The market is waiting for Tim Cook to reveal the next big thing, until then, strong iPhones sales will do ?- Image credit: Getty Images via @daylife
Tim Cook was probably breathing a sigh of relief as shares in Apple Apple took off after a solid fiscal third quarter earnings beat on Tuesday.? And while investors were rejoicing from a welcome jump in the stock price, Apple continues to face intense margin pressure, particularly as its marquee iPhones and iPads saw continued erosion in revenues per unit.? Without the release of some bombshell new products, it will be different for Tim Cook to keep the wind blowing behind?Apple?s sails.
It?s been a difficult few months for Apple?s management and investors since last September, as concern over the company?s future helped wipe out about 40% of its market capitalization.? A big part of the problem has to do with margin erosion, as it becomes increasingly difficult for the company co-founded by Steve Jobs to squeeze higher profits from its cash cow product, the iPhone.
Gross margins continued to contract during Apple?s fiscal third quarter, Tuesday?s earnings release showed, both on a sequential and a yearly basis.? At 36.9%, margins are nearly 700 basis points off their levels last year.
While Apple saw its iPhone shipments jump 20% to 31.2 million, beating the consensus estimate by a wide margin and helping the company beat profit forecasts, increased competition is clearly taking a toll on profitability. ?Samsung and other Android-powered smartphones provide different, and in some cases, cheaper alternatives to Apple?s iPhones, while the return of the Blackberry and the prospects of Windows powered phones could make it harder to gain share.
This fact is clearly expressed in Apple?s supplemental documents, where they break out revenue and unit metrics per device.? A year ago, Apple was making $607.85 per iPhone in revenue, while today the company reported $581.10 per unit.? The same fact shows up with iPads, Apple second-best selling device, with 14.6 million units shipped in the third quarter.? Apple now makes $436.07 in revenue per iPad, a 15% decline from a year ago.
Interestingly, Apple saw increases in average revenue per unit in two of their least loved products.? While iPod shipments tanked 32% to 4.57 million from a year ago, Apple now records $160.43 per unit, compared to $157.01 previously.? And amid talks of the end of the PC era, with shipments ticking down to 3.8 million, Apple saw revenues per unit grow 6.2% to $1,303.41.
Apple has clearly relied on the iPhone as their main product over the past several years, also benefiting from the rise of the tablet and the dominance of their iPads.? But with margins per product declining, and competition becoming intense, it will become increasingly difficult for Tim Cook & Co. to deliver growth levels seen in previous years.
In the press release, Tim Cook stated, ?we are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014,? while in the conference call, he noted he doesn?t believe the high-end smartphone market is saturated. ?Cook will have to put his money where his mouth is if he wants to prove he?s right.
Beyond the unexpected jump in iPhone sales, Tuesday?s earnings release revealed other bright spots.? With Apple?s cash stash rising to $146.6 billion, it is encouraging to see research and development spend jump 33.6% in the nine months to June 29, hitting $3.3 billion.? Furthermore, revenues from iTunes, software, and services surged 25% to $3.99 billion, becoming the fastest growing product by far over the past 12 months.
Investors were clearly pleased with Apple?s fiscal third quarter, rewarding the company with a substantial share price increase in the post-market session.? The stock did slowly begin to make its way lower, though, and by 6:00 PM in New York was trading up 3.5% to $433.60.
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