At least that’s the story financial analysts are telling to explain why their estimates for Apple’s fiscal fourth-quarter results, to be reported today after the market closes, have been ratcheted down. And why Apple’s forecast for its first quarter, which covers the holiday shopping season ending in December, May fail to impress investors.
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And also why Apple’s shares, after closing above $700 for the first time last month, fell 3.3 percent on Oct. 23 after the iPad mini was introduced. The shares closed yesterday at $616.83 in regular Nasdaq trading.
“Expectations have been reset,” said Shaw Wu, an analyst With Sterne Agee in San Francisco. “A lot of people are expecting a miss. The stock has corrected. Right now, the big question is not as much about demand, but did they build enough? It’s a high-class problem. A lot of companies build too many products and nobody wants to buy them. Apple has the opposite problem — they don’t build enough to meet demand.”
It’s that high-class problem and Apple’s potential to keep winning over customers, even With an iPad mini that at $329 is higher than the $199 rivals from Google and Amazon, that keeps Wu and other analysts optimistic about the company’s prospects.
“Almost every product from Apple has been criticized. And yet every one has gone on to sell way more than anyone thought,” Wu added. “At the end of the day, does it really matter what we say or the press says? No. At the end of the day, customers decide.”
For the three-months ended Sept. 29, Apple was expected, on average, to Report sales of $36.2 billion and profit of $8.84 a share earlier this week. This morning, those estimates were at $36.02 billion and $8.81 a share.
Yes, that’s still up from last year, when the company had fourth-quarter sales of $28.3 billion and profit of $7.05 a share. And it’s also higher (as usual) than Apple’s fourth-quarter forecast of $34 billion and $7.65.
But many analysts lowered their estimates after Cook said Apple had sold its 100 millionth iPad as of about two weeks ago. Given that Apple had shipped 84.1 million iPads through June, Cook’s comment suggested Apple sold less than 16 million iPads in the fourth quarter — below the 17 to 18 million the Street was expecting.
It was also below his “conservative estimate” of 16.5 million iPads, Wu said. For that reason, Wu dropped his fourth-quarter sales estimate to $36.2 billion, from $36.6 billion, and earnings per share to $8.88 from $8.93.
iPhone shipments also took a hit in the quarter as customers held off buying as they waited for the iPhone 5. The new device went on sale Sept. 21 and Apple said it sold a record 5 million units in the opening weekend. But analysts says that week or so of sales is probably not enough to make up for the customer pause. They predict iPhone unit shipments will be below the 26 million iPhones Apple sold in the third quarter.
(For the record, the iPhone (at almost half of revenue) and iPad (at about a quarter of sales) together account for more than 70 percent of Apple’s sales. The Mac, meanwhile, brought in 14 percent of revenue last quarter. )
Ben Reitzes of Barclays Capital, says investors should also brace themselves for Apple to deliver a sales forecast below the $54.9 billion the Street is expecting for the holiday shopping season. He sees product shortages over the holidays of both the iPhone and iPad mini, which goes on sale in the U.S. on Nov. 2.
Reitzes expects Apple to Report sales of $34.3 billion today, down from his prior estimate of $34.9 billion, and profit of $8.31 a share. But like Wu, he’s bullish on Apple’s prospects, in part because of Apple’s App store, which he calls a “key differentiating factor” for Apple’s mobile devices.
Cook this week said there are more than 700,000 apps on the App Store, including 250,000 specifically designed for the iPad. Users of Apple’s iOS mobile devices — the iPhone, iPad and iPod — have downloaded more than 35 million apps. Apple said it kept the pixel resolution the same on the iPad mini as on the regular 9.7-inch iPad, which means existing apps should run without any modifications on the mini’s 7.9-inch screen.
“This software strategy enables a distinctive ‘stickiness,’ which should enhance customer loyalty/retention over the long term as apps personalize devices to levels that competitive imitations cannot match,” Reitzes told investors in a note yesterday.
He’s also banking on the iPad mini to win over new buyers, and lift Apple’s sales next year. “The iPad mini is one of the best ways for Apple to expand the [total addressable market] for the iPad,” Retizes said. “Given Apple’s reputation for superior design, software, content delivery and overall brand the iPad seems like a market where its share could arguably be permanently higher than that of the iPhone’s.”
Gene Munster of Piper Jaffray, who has a $910 price target on the shares, says investors should look beyond today’s report, saying he expects the company to outperform in 2013 on continued demand for the iPhone and iPad mni. “While the September quarter and December guide May be disappointing compared to historical trends, we remain positive on Apple given that we expect a significant ramp in iPhone 5 sales as supply issues resolve,” Munster told investors in Report today. “We continue to believe that Apple will launch a TV in mid-to-late 2013, which should be positive for investor psychology around Apple’s ability to innovate.”
Apple will host a conference call at 2 p.m. California time to discuss its results. Check back here to see my recap of the earnings news and a live play-by-play of the call.
Apple, Enjoying 'Prolific Year Of Innovation' With iPhone, iPad, May Report Muted Earnings
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