Apple’s margins, China sales take shine off quarterly results

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SAN FRANCISCO — Investors breathed more easily after Apple Inc turned in a quarterly report card with a pleasant iPhone sales surprise.

Reuters

But the resultant share-price rally may prove short-lived as Wall Street frets about sliding margins and puzzles over a dramatic revenue drop-off in its No 2 market of China.

Without releasing a new product, Apple sold 31,2 million units of the iPhone — its most important device in the fiscal third quarter — or about 20% more than analysts had envisioned.

The company’s shares climbed 5% in after-hours trade, partly on Apple saying it would buy back stock at a faster pace.

But revenue from all Apple products in greater China plummeted 43% from the previous quarter and 14% from a year earlier — worrying for a region where smartphone penetration is still low.

Growing competition in a maturing global smartphone market, coupled with the rising number of lower-priced devices in Apple’s line-up, such as iPad minis and older-model phones, pushed third-quarter profit margins to below 37% from more than 42% just a year earlier.

Analysts and executives struggled to explain the slowdown in greater China, which includes Hong Kong and Taiwan and accounts for 13% of Apple’s fiscal third-quarter revenue.

Tuesday’s stock rally may quickly lose steam, as Apple is dogged by issues such as lower selling prices and an uncertain product pipeline, said Colin
Gillis, an analyst with BGC.

“We’re not likely to have any new product shipping in June,” Gillis said. Average selling prices (ASP) “are declining and margins are going to be under pressure. These things look like the realities”.

Apple’s average selling price during the quarter was $581, which is about $27, or 4%, down from the previous year. Apple attributed this decline to the “mix of products” — the company saw significant growth in the lower-priced iPhone 4 — and foreign exchange problems.

“It’s not just the ASP per se,” said Gartner analyst Carolina Milanesi. “What you have seen with iPhone 5 is the bill of materials is going up. You are spending more.”

The global battle for mobile supremacy is now being played out between heavy-hitters like Apple, South Korea’s Samsung Electronics Co Ltd and relative newcomers like Huawei Technologies Co Ltd and ZTE Corp in China.

Samsung, which for a year or more has been steadily encroaching on Apple’s turf particularly in Asia, is also showing signs of fatigue and issued a disappointing earnings forecast earlier this month.