19 hours ago | By Cassandra Napoli
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Jul 22, 2015
By Petah Marian
OK Mr Cook, how many Apple watches did you sell in in its launch quarter? No information? Oh, so you’re not going to tell us… cue share price slide.
Actually, let’s not get carried away – Apple’s shares did fall after its Q3 earnings report for a lot of reasons but many sector watchers were disappointed at the frustratingly small amount of information about the most hyped wearable tech product ever, especially given recent speculation that sales may have dropped-off since the initial excitement of the launch.
Instead of talking at length about the Watch, Apple gave an overall figure for its ‘other products’ (the Watch, iPod, Apple TV and Beats) with sales combined there up 49% to $2.64bn.
Company chief Tom Cook did say that Watch sales beat Apple’s own expectations and that sell-through was better than either the iPhone or iPad just after they’d launched, encouraging news given that the product is only available in 680 stores – that’s less than 1% of the locations where Apple fans can buy iPhones.
So what exactly did cause the share price slide? Basically, the market was expecting better overall news than Apple delivered. But there’s no denying it really did deliver. Who can argue with profits up 38% to $10.7bn, revenue up 33% to $49.61bn, sales more-than-doubling in China to $13.23bn (with iPhone sales up a staggering 87% there), iPhone revenue globally up 59%, the gross margin topping Apple’s own estimates at 39.7%, and – pause for breath – more users than ever switching from the rival Android operating system.
What was the biggest driver of all this? The iPhone, of course, and especially the latest larger screen iPhone 6 models. Apple resisted larger screens for years but its entry into the market has helped lure users from Samsung/Android, even though Google’s Android remains the world’s top operating system.
The iPhone has also made major inroads into the key Chinese market that was relatively untapped and Apple sees this as its biggest market one day.
Any downsides? Apple expects less revenue for the current quarter than analysts had been hoping. That was one. Also, when analysts dug deeper into the sales figures for the last quarter their conclusions appear to have unnerved investors.
Q3 is traditionally a weak iPhone quarter as consumers wait for Apple to unveil new models. This Q3 was no different as iPhone sales fell 23% compared to Q2. That was a bigger quarter-on-quarter fall than in the previous two years. While Apple said that was due to it lowering inventory during the period (signalling that it sold more phones than it made), it gave investors the jitters as they have always believed that the iPhone is one product that can defy seasonal shifts.
Sales of iPads continued to fall too with an 18% volume decline, the sixth quarter in which they’ve fallen as the tablet market loses its appeal in the face of ever-larger smartphones and tablets remain less of a must-upgrade product than phones.
But even without the bad news, even the impressive sales and profit figures actually came in below what analysts – and, of course, investors – had expected.
It’s the perennial problem of high-performing companies and sectors: too-high expectations. The fact is that if you deliver a certain percentage of growth one year, then one per cent less is seen as a failure. If your sales soar every quarter, then soaring isn’t good enough – they have to be stratospheric in the next quarter.
So, as soon as the earnings report came out, Apple’s shares fell as much as 7% in after-hours trading, wiping about $60bn in market value from the company.
Another major investor concern is the firm’s heavy reliance on the iPhone and that’s also another reason why they were looking for more detail around the Watch’s sales. The phone now accounts for 63% of the company’s sales (compared with 53% a year ago and less than half three years ago). On the plus side, the company sells it phones at a high price with average selling prices per unit rising by $100, boosting profits.
But with iPad sales continuing to dip, there’s always the fear that iPhone sales might have peaked or even that a clever competitor might hit them from left field with a product that changes (and dominates) the market in the same way the original iPhone did.
But Cook sought to allay those fears. He told the Wall Street Journal that the firm has always proved doubters wrong in the past and that a ceiling for iPhone sales isn’t anywhere close. If only he’d said something about the Watch…
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