Tuesday, July 23, 2013

Apple earnings spotlight growth slowdown


The Apple logo is displayed on the exterior of an Apple Store in San Francisco, Calif. (Photo: Justin Sullivan, Getty Images)


SAN FRANCISCO -- The other shoe has dropped at Apple: Growth is cooling.


Apple's second-quarter ended a decade-long year-over-year profit run, capping an end to an era of dominance with ongoing price pressures. Now, the Silicon Valley gadget maker's third-quarter shows a growth slowdown. The sluggishness comes as Apple rivals Samsung Electronics and Google circle its core businesses.


Shares of Apple rose nearly 4% to $435.24 in after-hours trading on its third-quarter report that narrowly edged past analyst expectations.


"Many people see this coming but the reality of it coming to fruition will still be a bit of a shock to some. They used to dictate those markets and now they appear to be playing catch up," says Edward Jones analyst Bill Kreher.


Apple was expected to report third-quarter revenue of $35 billion, according to the survey of estimates from Thomson Reuters. Apple reported $35.3 in revenue for the quarter.


Analysts were expecting Apple to report third-quarter net income of $6.87 billion, or $7.31 per share. Apple reported $6.9 billion in net income compared with $8.82 billion a year ago, underscoring a steep profit dip. It reported earnings per share of $7.47 on a diluted basis.


Apple's historic stock run -- climaxing above $700 in September -- was propelled by a pipeline of runaway products. Now that Apple has failed to deliver another game-changing gizmo to consumers, the stock has gone from hot to not. Speculation continues about Apple launching different size iPhones and iPads, a move unlikely to bouy shares.


Long-standing rumors of a profit-gushing Apple television have failed to materialize, despite Steve Jobs' own words in Walter Isaacson's biography saying, "I've finally cracked it." Prospects appear to have dimmed -- serving of little profit interest to cable companies -- even though CEO Tim Cook has said Apple TV is "an area of intense interest for us.'


An Apple iWatch could be a catalyst for growth as experts predict a next wave of wearable computing products just around the corner.


Apple's once-runaway leadership is deeply in question. Last week, rival Google announced there are over 900 million Android installations. Google's mobile operating system is widely viewed as a more viable competitor in China and Latin America, where consumers are more price sensitive. Analysts say Apple needs an edge in emerging economies. A deal with China Mobile "would be the biggest catalyst on the horizon," says analyst Kreher.


Samsung has unleashed a blur of devices while nothing emerges from Apple. Last month, it unveiled a splash-resistant Galaxy S4 Active smartphone and three new Galaxy Tab tablets. And Google-owned Motorola Mobility on Tuesday showed a fresh lineup of Droid smartphones.


Apple's profit streak ended as Apple investors had grown wary of the stock's once-high-flying price as questions loomed over the company's innovative edge.


Apple warned last quarter that third-quarter gross margins would come in lighter than expected. What that means is the company likely sold an increasing mix of lower-cost iPad Minis and older iPhones commanding lower profit margins.


"Doubt is increaslingly creeping in with regards to the product road map. Investors had given Apple the benefit of the doubt and now that is simply being replaced with doubt," Kreher says.


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