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Apple's profit gains 54%, but iPhone sales fall short of expectations

Apple's profit gains 54%, but iPhone sales fall short of expectations

By Nick Wingfield, New York Times | Updated: 6 June 2012 16:11 IST

Highlights

In a rare disappointment, Apple Inc. missed Wall Street forecasts for its latest iPhone 4S business.

For any other big company, a 54 percent increase in profit and a 39 percent jump in revenue would be enviable. For Apple though, weak sales of its star product -- the iPhone -- were enough to overshadow everything else when it reported fourth-quarter results on Tuesday, sending the company's shares tumbling nearly 7 percent in after-hours trading.

In a rare disappointment, the company missed Wall Street forecasts for its iPhone business. The company reported big increases in the sale of the iPad and of Mac computers, and even said the number of iPhones it sold in the quarter jumped 21 percent from a year ago. But investors fixated on a 16 percent decline in iPhone sales from the third quarter. Apple shares fell 7 percent after the release of the results at the close of normal trading hours.

Apple executives blamed the shortfall in iPhone sales on unusually heated rumors that the company would release a new phone in the fall, leading consumers to delay their purchases so they could get the latest version. That new phone -- the iPhone 4S -- did, indeed, come out earlier this month, to what Apple said was the best initial sales of any iPhone yet. But it was too late to benefit the fourth quarter, which ended Sept. 24.

Investors and analysts largely accepted Apple's explanation, in part because of the sales of the iPhone 4S. Apple said that during the first weekend it was available, more than four million were sold, which is more than double the sales of its predecessor in the first days after its introduction.

Mark Moscowitz, an analyst at J.P. Morgan, said he and others on Wall Street "got too excited" in predicting blow-out iPhone sales, which should have been tempered by the increasing levels of speculation that Apple would come out with a new phone. While Apple has long had to contend with rumors about coming devices that can potentially freeze current product sales, analysts believe that customers have become more sophisticated about when Apple releases new devices, typically in the summer or early fall.

"Consumers are a lot smarter, and they're going to wait," said Mr. Moscowitz, who had estimated that Apple would sell 20.6 milion iPhones in the quarter. The company reported sales of 17.07 million iPhones.

David Rolfe, chief investment officer for Wedgewood Partners, a money management firm whose biggest holding is Apple, said the company's financial forecast of $37 billion in revenue for the next quarter was strong enough that he thinks demand for the company's products remains robust.

"There's no way you get to $37 billion unless the iPad, iPhone and Mac franchises are really healthy," Mr. Rolfe said.

Apple said its net profit for the quarter was $6.62 billion, or $7.05 a share, up from $4.31 billion a year ago, or $4.64 a share, a 54 percent increase. Revenue rose to $28.27 billion from $20.34 billion, a 39 percent increase. Those results were well ahead of the $5.50 a share in earnings and $25 billion in revenue that Apple had forecast for the fourth-quarter.

The period was Apple's first officially under the leadership of Timothy D. Cook, who was named chief executive after Steven P. Jobs, Apple's co-founder, resigned from the helm of the company on Aug. 24. Mr. Jobs died on Oct. 5 after a long battle with pancreatic cancer.

The death of Mr. Jobs has stirred deep emotions inside and outside Apple and raised concerns about whether the company can, in the long run, continue its remarkable streak of hits.

In a conference call with analysts, Mr. Cook said the "world has lost a visionary" with the death of Mr. Jobs. "That spirit will forever be the foundation for Apple, and we're dedicated to continuing the amazing work he loved so much," he said.

Despite the disappointing iPhone sales, Mr. Cook said he was confident that Apple would set "an all-time record" for iPhone sales in the current holiday quarter. He added that the company had a product pipeline that's "unbelievable."

The company said it sold 11.12 million iPads during the quarter, up from 4.19 million a year ago. It has sold over 40 million of the devices since it introduced it about 18 months ago, a number that Mr. Cook said was beyond Apple's "wildest dreams."

While routinely overshadowed by the company's younger, more glamorous businesses, the most venerable product family in Apple's lineup -- Mac computers -- continued to perform well. The standout in that division during the quarter was a remodeled version of Apple's notebook computer, the MacBook Air, which came out late last year.

Apple said it sold 4.89 million Macs in the quarter, up from 3.89 million a year ago.

In contrast to its heftier market share in mobile phones and tablets, Apple remains a relatively small player in the computer market, with a 5.1 percent of global PC shipments during the third quarter, according to the research firm IDC. But that figure has been growing in recent years, rising from 4.2 percent a year ago.

Apple managed those gains because Mac shipments grew almost 26 percent during the third quarter, compared with IDC's estimate of less than 4 percent growth for the overall computer business. At an event to introduce the new iPhone this month, Apple's Mr. Cook said the company's Mac business had exceeded the growth rate of the industry for the last five years.

Apple's iPhone sales show the company is still thriving in the mobile phone market, even though Google's Android operating system now powers significantly more smartphones. In the second quarter, handsets running Android software accounted for 43.4 percent of the worldwide smartphone market, compared with 18.2 percent for Apple, the research firm Gartner estimates.

Both companies are seeing growth in their mobile businesses, although it is easier to tell how Apple is profiting because it sells a device. Google, by contrast, gives away Android for free to handset makers, with the intention of generating revenue from advertising when consumers conduct tasks on Android phones. The growth of both Apple and Google has come at the expense of incumbents in the industry like the BlackBerry-maker Research in Motion.

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