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 This year was to have been Apple Inc's watershed moment in China,
when a long-awaited deal with the nation's largest carrier was to
have propelled it back toward the top ranks of its most crucial
market, clawing back ground from rival Samsung Electronics.
Instead, the forecast for the March quarter — when Apple is expected
to have reaped the fruits of that long-awaited deal — raises
questions of whether investors had over-estimated that arrangement,
and broader concerns about flagging demand for smartphones and
tablets in general.
"There's no doubt that shipments (to China Mobile) are lower than
almost anybody expected," said Pacific Crest Securities' Andy
Hargreaves. Globally, "the high-end smartphone and tablet markets
are saturated, and that's not going to grow."
The world's most valuable technology company sold a record 51
million iPhones in the quarter, but that was still shy of the 55
million or so that analysts had expected.
The company forecast sales of $42 billion to $44 billion this
quarter, brisker than usual because of Apple's new deal to sell
iPhones through China Mobile Ltd, the country's No. 1 carrier. But
Wall Street had expected even more — $46 billion, on average.
The company on Monday recorded sales of $57.6 billion in its
December or fiscal first quarter, versus expectations for about
$57.5 billion. Net profit was flat from a year earlier at $13.1
billion, or $14.50 a share, compared to Thomson Reuters I/B/E/S
estimate of $14.07.
"After showing modest signs of improvement, we're back to a
no-growth outlook," said JMP Securities' Alex Gauna. "It's something
Apple needs to find an answer to... If it can't prove that it's
going to be a growth story again, the valuation is too high."
Chief Financial Officer Peter Oppenheimer told analysts on a
conference call the March-quarter revenue outlook reflected the
effects of a strong U.S. dollar, and more balanced levels of demand
and supply for iPhones at the start of 2014 than a year earlier,
when demand outstripped available inventory.
EMERGING STRENGTH
In the December quarter, Apple recorded gross profit margins of 37.9
percent, roughly in line with expectations.
But it was the iPhone sales and revenue outlook shortfall that drew
attention.
The iPhone maker has been ceding ground to Samsung and other rivals
in China, its No. 2 market, but investors hope its tie-up with the
country's dominant mobile carrier will help reverse its fortunes in
the world's largest cellular arena.
In the closely watched greater China region, which includes Hong
Kong and Taiwan, revenue jumped 29 percent from a year earlier to
$8.84 billion, bolstered by strong iPad sales and the iPhone's
global launch in September, when China was included among launch
countries for the first time.
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Company executives did not talk about iPhone unit sales in the
world's No. 2 economy. But intense competition not just from Samsung
but also lower-cost, local rivals like Huawei and Xiaomi is impeding
its progress.
The latest figures show Samsung increasing its lead in global
smartphone sales.
In the less competitive tablet arena, Apple sold a record 26 million
iPads globally in the quarter, in line with Wall Street estimates.
Oppenheimer told Reuters the company more than doubled sales of the
tablet in mainland China during the December quarter, helping drive
that milestone.
The iPod, which sparked the revival of Apple last decade, is now a
waning product, selling just over 6 million in the quarter, less
than half the year-ago tally.
"IPod sales declined by 52 percent year-over-year in the December
quarter and we would expect them to continue to decline
year-over-year in the March quarter," said Oppenheimer.
Longer term, investors continue to hope that Apple, which last came
out with a revolutionary new device — the iPad — in 2010, has
something up its sleeve for 2014. Speculation currently revolves
around a smartwatch or even a long-rumored TV product. Others say
Apple can use its huge iPhone and iTunes base to get into mobile
payments or advertising.
"What we need to see from them is some sort of new product
development and it would be likely in the area of software, mobile
payments and advertisements that would get us thinking that there is
an opportunity for accretion," Gauna said.
"Hardware can only go in one direction and that's flat or down. It
has to be something in the innovation space and they have a lot of
things they can do."
(Additional reporting by Malathi Nayak
and Alexei Oreskovic in San Francisco, writing by Edwin Chan;
editing by Cynthia Osterman and Ken Wills)
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