In Apple Watch Debut, Signs of a Familiar Path to Success

22 Jul 2015 | Author: | No comments yet »

Apple Slides Despite Huge Profit, Massive Cash Pile: It’s All About The iPhone.

Sure, it can do many useful, even delightful things, such as showing us incoming texts and email, tracking our heart rate during exercise or letting us send digital doodles to friends. Shares of Apple dropped more than 8% in after-hours trading, and the likely culprit offers a reminder of just how important the smartphone segment is to the Cupertino, Calif-based company. Early Apple Watch owners seem generally happy with it, but Apple’s bigger worry should be those on the sidelines — even hardcore Apple fans, not to mention the rest of us — who are waiting to take the plunge. But Apple’s revenue forecast of $49-$51 billion for its fiscal fourth quarter was slightly short of analyst expectations, and that prompted the rapid selloff after the bell. Apple hasn’t released sales figures, but its quarterly financial report Tuesday suggests that they were lower than many Wall Street analysts expected, even though they exceeded Apple’s internal projections. “It’s been cast as a want, not a need,” said Matt Quick, a Topeka, Kansas, engineer and Apple fan who is holding off on getting one. “I’m kind of waiting to see what next year’s model will bring.” Patrick Clayton, who has had Mac computers all his life and owns an iPhone and several iPads, returned his Apple Watch after three weeks.

It nagged the physically active New Yorker to stand up during a six-hour flight. “Apple is famous for telling us what we need before we need them,” Clayton said. “I thought this would be the case with the watch. Given the massive impact of iPhone on Apple’s results — it accounted for 63.2% of quarterly revenue — it makes sense to assume that expectations for smartphone sales are primary factor in the company’s earnings and revenue forecasts. Wristly, a research company created to study the watch, found that early buyers are overwhelmingly satisfied, more so than with the original iPad and iPhone.

Tuesday’s earnings report and the subsequent reaction illustrates one of Apple’s biggest challenge, albeit one that most other companies would love to have: it’s been so successful and gotten so big that everyone assumes its own forecasts are too modest. (In fairness, Apple for years would issue almost absurdly coy guidance, leaving analyst scrambling to get close when they issued their own, far higher, forecasts.) So, with Apple being punished this week almost entirely for missing the “whisper number” that was even higher than Street consensus, it’s hard to look at the declines as anything but a temporary disappointment in results that most companies would envy. Comment: “We are buyers on the 6% aftermarket pullback on shares of AAPL based on the belief that Apple will continue to gain share in the high-end smartphone market and margins will expand into the S cycle resulting in Street numbers inching higher over the next several quarters. The consensus among analysts had been closer to 49 million, with some of the more bullish analysts arguing that Apple would surprise us with as many as 52 million iPhones sold last quarter. While some investors will view the 48.1 million iPhones (ex channel drain) as a disappointment below investor thinking for more than 49 million units, the reported unit sales represent significant market share gains. After all, early adopters of new technologies tend to understand that what they’re getting isn’t perfect. “I’d recommend it to people with an open mind,” said Dennis Falkenstein of Danville, California.

Strip that out from the $756 billion market capitalization Apple ended Tuesday’s session with, and the stock fetches less than 10 times forward earnings expectations. For the Watch, we estimate Apple sold around 2.5 million units, which was in-line with investor expectations.” Comment: “Given the revenue, iPhone unit and EPS upside seen in the past two quarters, investors were likely looking for sharper upside.

With that said, we viewed this as a solid performance for the tail end of the iPhone 6 cycle, and investor attention is likely to quickly shift toward the iPhone 6s refresh later this quarter. This, in spite of the fact that Apple’s revenue rose 33% to $49.6 billion and its net income rose to $1.85 per share, beating Wall Street estimates by four cents a share. While the next iPhone family faces a tough set of comps, we continue to believe there is upside to expectations — particularly on gross margins.” Comment: “With demand strong despite these price increases in many regions, we see a path for channel inventory build in 2H15 that further supports our view that iPhone units can grow Y/Y.

We like the set-up created by 1) lowered expectations, 2) lower than target channel inventory, 3) 73% of the installed base yet to upgrade to larger screen iPhones, which we believe can drive iPhone unit growth in FY16, and 4) continued strong international demand data points.” The headline numbers on earnings reports often tell only part of the story, especially with a company like Apple that is so obsessively tracked by analysts, investors, fanboys and bloggers. Chief Financial Officer Luca Maestri told The Associated Press that revenue from the watch amounted to “well over” that $952 million increase, as the category includes products whose sales fell.

Apple has run television commercials showing the watch in everyday life, and it has devoted tables at its retail stores for people to try one on and learn more. It came from a much deeper concern about Apple’s ability to keep dazzling–eight years after it introduced the iPhone–with its technology and design. “We think the iPhone has a lot of legs to it–many, many, many years,” CEO Tim Cook said after an analyst hinted the company was a little too focused on the iPhone. “We’re in the early innings of it, not the late innings.” Fine, except as any baseball fan knows, there can be some ugly things that happen inning by inning, even when you end up winning the game. Connected wirelessly to an iPhone, the Apple Watch isn’t meant to replace the phone, but rather provide tidbits of information readily while the phone is in a pocket or purse. David Lubarsky, a Fairfield, Connecticut, photographer, loves that he can get “basic information, quick” and avoid staring at Facebook on the phone all day.

The watch version of one transit app offers bus schedules for your saved locations — even if they are far away — rather than the stops closest to you at the moment, as the phone app does. Apps will get better when Apple updates the watch’s software this fall to permit more “native” apps — those that aren’t just extensions of phone apps. Of course, it didn’t help that Apple said that revenue this quarter would come in between $49 million and $51 billion, below the consensus estimate of $51.1 billion. Which is encouraging, but the broader fear among tech investors is that smartphone sales in general are slowing, having reached market penetration in many global markets.

Apple sold an estimated 2 million Apple Watches last quarter, assuming a median sales price of $499, which isn’t bad but also below the projections some saw of 3 million or more. But already this week we’ve seen IBM disappoint (in its ongoing painful transformation into the cloud), and then Microsoft somehow fall short of what investors wanted. Most of these disappointing earnings have less to do with a fundamental, widespread weakness among tech companies and more with a sense among investors the rally is peaking.

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