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iPad slumps in Apple's transitional quarter

In a quarter with only old models to sell, Apple sees profits slide, but no nasty shocks for investors


Published: 24 July, 2013

READ MORE: Financial | Apple | iPhone | Tablet

Apple investors largely breathed a sigh of relief when the firm's fiscal third quarter earnings were announced on Tuesday, even though profits fell by about $2bn compared to last year. Gone, for now, are the days when the vendor routinely blew Wall Street predictions out of the water, but despite disappointing net profit and iPad sales figures, most felt things could have been far worse. After all, this was a quarter relying on ageing products, while the real test of Apple's ability to regain its old dominance will be the holiday period, when it will be offering a new iPhone and other products.

Sales of iPhones grew by almost 20% year-on-year, and are the largest contributor to Apple's overall finances, which saw revenue of $35.3bn, at the high end of the company's own guidance and in line with Wall Street consensus of $35.09bn. However, pundits had expected more of the profit figure of $.6.9bn, though the $7.47 per share number was ahead of forecasts.

Apple shipped 31.2m iPhones during the quarter, up from 26m a year earlier, but iPads were down to 14.6m, from 17m in the year-ago period, and Macs were also down, to 3.8m from 4m. The iPad dip was to some extent expected, given that last year's fiscal Q3 was the first sales quarter for the third generation model, while there has been no new tablet this time around. However, given the buoyancy of the tablet segment, and the failure of new entrants like Microsoft's Surface RT to steal share, more might have been expected from this flagship device.

And the iPhone, despite holding up well in unit terms, is starting to weigh on profits, as the sales balance shifts to older models and emerging markets. The average selling price across the iPhone family fell by 4% on last year.Apple is still expected by many to announce a low end model this fall, and that could be more forgiving on margins than the current situation, where legacy iPhones are the main options for lower budget customers. A handset designed with lower price points in mind could have a more efficient bill of materials and so keep margins decent. However, Apple's overall gross margin was on track with the firm's own targets, at 36.9%.

CEO Tim Cook, under intense pressure to convince investors that Apple can regain its 'magic' with major innovations and launches, said in his statement: "We are especially proud of our record June quarter iPhone sales of over 31m and the strong growth in revenue from iTunes, software and services." As usual, he hinted at new products to come but revealed no details, saying: "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 is going through an exaggerated version of the usual doldrums it suffers because of its one-per-year iPhone release cycle, and this time the iPad failed to make up the slack. However, high hopes remain for the next wave of launches. "The bad news is really in the rear view mirror," Brian Blair, an analyst at Wedge Partners, told Bloomberg. "What we're going to see from here on out is numbers going up across the board for a couple of quarters. We're going to see a product refresh and the kinds of things that get investors excited."

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