Steve Jobs Keeping Apple Cash `Powder Dry' for Future Bets

Apple Inc. fell the most in two months on the Nasdaq after forecasting shrinking gross margins and profit that missed some analysts’ estimates, indicating that the company is making less from each iPhone and iPad it sells.

Apple dropped $8.51, or 2.7 percent, to $309.49 at 4 p.m. New York time in Nasdaq Stock Market trading. Apple predicted profit of $4.80 a share for this quarter, short of the $5.03 average of estimates compiled by Bloomberg before the announcement.

The forecast, coupled with a drop in new contracts reported by International Business Machines Corp., pushed down technology stocks. While Apple’s profit climbed to a record last quarter, competition from Google Inc. and Research In Motion Ltd. threatens to squeeze margins. The iPad tablet, released this year, also didn’t sell as well as analysts had estimated.

“Everyone is closing in and it’s a huge question of how they are going to respond,” said Michael Obuchowski, chief investment officer of First Empire Asset Management, which holds Apple shares. “I’m really worried about Apple; I’m not convinced that I’m going to hold Apple two years from now.”

Profit Margin

Gross margin, the percentage of sales left after deducting production costs, will be about 36 percent, compared with 36.9 percent last quarter and 41.8 percent a year before that, Chief Financial Officer Peter Oppenheimer said on a conference call.

Photographer: David Paul Morris/Bloomberg

Steve Jobs, chief executive officer of Apple Inc. Close

Steve Jobs, chief executive officer of Apple Inc.

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Photographer: David Paul Morris/Bloomberg

Steve Jobs, chief executive officer of Apple Inc.

Earnings helped push up cash and investments to more than $50 billion, giving Apple the technology industry’s biggest war chest for acquisitions, said Brian Marshall, an analyst at Gleacher & Co. in San Francisco. Apple may eventually make a large acquisition, possibly for a company such as Akamai Technologies Inc., which produces technology for distributing media content on the Web, he said.

“They are in a position to outbid everybody if they view the asset as valuable enough,” said Marshall, who recommends buying Apple shares and doesn’t own any himself.

Jeff Young, a spokesman for Cambridge, Massachusetts-based Akamai, didn’t return a call seeking comment.

“We’d like to continue to keep our powder dry,” said Chief Executive Officer Steve Jobs, after joining an earnings conference call for the first time in two years, when asked whether Cupertino, California-based Apple would use the cash for a stock buyback or dividend. “We strongly believe that one or more very strategic opportunities may come along.”

Open Versus Closed

He spoke after Apple reported that fourth-quarter profit rose 70 percent to $4.31 billion, or 4.64 a share, on sales of $20.3 billion.

Jobs, 55, dismissed the threat of rivals. Apple’s approach of designing the software and hardware for its devices results in a better user experience, he said. Google, meanwhile, has touted its open software standard, giving Android free to handset makers such as Motorola Inc. and HTC Corp. That just creates a “commodity” experience, Jobs said.

“We are very committed to the integrated approach, no matter how many times Google tries to characterize it as closed,” Jobs said. He said Apple is outselling RIM, which makes the BlackBerry, and he doesn’t “see them catching up with us in the foreseeable future.”

Marisa Conway, a spokeswoman for Waterloo, Ontario-based RIM, declined to comment. Jane Penner, a spokeswoman for Google in Mountain View, California, didn’t respond to requests for comment.

Past $300

Apple shares, up 47 percent this year, surpassed $300 last week. The company accounts for 21 percent of the Nasdaq 100 Index.

Apple sold 4.19 million iPad tablet computers last quarter, fewer than the 4.5 million predicted by Gene Munster, an analyst at Piper Jaffray Cos. in Minneapolis. Yesterday’s results also included the first full quarter of sales for the iPhone 4, released in June. Apple sold 14.1 million iPhones and 3.89 million Macintosh computers. Munster estimated that Apple would sell 11 million iPhones.

Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco, said that concerns about declining profit margins are overblown. By aggressively pricing its devices, the company is gaining more share from competitors. Munster said the drop in the stock price creates a buying opportunity for investors.

Manufacturing Costs

Revenue this quarter will be about $23 billion, Apple said. Analysts had predicted sales of $22.3 billion.

Apple may get a sales boost by expanding the availability of the iPhone in the U.S. Verizon Wireless may begin selling it in January, two people familiar with the matter said in June.

Jobs also said he’s been surprised by iPad purchases by business customers.

“We haven’t pushed it real hard in business,” Jobs said. “The more time that passes, the more I am convinced that we’ve got a tiger by the tail.”

Still, the cost of making the iPhone may be increasing, said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon. The device accounts for 43 percent of Apple’s revenue.

“We saw what we think is a pretty remarkable increase in iPhone costs,” and that’s fueled concern about margins, Hargreaves said in an interview with Bloomberg Television.

Supply shortages also likely held back sales of both the iPhone and iPad, Munster said.

Competition also is increasing. The Android operating system was the most popular smartphone software in the U.S. in the second quarter, according to Gartner Inc.

Samsung Electronics Co., HTC, Motorola and Dell Inc. are among the companies using Android in tablet computers to rival the iPad. Hewlett-Packard Co., the largest computer maker, also is developing a tablet computer.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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