Apple revenues fall $2bn short of estimates

26th July 2012

The company, which saw shares fall 4.7 per cent ($28.18) to $574, puts the blame on devoted Apple followers holding out for iPhone5 – due later this year, a process known as "product transition".  The new phone is likely to be a more substantive improvement than recent upgrades.

According to the Financial Times, the California-based company sold 26m iPhones in the three months to June 30, up 28 per cent on the same period a year ago but showing a slowdown in growth over recent months.

Apple needs now to explain why so many analysts were wrong when it gives them "guidance" on a regular basis. It seems odd that the company must have been aware of potential buyers holding back.  Revenues for the quarter at $35bn were more than $2bn short of estimates. While iPad tablet sales were good, they failed to offset poor iPhone deliveries.

Competitors coming up fast

The disappointment comes as it faces new competition from Samsung – as well as a raft of patent and other legal actions. 

The iPhone is Apple's largest revenue segment and accounts for about two-thirds of its overall profits.

Figures from Marketwatch suggest that analysts had been expecting some 28 million iPhone units for the period, even accounting for consumers holding off purchases ahead of iPhone 5 although Apple policy is to never confirm what it is doing until launch. Investors are now criticising Apple's self-imposed silence although many are loath to say so publicly – many believe that Apple will more likely surprise on the upside in more quarters than disappoint forecasters.

Some analysts may have been confused by higher sales of the current iPhone by mobile companies, concentrating on the numbers shipped rather than profit margins – it is now clear that the handsets were sold at little or no gain to clear old inventory.

The iPad was a bright spot in the period; Apple said it shipped 17 million units of the tablet computer, compared with analysts' expectations for 15.4 million units. Mac shipments were 4 million units, and the iPod shipped nearly 6.8 million units.

For the current quarter, the company predicted earnings of $7.65 per share on revenue of $34 billion. Analysts had been expecting earnings of $10.26 per share on revenue of $38.1 billion for the period. 

Apple key is sustainable earnings

James Gautrey, a Global Equities manager at Schroders believes the setback will not be long-lasting.  He says: "The real key to Apple is the sustainability of its earnings. The lowly valuation multiple means most think earnings growth will not last. The software ecosystem and how well products work with each other means this view may not be right and the shares can continue to surprise. Profit margins are my biggest fear as they are very high right now but I do believe sales can be sustained nicely."

Apple may now face calls to give more structured updates on its new products programme. Investors may conclude that while the present secrecy can achieve better marketing coverage in consumer media, it is wrong for the biggest company in the world by equity value to play this game of pretend.

As Mindful Money blogger Ken Eisold says of the clash between excited gossip (such as that of Apple worshipers) and the company's refusal to give information:

"When we gossip we don't check for accuracy, or think through the consequences. We don't stop to examine our motives or reflect on our goals. We disregard collateral damage. It's like a garage sale of the mind, allowing us to impulsively put on display the facts and feelings we want to get rid of.

All the advantages are with the seller. The object of gossip is exposed and vulnerable, while the source is protected. The "news" spreads anonymously, enjoying the privilege of always seeming inside information. That makes it dangerous.  Not only can the facts be wrong, but also the intent can be malicious. Speculators can manipulate this unregulated information for their own ends."

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