At Apple, revenue is up, but profit is not; meanwhile, iPhone sales in the October-December quarter fell short of analyst expectations by four million units. Both setbacks could turn out to be temporary, but they certainly suggest that the job of being Apple is getting harder as competition and the cost of missteps—such as the less-than-buoyant iPhone 5C—take their toll.
Last October, Apple predicted its revenue to grow to between $55 and $58 billion, thanks to a new lineup of iDevices and the lucrative holiday season. The company landed squarely within its own estimates for its fiscal first quarter, which ended on December 31, bringing in $57.6 billion in revenues and a quarterly profit of $13.1 billion. In the same quarter a year ago, Apple’s revenues totaled $54.5 billion, yielding a quarterly profit of ... $13.1 billion.
Where did that extra $3.1 billion in revenue go? A lot of it, apparently, got paid straight back to Apple's component suppliers and manufacturing partners. The company's cost of sales jumped by $2.3 billion over that period, leaving just under $800 million in additional gross profit (which Apple calls "gross margin) to fund increases in R&D and sales expenses and a shortfall in investment income.
Product, Product, Product
Sales of iPhone and iPad sales rose in the quarter, while sales of the iPod and the Mac have slowed. In the December quarter, Apple sold 51 million iPhones (across all models), up from 47.8 million in Q1 2013. The company moved 26 million iPads, up from 22.9 million in the same quarter last year. Mac sales are down to 4.1 million this quarter, from 5.2 in Q1 2013. Sales of the iPod are at 12.7 versus 15.4 million one year ago.
One interesting tidbit: Despite the fact that iPhone sales hit a record in the quarter, growth has cooled considerably. Unit sales of the phone rose just 6.7% over a year earlier. A year ago, by contrast, iPhone sales growth was 28% compared to the same quarter in 2011.
International sales accounted for 63% of Apple’s revenue in the quarter, up from 60% a year earlier. With smartphone and tablet saturation looming large in western markets, Apple turned toward securing major telecom deals in Asia to expand its footprint. Apple is counting on those new partnerships in the coming quarter:
China Mobile could hand Apple 700 million subscribers. That's seven times more mobile customers than subscribe to Verizon, the largest mobile provider in the U.S. Beyond that, Apple just struck a deal with Japan's NTT Docomo, Japan's largest carrier, netting itself another pool of 60 million potential iPhone owners.
On the call, Cook noted that Apple has been selling the iPhone with China Mobile for only one week, and that last week set a record for iPhone activations in the country, where the iPhone is still only available in a handful of cities. He also cited the dollar’s multi-month low against the yen as a complication to sales in its new Japanese market.
Oh See, The 5C
In response to a question about its iPhone 5C model, Cook explained that Apple overestimated demand for the plastic iPhone in North American markets. Of course, we don't have any solid numbers on sales of that device, but it's obvious that Apple is disappointed with the 5C's performance. Cook admitted that "the 5S got a significant amount more attention and a higher mix of sales" compared to what the company anticipated, and it sounds like the company is still trying to figure out what that means.
Last year was a relatively rocky one for Apple, which still makes it wildly successful when measured against anything other than the company's own past success. And there are still shoes to drop.
Apple's July-September quarter, for instance, only included 10 days of sales iPhone 5S and 5C sales—certainly not enough to properly judge the product launch’s relative success or failure. This October-December quarter may not be much of a harbinger either, as the company and its shareholders are eagerly awaiting a payoff from Apple's expansion into Asian markets—a critical play that might be complicated by poor sales of its "entry-level" iPhone 5C elsewhere in the world.