Apple's Mountain Lion Roars
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Its earning seasons again and a number of big name technology companies have already reported their results. Microsoft reported its first ever quarterly loss as a public company. This was due to a one time write off and revenue hit a record high for Microsoft. Nokia reported a loss of $1 billion; though they did double the number of Windows Phone smartphones they sold in the quarter. Google (NASDAQ: GOOG) posted a strong second quarter, but they were held back somewhat by a $233 million loss from Motorola Mobility which is now officially a subsidiary of Google. On July 24th Apple (NASDAQ: AAPL) reported their second quarter results and as usual Cupertino is making big money.
Apple had revenue of $35 billion dollars and a profit of $8.8 billion; both of these were records for Apple. Their 8.8 billion dollar profit is up from $7.31 billion a year ago and their revenue was up 23%. However this seemingly good quarter fell well below the estimate of $10.37 profit per share from Reuters. Apple sold 17 million iPads in the latest quarter and 26 million iPhones. The expectation was that Apple would sell 28 million iPhones and 18 million iPads, according to Piper Jaffray. Apple’s gross margin for the quarter came in at 42.8% again, lower that then 44.6% that had been anticipated by Goldman Sachs.
Apple experienced weakness in both the European and Chinese markets this quarter. Apple blamed the weakness in Europe on a slowing economy but said that they did not see a slowing economy as the reason behind the Chinese slow down. Much of the reason Apple missed expectations for the iPhone could be because customers are waiting for the iPhone 5 to launch, and of course stronger than ever competition from Android. Even missing expectations the iPad saw 84% year-over-year growth and the iPhone saw 28% year-over-year growth.
Mac sales were not so hot; Apple sold 4 million macs in the last quarter representing only a 2% increase. Their desktop sales actually dropped 13% while their laptops sales grew at 8%, resulting in virtually flat sales in the mac division. Lastly Apple’s iPod line continues to experience sales declines, selling 6.8 million units, which was actually higher than expected. The iPod line has been losing out to Apple’s other products specifically the iPhone and iPad, within the iPod family the iPod Touch makes up over half of all iPod sales. Tim Cook added during the earnings call that Apple sold 1.3 million Apple TV’s during this quarter a 170% increase year over year, though still a ‘hobby’ compared to their other products.
Part of Apple’s sales not quite living up to expectations was because customers held off purchasing an Apple product. Apple has a new version of their mobile operating system iOS launching soon, and there is the much rumored iPhone 5 launching later this year. People may also be waiting to see if they like the rumored ‘iPad mini’ that Apple may launch later this year. Apple’s newest mac OS, Mountain Lion has just launched and people may have waited to buy a mac until it shipped with Mountain Lion and this may have had an impact on sales, albeit a small one. Apple is also experiencing a new phenomenon, customers are opting for the cheapest Apple options far more than they used to. The average selling price on the iPhone dropped to levels last seen in 2010 and the average selling price on the iPad is at its lowest ever.
On the iPad front this decrease in average selling price is partially because when Apple introduced their new iPad they kept selling a few models of the older iPad at a lower price. Budget conscious customers are buying these older cheaper models in droves. Apple is also being hurt internationally by a strengthening dollar, a recession gripping Europe and weaker than expected sales in China. With a new iPhone launching later this year the current iPhone 4S and the model before it, the iPhone 4 will probably still be sold at a lower price.
While many customers will jump to the new iPhone 5, and its sales will no doubt set records for Apple and the industry many customers will flock to the discounted older iPhones. This could result in the average selling price of the iPhone not rise like it should when the iPhone 5 is launched. Additionally if Apple decides to make a smaller iPad part of their reasoning will be to target the Google Nexus 7 tablet and so the iPad mini will have a lower price tag than its big brother. This will keep the iPads average selling price down, though because it will cost less to build the iPad mini the margins could still be high.
The last thing in Apple’s rear view mirror, or already ahead of Apple depending on how you see it, is their competition. Google’s Android platform has a majority of the smartphone market in virtually every country and continues to grow. Apple’s iPhone continues to gain market share in most markets, but with dozens of Android makers and hundreds of devices in every shape at every price point, Android has the growth advantage. Additionally Android phones are not second class citizens to the iPhone, only selling because they are cheaper or because the iPhone is not available on a carrier.
Samsung’s Galaxy SIII racked up 9 million carrier pre-orders and has already sold 10 million units. Additionally HTC has their One series of Android smartphones and the flagship One X was widely reviewed as an excellent alternative to the iPhone. Thus Google’s Android ecosystem has the low-end with manufacturers like ZTE and older devices like the Galaxy S and the high-end with the Samsung Galaxy SIII and the HTC One X. Google is also launching their own tablet, the Nexus 7. This 7 inch tablet has excellent performance and an excellent price, $199 for the 8GB model. The nexus 7 sets the bar for Android tablets and also provides a very credible competitor for the iPad.
There will also be added competition from Microsoft (NASDAQ: MSFT) for both the iPhone and the iPad. The added competition to the iPhone will come from Windows Phone 8. Windows Phone 8 was announced by Microsoft in June and will feature a common core with Windows 8, which will allow for easier development of applications for both Windows 8 and Windows Phone 8. Additionally Microsoft has lined up more hardware partners for the launch of Windows Phone 8. No current Windows Phone device will receive the Windows Phone 8 update. Microsoft is drawing a line in the sand with Windows Phone 8 and launching it as part of their Windows 8 ecosystem. Microsoft also announced the Surface tablets in June, these two tablets are designed and sold directly by Microsoft and will be running Windows 8. With Microsoft entering the tablet market in a big way alongside Google’s Nexus 7, Apple’s dominance in the tablet market will shrink.
People have grown accustomed to Apple knocking it out of the park with every set of quarterly earnings, however Apple cannot do this forever. Now that Apple has a steady dividend they are becoming a more mature company. That is not to say they will stop growing, or stop beating the market, but somewhat lower more stable growth is Apple’s future.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
