updated 09:26 pm EST, Mon January 27, 2014
Missed expectations on iPhones causes $44 drop in stock price
Though many analysts have already noted that Apple revenues in the Americas were down one percent year-over-year -- with global iPhone sales failing to meet the 55 million mark of consensus estimates -- less reported is that in most other areas, the company exceeded expectations. Sales of both Macs and iPads hit higher-than-predicted levels, and the company also beat consensus estimates for earnings per share (EPS) and gross margins. The 51 million iPhones sold, however, had serious repercussions on the stock.
The news that Apple "only" sold 51 million iPhones -- an all-time quarterly record -- rather than the expected 55 million units saw the price of AAPL tumble in after-hours trading, now down about eight percent to $506, a loss of $46 from the closing price -- despite overall healthy growth and profitability, particularly in light of the general downward trend in computer and device growth in the industry overall.
CEO Tim Cook tried to cushion the blow of lower-than-expected iPhone sales during the quarterly conference call with analysts by noting -- repeatedly -- that the company had deferred about $2 billion in sales due to the introduction of value-added services such as the free iOS 7, Mavericks for Macs and the change in pricing for iWork apps for new buyers for both Mac and iOS devices. Were that deferred revenue applied only to iPhones, Apple would have met expectations by reporting around four million more units, which were in fact sold in the quarter but won't be counted until the March quarter. The equation didn't seem to register with investors, causing the huge drop in after-hours trading.
Apple CFO Peter Oppenheimer also noted four other factors that affected iPhone sales in the December quarter: a general drop in the value of the US dollar against foreign currencies; the aforementioned higher deferral of sales; unexpectedly lower iPod sales (as iPod revenues are counted as part of iPhone revenues), and changes in inventory. On that last point, Oppenheimer said that refilling the channel with inventory had happened mostly in the March quarter (the company's fiscal Q2) last year, but was done in the December quarter (fiscal Q1) this year.
Also ignored by investors was that iPhone growth overall was up seven percent from the record holiday quarter of last year. The iPad line posted a year-over-year 14 percent growth rate, and Mac sales were up a remarkable 19 percent from a year ago. Apple's iPod line took an unexpectedly sharp dip during the holidays, dropping 52 percent in units
The Americas saw a one percent drop in revenue overall from last year, with the Asia-Pacific region (excluding Japan and China, both of which are broken out separately) down about nine percent. These drops were more than made up for, however, through increases in sales in all other regions, with "Greater China" (which includes Taiwan and Hong Kong) up 29 percent year-over-year, and Japan up 11 percent. Europe reported a gain of five percent, and Apple's retail store segment reported a nine percent increase, leading to the overall six percent rise in revenues.
Cook blamed the drop in North American revenue on a few factors, but specifically brought up a significant change in the upgrade cycle for contract iPhone users: carriers, which previously allowed customers to upgrade (with a fee) as early as one year into their contracts, have recently moved to make that more difficult, meaning more buyers will skip a yearly or 18-months upgrade, and instead wait two full years between new iPhones. "This affected last quarter and will have some effect on the current quarter," Cook said. "This restricted customers who were used to upgrading earlier than the 24 months that they were allowed, and sort of stretched the time out to be a hard and fast 24 months. And so that's a major factor playing into the North American results."
He also admitted for the first time publicly that the iPhone 5s turned out to be even more popular than the company had predicted, saying "the mix was stronger to the 5s, and it took us some time to build the mix that customers were demanding." Cook went on to add that it took "the bulk of the quarter" for Apple to bring production, supply and demand into harmony for the 5s, thanks to its robust popularity worldwide.
Later in the conference call, he addressed the iPhone 5c specifically, saying that the company had seen "significant 'new-to-iPhone' numbers" in its iPhone 5c sales, which is "what we wanted to see." Upgraders for the quarter, particularly in North America, were "less than we'd thought" because of the carrier changes he referenced earlier. Apple doesn't release breakouts of iPhone sales by model, but does -- unlike all other smartphone and tablet manufacturers -- deal with "sell through" to customer numbers when referring to sales, rather than "sell-in" channel inventory numbers.
While noting that the iPhone 5c and 4S were both selling better as the "mid-tier" and "entry-level" phones in Apple's lineup than the iPhone 4 and 4S had done in those positions last year, Cook appeared to confirm third-party data that suggested Apple is selling two iPhone 5s models for every one iPhone 5c. He added that he expects the demand to re-stabilize with the policy changes after the next quarter.
The company also guided investors to lower revenues than expected for the March quarter, saying it expects to bring in $42 to $44 billion in revenue: analysts had expected around $46 billion for fiscal Q2. On the upside, the company said margins would actually rise slightly, to between 37 and 38 percent, due to lower component costs and less discounting. The prediction does not account for the possibility that Apple would introduce a new product or service during that period which could affect revenues, forcing the company to issue a revised guideline later on.