As iPad Sales Wane and Watch Flops, iPhone Saves Apple’s Profit With Its Heroics

23 Jul 2015 | Author: | No comments yet »

Apple Feels Tug Of Gravity: Shares Fall On Outlook, Uncertainty Over Watch Sales.

NEW DELHI: Apple’s iPhone sales growth in India has for the first time raced past Greater China in the three months to June, underlining the importance of the South Asian nation where the smartphone maker has started aggressive pricing, discounts and buybacks, a sea change from its earlier staid stand when the country wasn’t considered a prime market.While analysts yesterday were left to crunch their own numbers after Apple CEO Tim Cook refused to go into sales specifics of the Apple Watch, a new report released this morning shows how quickly Apple has become the dominant player in the smartwatch market.CUPERTINO (KCBS) — Apple was getting bruised Wednesday despite its earnings report showing soaring profits as investors appear spooked by its lukewarm outlook and uncertainty over sales of its smartwatch. The tech giant had previously announced it would write off about 80 percent of its Nokia phone business after failing to generate much buzz around its Windows Mobile smartphones.

The Cupertino-based company’s sales of iPhones in India grew 93% in the third quarter — albeit off a far lower base — faster than 87% growth in Greater China markets, comprising China, Hong Kong and Taiwan. However, Apple (AAPL) didn’t sell quite as many iPhones as expected, and it disappointed analysts by not providing specific Apple Watch sales figures, rather lumping them in with the “Other Products” category which includes iPods and Apple TV. Cowen and Company was one of the few firms to turn cautious on Apple, downgrading the shares to “market perform” from “outperform,” citing concerns about China, where competition is growing. The company’s global phone sales rose 35% to 47.5 million units. “(In) India we grew at 93% and this is on top of the Greater China numbers that grew 87% during the quarter against a market of 5%,” Apple’s chief executive officer and director Tim Cook said during an earnings call Wednesday morning. “So, we did exceptionally well I think in any way that you look at it,” he said.

That’s about $952 million more than the previous quarter, when the watch had not yet gone on sale, or significantly less than the $1.8 billion in watch sales that analysts surveyed by FactSet were expecting. Apple’s stock was impacted by China’s recent stock slide, given its rapid growth in China, where demand has been high for the larger-screen iPhone 6 and 6-Plus. Apple, meanwhile, posted a largely positive quarter: The company’s net sales, net income, earnings per share and gross margins were all solidly above where they were last quarter. “It’s incredible numbers. … Every single category of their business accelerated in the quarter,” Dan Ernst, a senior analyst at Welch Capital Partners, said on CNBC’s “Squawk Box” Wednesday morning. “This is a well-run company with a fantastic management team.

The company was still reluctant to mention how many Apple Watches it sold, since its April release, giving some the impression that the launch was a disappointment. They had expected something closer to 50 million, and the disappointment in that gap ended up shaving $62 billion off of Apple’s market value in three minutes. While it only accounts for a fraction of Apple’s current revenue, some investors viewed the new product category as a growth opportunity for the company. Apple stocks were down 5.2 percent in midday trading Wednesday and accounted for more than half of the Dow Jones industrial average’s 86-point drop in the middle of the day. And chief financial officer Luca Maestri said Apple sold more Apple Watches in the first nine weeks after its launch than Apple sold in the first nine weeks of the iPhone or iPad.

That’s also not a total surprise, though; the further into the (extraordinarily predictable) iPhone product cycle we go, the fewer people there are left to buy them. Earnings season is far from over, but a few major themes are starting to take shape that could make or break a company’s quarterly performance (and subsequent stock valuation). Mounting a defense for the iPhone feels a little like holding Goliath’s spit bucket, so let’s think of this more as a light dusting of context, a gentle reminder that the iPhone dominates the premium smartphone space as it seldom has before—and will continue to do so barring extraordinary events. “Whether you’re talking about phones or tablets or PCs, even the digital music players, it’s always been known as the premium, high-end play,” says Gartner analyst Tuong Nguyen. “So the fact that they’re well secured in this end of the market is not so much of a surprise to me.” Nguyen isn’t just referring to Apple’s most recent quarter, but to a Gartner study published earlier this year that highlighted just how dominant Apple became by the end of 2014. That growth, according to Nguyen’s colleague Anshul Gupta, came largely at the expense of Samsung, which lost 10 percentage points of market share in the fourth quarter of last year. “This downward trend shows that Samsung’s share of profitable premium smartphone users has come under significant pressure,” explained Gupta at the time. Tupperware Brands on Wednesday reported second-quarter sales that were up 4 percent in local currencies but ultimately down 13 percent when converted to U.S. dollars.

