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Wednesday, July 24, 2013 - Page updated at 05:00 p.m.
Tepid earnings put squeeze on Apple to produce new hit
By Patrick May
San Jose Mercury News
With Apple’s announcement Tuesday of yet another round of lackluster earnings, it’s time for the really big show to begin.
After changing the world with the iPhone and iPad, only to see its performance slow and its stock price plummet because of a glaring absence of new product launches, Apple and CEO Tim Cook now face a six-month trial by fire.
With investor and fan fervor cooling, experts say time could be running out for Apple to prove it still has the mojo that co-founder Steve Jobs unleashed upon the world.
“Everyone is watching and everyone knows that this is either the earnings trough — it better be the earnings trough — or else Apple is in real trouble,” said Laurence Balter, an analyst at Oracle Investment Research.
“It’s important for management to communicate to shareholders that this is not the end for Apple, but rather the beginning of the next phase,” he said. “And they really need to say that because shareholders have lost faith.”
While Apple’s revenue was essentially flat with its year-ago quarter, meeting analysts’ estimates, the company did sell a higher-than-expected number of iPhones in the most recent quarter.
“We are especially proud of our record June quarter iPhone sales of over 31 million and the strong growth in revenue from iTunes, Software and Services,” Cook said in a statement. “We are really excited about the upcoming releases of iOS 7 and OS X Mavericks, and we are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014.”
Apple sold 31.2 million iPhones in the quarter ended June 29, compared with 26 million in the same period last year. That handily beat analysts’ expectations that Apple would sell 26.5 million.
The company sold 14.6 million iPads during the quarter, compared with 17 million in the year-ago quarter and 19.5 million in the previous quarter. It sold 3.8 million Macs, compared with 4 million last year.
Analysts say Apple not only must say the right things in coming months, but also must come up with another blockbuster, and soon.
Balter says the next obvious chapter is the integration of the iPhone into the rest of our lives, such as our cars, kitchens and living rooms. Others think Apple could recapture the groove it found with the 2006 launch of the first iPhone by rejiggering the shape and size of existing products.
“We will be looking for signs of new products such as the low-priced handset,” Société Générale analyst Andy Perkins wrote in a note to investors, “and possibly the iWatch.”
Most analysts agreed that what Apple pulls out of its hat in the next few months is far more important than the tepid earnings report the company issued Tuesday. Wall Street had expected Apple’s revenue to be flat with the year-ago quarter, with $35 billion in revenues, while those surveyed by FactSet were expecting, on average, earnings of $7.33 per share.
Apple announced revenue of $35.3 billion. That came to earnings of $7.47 per diluted share, compared with $9.32 per diluted share a year earlier. Gross margin was 36.9 percent, down from 42.8 percent in the year-ago quarter.
Clearly, Apple has lost the red-hot momentum it had going into the end of 2012, when it announced the iPhone 5 to great critical acclaim.
It’s been an underwhelming year so far, prompting many to wonder if the tech icon has run adrift. Investor angst has hammered the company’s stock price, at one point dragging it below $400 a share after it was hovering near $700 a year earlier.
After years of exciting launches, including variations of the iPhone and iPad, there have been no new product announcements in 2013, despite rumors Apple is secretly working on a smart watch and a beefed-up Apple TV.
“This has been a very tough period for Apple, and it’s made worse by the fact that the company doesn’t talk openly with people, so you don’t know what’s really going on inside,” said analyst Roger Kay with Endpoint Technologies.
“But it does seem as if there’s been a dearth of announcements the entire year and the momentum Apple had before is almost entirely dissipated.”
Kay said it’s now showtime. Apple needs to prove it still has the goods, he said, and it needs to start talking about them “in the next few weeks.”
Before the earnings announcement, Apple shares had closed at $418.99, down $7.32, or nearly 2 percent. Some investors smelled a deal, as the stock regained $17.02 to $436.01 in after-hours trading.
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