Apple Forecasts Lighter Holiday-Quarter Margin on Costs

Oct. 29 (Bloomberg) -- Jon Erlichman looks at the numbers behind Apple's fourth-quarter earnings report. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Apple Inc. (AAPL) forecast gross margins that missed analysts’ projections, as the world’s most valuable company faced higher costs to introduce new iPhones and iPads ahead of the holiday shopping season.

The Cupertino, California-based company forecast gross margins will be 36.5 percent to 37.5 percent, compared with 38 percent predicted by analysts. Revenue in the current period will also be $55 billion to $58 billion, Apple said in a statement today. While that topped the $55.5 billion average of analysts’ estimates compiled by Bloomberg, it would be the first single-digit sales rise for the holiday period since 2008.

Chief Executive Officer Tim Cook is rolling out new iPhones and iPads for the end-of-year shopping season, which is Apple’s most important quarter. The company, which is grappling with lower-priced products from Samsung Electronics Co. (005930) and others, is under pressure to reignite growth and maintain its margins with a new blockbuster product. Apple’s earnings jumped 61 percent in its previous fiscal year ended September 2012, then fell this year for the first time in at least a decade.

“People aren’t going to be excited until they see a definitive return to growth,” said Daniel Ernst, an analyst at Hudson Square Research in New York.

Photographer: David Paul Morris/Bloomberg

Tim Cook, chief executive officer of Apple Inc., takes a photograph during the launch of the iPhone 5c and 5s at the company's new store in Palo Alto, California. Close

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Photographer: David Paul Morris/Bloomberg

Tim Cook, chief executive officer of Apple Inc., takes a photograph during the launch of the iPhone 5c and 5s at the company's new store in Palo Alto, California.

Apple fell as much as 5.1 percent in extended trading after the results were released. The shares later climbed back to near their closing level of $529.88 after Chief Financial Officer Peter Oppenheimer said margins would have been better if not for a new accounting method Apple is using for software. The stock is down 25 percent from a record in September 2012 following the debut of the iPhone 5.

New IPhones

Apple said sales for its fiscal fourth quarter ended in September rose 4.2 percent to $37.5 billion. IPhone sales, including about a week of the new 5s and 5c models on store shelves, were 33.8 million, more than the 32.8 million predicted by analysts on average in a Bloomberg survey. The company also sold 14.1 million iPads, compared with an estimated 14.3 million units. Back-to-school shopping helped push purchases of Mac computers to 4.6 million.

Profit for the just-ended quarter fell 8.6 percent to $7.51 billion, or $8.26 a share, above the $7.92 projected by analysts on average and the third-consecutive period of declines.

Margin Pressure

In a conference call with analysts, CFO Oppenheimer said gross margins are being influenced by higher costs for new products, currency pressure from conversions in Japan, and an accounting change related to revenue adjustments for software that the company is now giving away for free with new iPhone, iPads and Macs.

Photographer: Craig Warga/Bloomberg

Apple Inc.’s earnings jumped 61 percent in its previous fiscal year ended September 2012, then fell this year for the first time in at least a decade. Close

Apple Inc.’s earnings jumped 61 percent in its previous fiscal year ended September... Read More

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Photographer: Craig Warga/Bloomberg

Apple Inc.’s earnings jumped 61 percent in its previous fiscal year ended September 2012, then fell this year for the first time in at least a decade.

Without the deferred revenue, Apple’s gross margin outlook would have been about 38 percent, Oppenheimer said.

“We’re going to work hard to work down the cost curve,” he said.

Apple investors are facing a new dynamic in which the company’s growth has slowed, said Jack Ablin, chief investment officer at BMO Private Bank, which has $66 billion under management and owns Apple shares.

“This is a company that has routinely blown the doors off their estimates so meeting or just exceeding is probably a disappointment,” he said.

Product Lineup

Apple has been busy updating its product lineup ahead of the holiday season. The company has said its new iPhones will be available in about 100 countries by the end of the year. The higher-end iPhone 5s costs $199 with a two-year wireless contract and includes a more powerful processor, improved camera and fingerprint-reading technology.

The new iPhone 5c is mainly last year’s model with colorful plastic cases. The handset is seen as Apple’s bid to win more customers in emerging markets like China and Russia. Without a contract, the handset costs about $800, leading analysts to say it’s too expensive for those markets and that demand is light.

A new iPad Air also goes on sale on Nov. 1, followed later in the month by an updated iPad mini with a high-definition screen.

On the conference call, Cook hinted that new products are in the works. Apple is exploring entering new product categories with “significant opportunities,” he said.

Changing Momentum

The holiday releases arrive as some of the momentum in the smartphone and tablet industries has shifted toward the lower-end of the market. Samsung has become the world’s largest smartphone maker by offering customers handsets with different screen sizes and prices. The South Korean company also is Apple’s closest competitor in tablets, along with devices from Google Inc. (GOOG), Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT)

Apple also is being pressured to return more money to shareholders. Billionaire activist investor Carl Icahn has been on a publicity campaign to get Apple to initiate a $150 billion buyback to boost the company’s stock price.

Cook said on the conference call that Apple’s board discusses what to do with cash on an “ongoing basis.” The company will seek input from shareholders and announce any change to the existing dividend and buyback plan in early 2014, he said. Apple paid out $36 billion in dividends and buybacks in the past five quarters, he said.

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

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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