Apple is selling more smartphones – but making less money.
The company behind the hyperpopular iPhone reported fourth-quarter results on Monday that beat analysts’ expectations for both revenue and profit, propelled by a whopping 33.8 million iPhones sold.
But behind the headline numbers lie some worrying trends. Profit declined from the year-earlier quarter for the third time in a row. And Apple’s once-stellar profit margins are slowly eroding.
In the quarter ended Sept. 28, Apple’s gross margins came in at 37 per cent, essentially unchanged from the previous quarter, and down from 40 per cent from the same quarter a year ago. Indeed, Apple’s margins have dropped or remained flat for the past seven quarters.
For the upcoming quarter, which will include sales of the company’s recently unveiled tablets and smartphones, Apple predicted margins in the range of 36.5 per cent and 37.5 per cent, below expectations. Apple’s margins tend to dip right after the launch of new products, which are initially more expensive to build before the company streamlines the production process.
“We will endeavour to work very hard to bring down those cost curves,” Apple chief financial officer Peter Oppenheimer said.
Declining margins are by no means unique to Apple. Many companies in the mobile electronics industry in recent years have had to contend with the transition of smartphones and tablets from premium luxuries to commodity products. To avoid missing out on the growing demographic of new buyers who are more interested in price tag than brand, Apple has in the last few months introduced specifically downmarket versions of both the iPhone and iPad. The company also slashed prices on two of its most popular laptops, and announced that some of Apple’s most popular software, including its mobile productivity tools and its OS X computer operating system, will be available to many consumers for free.
Both the iPad and the iPhone remain among the most critically acclaimed mobile products in the world, but even if they sell better than previous models, many come with a reduced price tag.
“If you look at the iPhone launch... we are selling the iPhone 4S as the entry-level offer, the 5C as the mid-tier and of course the iPhone 5S,” said Tim Cook, Apple’s Chief Executive Officer, referring to three flavours of the popular smartphone. Both the iPhone high-end 5S and the less expensive 5C were introduced last month and quickly went on to become huge sellers, as consumers bought 9-million devices in the first weekend of availability.
“Our goal overall is to have growth but we want to have each of those categories grow.”
For the most recent quarter, Apple posted revenue of $37.5-billion, up from $36-billion a year earlier, and net profit of $8.26 per diluted share, down from $8.67 a share a year earlier.
Heading into the coming quarter, which includes the holiday shopping season and is usually Apple’s strongest quarter, the company expects revenue between $55-billion and $58-billion, compared to $54.5-billion in the same period last year.
Like many companies in the mobile industry, Apple’s central challenge is readily visible in the race between rising volumes and declining prices. In the quarter, the company saw a 26 per cent increase in the number of iPhones sold, compared to a year earlier. However, over the same period, the average selling price of those phones declined 7 per cent.
Investors had a slightly negative reaction to Apple’s earnings. In after-hours trading, Apple shares dropped roughly 2 per cent immediately following the earnings announcement.