Apple reports earningsMIKE SEGAR/Reuters
Apple Inc. has suffered its first annual drop in profit in a decade, challenged by formidable competitors – and is struggling to maintain its aura as the world's greatest innovator of consumer electronics.
Seeking to court shareholders, the company said it will expand moves to return more of its cash hoard to investors. The board of directors has agreed to increase the quarterly dividend by 15 per cent, and the company said it planned to buy back as much as $60-billion (U.S.) worth of stock by the end of 2015, up from a figure of $10-billion announced last year. The amount represents the largest single share repurchase authorization in history, Apple said.
"We are very fortunate to be in a position to more than double the size of the capital return program we announced last year," Tim Cook, Apple's chief executive officer, said in a statement. "We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases."
The decision reflects a sea change within Apple since the death 18 months ago of founder Steve Jobs, who refused to reward investors with cash payments. The late CEO felt that shareholders were sufficiently compensated by Apple's rising stock price, and believed that the company could generate the greatest return by reinvesting its cash in new products.
But Apple's stock has plummeted this year and the company is facing mounting pressure from institutional investors to return some of its cash as its business matures and growth slows. Tuesday's results prompted several brokerages to slash their price targets. Nomura cut its target to $420 from $490; analysts at Credit Suisse said as they cut their target price by $75 to $600.
Profit tumbled 18 per cent in the first quarter, as the exploding demand for iPhones and iPads that had vaulted Apple to the pinnacle of global enterprise finally began to settle.
Sales of iPhones, responsible for the lion's share of the company's business, rose just 6.6 per cent from a year earlier. While Apple's overall revenue grew by 11 per cent, executives warned that, in the current quarter, overall sales will likely be flat or even decline by 4 per cent.
Cash from operations amounted to $12.5-billion last quarter alone and the company reported a stash of $144.7-billion in cash and investments on hand at the end of March. However, because more than $102-billion of that amount is offshore and cannot be brought back to the United States without significant tax charges, Apple has decided to incur debt to fund part of its repurchase and dividend programs, Peter Oppenheimer, Apple's chief financial officer, said on a conference call.
Analysts quizzed senior executives on sliding profitability and the intensifying competitive landscape, concerned that Apple's gross margin continues to decline. For the three months ended March 30, gross margin fell to 37.5 per cent, compared with 47.4 per cent in the year-ago quarter, as the company sought to capture a broader market with cheaper products such as the iPad Mini.
Apple's dominance in the handset market now faces serious threats from manufacturers using Google Inc.'s Android operating system. Chief among them is Samsung Electronics Co. Ltd., which this week is launching its much-anticipated Galaxy S4 smartphone. In addition, Facebook recently announced it would team up with some of Apple's rivals, including HTC, to build Android-based phones.
Mr. Cook acknowledged that the market was extremely competitive, but said the only thing that has changed recently is the identity of its rivals, with Samsung succeeding Research In Motion Ltd. as the latest threat.
"They obviously are a tough competitor," he said of Samsung, "but we feel that we have the best products by far. I feel very good about our competitive position." Investors continue to wait anxiously for the next wave of Apple products but executives did not offer any details on Tuesday.
Mark Moskowitz, an analyst with JPMorgan, expects Apple to introduce two new smartphone models between June and September: a faster version of the iPhone 5S and a lower-priced iPhone model directed at the midrange of the market. The latter device would sell for about $350 and generate a healthy gross margin of about 43 per cent, he estimated in a report last week. Mr. Moskowitz cut his target price on the shares to $545 from $725.
Apple said it sold 37.4 million iPhones in the last quarter, up from 35.1 million a year earlier. Sales of iPads rose to 19.5 million, up from 11.8 million. Mac computer sales dipped slightly to a little less than four million.
The company posted profit of $9.5-billion on sales of $43.6-billion, which compares with profit of $11.6-billion on sales of $39.2-billion a year earlier.
Apple shares gained about 3 per cent, to $418, in aftermarket trading, after rising more than 2 per cent during the regular session. The stock is down 42 per cent since hitting an all-time high of $705.07 last September. In January, Apple lost bragging rights as the world's most valuable corporation to Exxon Mobil Corp.