Apple's disappointing earnings report: 5 takeaways

iPhone sales in China dropped dramatically when rivals introduced new products in the spring.

(Image credit: Imaginechina/Corbis)

last updated 8 January 2015

Apple failed to meet expectations on Tuesday when it announced its earnings for the third-fiscal quarter. While revenue and net income both increased by 20 percent — a figure most companies would celebrate — the growth was paltry by the standards of the Cupertino-based giant, which typically blows analyst expectations out of the water. Apple was projected to generate $37 billion in revenue, but fell short at $35 billion, and sales of iPhones and iMacs were lower than anticipated. In reporting the numbers, CEO Tim Cook and CFO Peter Oppenheimer repeatedly mentioned a "fall transition," hinting that a new iPhone could be just around the corner. Here, five takeaways from the disappointing report:

1. Consumers are buying cheaper phones

For the April-to-June period, Apple moved a relatively meager 26 million iPhones, hitting the low end of most analyst expectations. But volume wasn't the real problem: Prices were the lowest they've been since 2010, and Apple has been offering older models such as the iPhone 4 or iPhone 3GS at a steep discount. More consumers are simply buying the least expensive iPhone available, "a new phenomenon that is causing Apple's breakneck growth rate to slow," says the Associated Press.

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Apple's sales in greater China, which includes Taiwan and Hong Kong, unexpectedly dropped $2.2 billion from the January to March period. Analysts noted that the sharp decline could be attributed to strong iPhone 4S sales at the beginning of the year, which were stunted when rivals like Samsung and HTC launched well-received products in the spring. "The [Samsung Galaxy S III] and [HTC One X] are outselling the iPhone now because people like their wider screens, better cameras, and the apps are pretty good," said one electronics store salesperson. The sales figures suggest that China's consumer base is not prepared to wait around for the next iPhone like American consumers.

Last year, Apple introduced the new Retina display-equipped iPad which reached quarterly sales of 17 million, or a massive 84 percent increase compared to a year ago. Cook was "obviously pleased" to detail the iPad's success in the education market, says Eric Zeman at Information Week: The company sold 1 million iPad 2s to schools and other educational bodies during the second quarter. The iPad 2, which costs $100 less than the new iPad, at $399 versus $499, "opened up the door to schools, especially those in the K-12 range." iPad sales now account for about $8 billion of Apple's quarterly revenue, or roughly 22 percent.

Three-quarters of the Macs sold were portable laptops, and a lot of that has to do with the new MacBook Pro, the first portable computer to get Apple's ultra-sharp Retina display. Result: The company owned the portable market in June, when the new model was launched: "Even with supply constraints, Apple accounted for 26 percent of the portable market by units and 47 percent of it by revenues," says Darcy Travlos at Forbes. Consumers have spoken loud and clear with their wallets, and Apple has not been able to keep up with production demand.

"Rumors that a new iPhone with a larger screen may come out in the fall have been rampant for months," says Andrea Chang at the Los Angeles Times. And "influential consumer blogs" have been strongly recommending that fans hold off buying a new phone until the next-gen model is released, likely sometime in the fall. "We're still very optimistic that Apple is setting up for a strong holiday season, which could be related to a new iPhone," says analyst James D. Ragan. "Maybe there's a pause in the numbers now, but stronger growth will resume later this year."