RSS
5 things we learned from Apple's disappointing earnings report
Apple met or beat analyst forecasts and sold record numbers of iPhones and iPads last quarter. So why is its stock down?
 
Apple staff members cheer before the Oct. 20 opening of the new Apple store in Wangfujing shopping district in Beijing.
Apple staff members cheer before the Oct. 20 opening of the new Apple store in Wangfujing shopping district in Beijing. Feng Li/Getty Images

Apple just had the kind of disappointing quarter most companies would die for. The Cupertino tech juggernaut posted $13.1 billion in net profit — $13.81 a share — topping Wall Street estimates, on $54.5 billion in revenue, roughly in line with expectations. It sold a record number of iPhones (47.8 million) and iPads (22.9 million), and did all this in a fiscal first quarter that was a week shorter than last year's. Nonetheless, Apple's stock slumped 11 percent in after-hours trading. That probably says as much about investors as it does about Apple, but here are five things we learned on Wednesday about the company Steve Jobs built:

1. Apple is done 'sandbagging' earnings estimates
Part of the famed "reality distortion field" that enveloped Apple during the Jobs era had to do with the company continually blowing away Wall Street expectations, in part by low-balling its own earning guidance — or, as CFO Peter Oppenheimer put it on Wednesday, offering "conservative" numbers it had "reasonable confidence in achieving." No more. Going forward, Apple will "provide a range of guidance that reflect our belief of what we are likely to achieve," like other companies do, Oppenheimer said. In other words, says Bryan Chaffin at The Mac Observer, Apple's years of "sandbagging its guidance" have caught up with it, as investors now routinely expect "blowout numbers every quarter." So when the company said it expects revenue of $41 billion to $43 billion in the current quarter, versus Wall Street's $45 billion expectation, "in the new era of a 'we're not sandbagging' Apple, that represents a guidance miss," and investors acted accordingly.

2. iPhones are monstrously profitable
Apple's smartphone is its cash cow. Not only did it sell 28 percent more iPhones last quarter than a year previously, but they now account for more than half of Apple's $55 billion in revenue. Google's Android operating system powers about 75 percent of phones shipped globally, says Nick Wingfield in The New York Times, but "Apple continues to take an outsize portion of the profits in the smartphone business." And the iPhone just keeps getting more popular — sales more than doubled in China last quarter and, according to a new study by Kantar Worldpanel ComTech, Apple's share of the U.S. smartphone market hit 51.2 percent last quarter, from 44.9 percent a year earlier.

3. Macs are facing stiff headwinds
Amid the confusing "flood of instant analysis and impassioned claims from Apple fans and foes alike, one thing clearly stood out" from Apple's earnings report, says Matt Rosoff at CITEworld: "Steve Jobs was right. The post-PC era is here." While iPhone and iPad sales soared, the number of Mac laptops and desktop computers sold dropped to 4.1 million, from 5.2 million a year ago. There are some extenuating circumstances — the loss of one week in the quarter, not enough new iMacs to meet demand — but as CEO Tim Cook said Wednesday, "the market for PCs is weak" industry-wide. There's also "some cannibalization" from the iPad, Cook acknowledged, but Apple sees "cannibalization as a huge opportunity," since every tablet sold by Apple will take a disproportionate bite out of the Microsoft/Windows-dominated PC market.

4. Apple isn't going for mass-market appeal
Cook obliquely swatted down a few rumors, pooh-poohing the idea that iPhone 5 demand is falling and throwing cold water on reports that Apple is planning to unveil a low-end iPhone or larger-screen "phablet" anytime soon. "The most important thing to Apple is to make the best products in the world that enrich customers' lives," Cook said. "That means that we aren't interested in revenue for revenue's sake.... We could put the Apple brand on a lot more stuff, but we don't want to do that." That's discordant music to the ears of lots of analysts and investors, who think Apple has to cut prices to compete with Samsung and the galaxy of Android-powered smartphones, says John Gruber at Daring Fireball. Well, let's look at Apple's excellent quarter at Verizon: "The iPhone outsold all Android phones 2-to-1 (the highest percentage to date) at the biggest U.S. carrier, which carries its own brand of Android phones," and the iPad (and new iPad Mini) are equally dominant. And it's Apple that should change its strategy? That's just "jackassery."

5. Apple cares a lot about China
The main thing spooking investors, says The New York Times' Wingfield, is that after years of breathtaking growth, Apple is now "so large that it seems unrealistic, mathematically, for the company to continue finding new pots of gold big enough to maintain its growth." Tim Cook's counter-argument "revolves a lot around China," says Erica Ogg at GigaOm. Apple notched "triple-digit" growth in Greater China (including Hong Kong and Taiwan) last quarter, and it's opening five new stores there this year alone to meet the growing demand. In fact, "the company is now breaking out Greater China revenue on its balance sheet specifically, to highlight its importance." If you're interested in "how Apple is thinking about pricing, screen size, and overall demand" for the iPhone, for example, look to see how it's faring in China.

 

THE WEEK'S AUDIOPHILE PODCASTS: LISTEN SMARTER

Subscribe to the Week