Wednesday, July 24, 2013

Demand Woes Bite Apple


Apple Inc. proved Tuesday there is still demand for its venerable iPhone in the face of stiff competition, though it is running into trouble convincing consumers to buy its other gadgets.


Apple and its rivals have faced increasing concern that the consumer electronics industry's boom over the past few years has started to slow. That phenomenon was evident in Apple's latest quarter, when it sold 20% more iPhones than a year earlier, but more customers opted for cheaper models.


Its other offerings fared worse. Sales of the company's iPads dropped 14% from a year earlier and demand for Macs fell 7%, contributing to a second consecutive quarter of declines for Apple's overall revenue and profit.


Apple Chief Executive Tim Cook said the company still has plenty of room to grow, including in premium-priced phones. "I don't subscribe to the common view that the higher end, if you will, of the smartphone market has hit its peak," he said in a conference call with analysts.


The company faces threats from market leader Samsung Electronics Co. and other smartphone makers that use Google Inc.'s Android operating system. Samsung on Friday is expected to announce its best operating profit ever, and it has outpaced Apple in growth in the number of phones it sells.


Apple's total profit declined 22% to $6.9 billion on roughly flat revenue of $35.3 billion. But the company remains vastly profitable, with a staggering $146.6 billion in cash and investments at the end of the quarter.


Apple sold 31.2 million iPhones in its fiscal third quarter, topping expectations, compared with 26 million in the year-earlier period. The average price per phone was about $581, down $32 sequentially from the period ended in March.


Some consumers, particularly in emerging markets, are gravitating to models of the company's less-expensive iPhone 4 line-which was introduced in 2010-rather than the flagship iPhone 5 announced last fall, Apple said. The company also said currency rate fluctuations affected average selling prices.


Mr. Cook said the iPhone 4 is helping to attract first-time smartphone purchasers, and though the iPhone 5 continues to be the most popular smartphone from the company, it is happy to sell as many iPhone 4 devices for customers as possible.



"It's a great way for a buyer to get into the iOS ecosystem," he said, noting customer satisfaction remains very high.


Apple said iPhone sales were particularly strong in the U.S. and Japan, jumping 51% and 66%, respectively, from a year ago. Apple trumpeted positive reviews for the product and usage by large businesses.


Gene Munster, an analyst at Piper Jaffray, said the product is doing well considering the iPhone 5 was released late last year. "This is a tired product, it's been out three quarters. That says something," he said. "What it comes down to is people spend a ton of time on their phone, and they're willing to spend a little more for the quality."


Analysts expect Apple will further build upon those results when it releases new products this fall. Apple is working on new versions of its iPhone, including a less-expensive version, which it plans to begin shipping from manufacturers in August, people familiar with the matter have said. Apple hasn't commented.


Apple said it expects fourth-quarter revenue will be between $34 billion and $37 billion, a range whose midpoint of $35.5 billion is less than analysts' prior expectations of about $37 billion. It also said its gross profit margin should be between 36% and 37%, which would be flat to slightly down from the third quarter.


"For Apple, our key catalyst would be, always will be, new products and new services," Mr. Cook said.


World-wide smartphone shipments grew 43% in the first calendar quarter of this year to 210 million units, the most recent period available, estimates the research firm Gartner Inc.


Apple's fortunes in smartphones compare favorably with some other well-known names in the sector. Nokia Corp. earlier this month said it sold 61.1 million mobile devices in the second quarter, down 27% from the same period a year ago. BlackBerry Ltd. said last month that said it shipped 2.7 million of its new smartphones in its latest fiscal quarter, far fewer than analysts expected.


But many companies with prominent brands, and relatively high-price handsets, are struggling to cope with competition from inexpensive models being sold in fast-growing markets like China.


Apple said its growth in mainland China had slowed, particularly because of economic headwinds.


But it said the number of software developers making apps for the company's mobile devices in the country has grown to about 500,000, up 70% from the same time last year.


The company also plans to double the number of retail stores there over the next two years.


"I continue to believe that in the arc of time here, China is a huge opportunity for Apple," said Mr. Cook said, echoing earlier sentiments.


Apple said it sold 14.6 million iPads, compared with analyst expectations of about 18 million. Apple sold 19.5 million iPads in the second period, and 17 million in the year-earlier period.


The company said iPad was impacted by both a tough comparison to last year's launch of the third-generation iPad in the year-ago quarter, and a drop of comparative inventory among channel partners because a new product had not been released this year.


Factoring in the inventory changes, Apple said, the number of iPads sold to customers fell about 3% from the same time a year ago.


Apple wasn't immune from the competition that tablets and smartphones have posed to personal computers. The company reported third-quarter Mac sales of 3.75 million units, off 7% from the year-earlier period.


But Apple executives noted that it fared better than the larger PC industry, whose unit shipments fell about 11% in the period ended in June, according to market researchers IDC and Gartner.


A version of this article appeared July 24, 2013, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Apple Profit Slides, Hit By Demand Slowdown.


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