It has been rapidly pushing sales, offering discounts and increasing its retail presence with plans to create smaller-sized stores to go deeper into the Indian market. The reason Samsung led the smartphone race since 2012 isn’t just that it flooded the market as many models as it could dream up, though that doesn’t hurt. Counterpoint analysts add that India performance is set to increase in the following quarters as the company has been able to offset the seasonality dip in the March and June quarters, owing to growth in emerging markets like India and China.

The iPhone holds a huge aspirational value for users in the entrylevel to mid-level segments where home-grown players like Micromax, Intex, Lava, Karbonn and a plethora of Chinese players, led by Xiaomi, operate. Not only is the iPhone siphoning disillusioned Galaxy owners away from Samsung, a large swath of Cupertino loyalists haven’t yet upgraded. “In terms of the percentage of customers that have upgraded to a 6 and 6 Plus versus that have not upgraded, it’s 73 percent,” Cook shared last night, “meaning that 27 percent of the installed base of customers prior to the launch of 6 and 6 Plus have now upgraded.” Roughly speaking, three out of four current iPhone owners are still on the table.

Thanks to a handy transcript from Seeking Alpha, we know that the word “China” came up on yesterday’s earnings call 29 times. (For context, “iPad” only merited 23 mentions, while “watch” hit 40). It’s said that one has to spend money to make money, but there’s inherently a limit to how much a company can spend and still turn a reasonable profit. That’s no coincidence; if Apple has room to grow, it’s there. “I think it’s fair to say that most if not all people who have or want iPhones in mature markets have them,” says Nguyen.

Not so overseas. “China is very important because it’s such huge market just in terms of total numbers… Similar to what we saw in the U.S. with pent-up demand, there’s pent-up demand there as well.” Nguyen notes that Apple may not find as much success there, proportionally, as it has in the United States because of a different socioeconomic environment. A bigger threat to the iPhone’s continued ascension—and maybe, at this point, the only thing that could possibly topple it—would be the introduction by a rival of some previously unthinkable feature, a premium offering to which Apple is slow to respond. Goldman Sachs, likewise, saw its net income drop 49 percent to about $1.05 billion (from $2.04 billion in the second quarter of 2014) after incurring $1.45 billion in legal and regulatory expenses (compared with the $284 million in such fees it incurred only a year earlier).

Even then, though, the hit might be muted; it already happened, after all, when customers migrated to bigger Android phones between the iPhone 4 and the iPhone 6. Noninterest expenses at Wells Fargo also weighed on the bank’s quarterly performance, although net income only ticked down to $5.72 billion, about $10 million shy of 2014’s second quarter. If anything, the best shot at unseating the iPhone may come from smaller manufacturers like OnePlus, the decent-quality, off-contract imports for those tired of spending more on their phone than they do on a month’s rent. On the other side of the fence, major banking and financial firms like JPMorgan Chase & Co., Citigroup and Bank of America saw positive second quarters thanks in part to their abilities to shave expenses (though the period ended before Citigroup will be refunding hundreds of millions of dollars to its customers for allegedly deceptive credit card practices).

Especially as smartphone plans evolve away from subsidies and toward installment plans, constant reminders of just how much that hunk of anodized aluminum really costs. But in the shadow of such an “off” quarter, it’s probably worth shining some light on just how ubiquitous it’s become, how much further it can go—and how hard it will be for anyone else to stop it. But you’d never know that by looking at Apple’s stock performance following its earnings announcement. “This was an expectations problem, not a problem with the numbers themselves. Intel, Netflix, Halliburton and a host of other major companies reported quarterly results that weren’t nearly as positive as Apple’s, yet the iPhone maker’s stock dip was the most noticeable. Even Harley-Davidson and Microsoft, whose quarterly performances were largely forgettable, managed to surprise analysts who were expecting much worse. “Am I happy that the stock’s down as an owner?

But everything I heard on that [Apple earnings] call demonstrated to me that the business is actually getting better, not worse,” Ernst said Wednesday. “I would be worried if these numbers were going in the other direction.”

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