‘Pleasing’ Apple results mark issues beneath surface

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Samantha Tomaszczyk argues that while Apple’s latest financial results appear to be positive, there are three signs that the Apple may be rotting

Apple’s latest results are a strange mix of very good and very bad news for the company.

Early headlines suggested the Californian firm had an astounding third quarter, with iPhone sales in April, May and June up 20 per cent to 31.2 million compared to 26 million in the same period last year.

According to CFO Peter Oppenheimer, the manufacturer is “very pleased” with this result, which is the culmination of growth across developed and emerging markets, he said. And perhaps it should be – but the fact that iPhone sales grew 51 per cent in the US, 66 per cent in Japan and around 50 per cent in the UK, shows it must be doing quite poorly elsewhere for this average to be dragged down so significantly.

Indeed, there are three signs that the Apple may be rotting and that the firm’s products may not have quite the appeal they once had.

The first is the company’s significant smartphone decline in China, where Tim Cook admitted it had seen “dramatic downturns” in iPhone sales. He said sales in Hong Kong, a “shopping haven” for tourists as well as residents, fell by 20 per cent. Of more concern was that Cook said he didn’t know why this had happened, although he said China’s economic situation had been unhelpful.

Analysts asked Cook how he could turn Apple’s fortunes in China around. Plans appear to be thin on the ground – basically double the number of retail stores and hope for the best – although Cook seemed to hint at something a bit more proactive. “iPhone sales are lower in China than we want them to be,” he said, adding the company will do something about this “but we are doing it very cautiously because we want to do it with great quality”. Was this a hint at a cheaper iPhone to match Chinese consumers’ budgets? We’ll have to wait and see – Apple said it will bring out new products in the autumn and throughout 2014.

The second worry which may keep Apple execs up at night is falling iPad sales. Global sales fell from 17 million in Q3 last year to 14.6 million. This looks worse when you put it into context with tablet sales forecasts. IDC, for example, predicts a 58.7 per cent year-on-year increase in tablet sales in 2013. Either the analysis firm is incorrect or other manufacturers are encroaching on Apple’s tablet market share.

It’s not all doom and gloom though. Cook pointed out that recent research shows 84 per cent of tablet data usage comes from iPads. “Maybe other tablets are being sold, but I don’t know what they are being used for,” he joked.

The third source of potential concern is the continuing decline in the average selling price, or ASP, of iPhones (we saw very similar things in Apple’s Q2).

Apple’s profits fell from $8.8 billion (£5.7 billion) in Q3 2012 to $6.9 billion (£4.5 billion) in the same period this year. According to analyst firm IHS, Apple’s ASP has been declining since Q1 – October, November, December 2012 – due to a shift in product mix towards the older iPhone 4 and 4S models.

IHS said this will continue as the high-end market is so saturated.

Indeed, with the proliferation of top-spec phones on the market, Apple needs to do something to protect its ASP, while at the same time capturing the Chinese market. There’s talk of iPhones with bigger screens (it worked for Samsung) and cheaper versions of the iPhone (Samsung and HTC have both released cheaper ‘Mini’ versions of their flagships) so it will be interesting to see if Apple goes down either or both of these routes.

From what Oppenheimer told investors last week, Apple’s autumn is set to be “very busy” – we only have a few more months to wait to find out.

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