Apple Forecasting Slower Holiday Sales Amid Samsung Gains

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)’s forecast for the slowest holiday sales growth in a half decade reflects how iPhones and iPads aren’t providing the growth surges they once did as competition accelerates in the saturated mobile market.

The trend was outlined yesterday when Cupertino, California-based Apple said revenue for the current quarter would be $55 billion to $58 billion, up 0.9 percent to 6.4 percent, from $54.5 billion a year earlier. That would be the slowest holiday-sales rise since 2008, when revenue jumped 6 percent. Profit will be about the same as last year, based on Apple’s predictions for gross margins.

The forecast is a turnaround from previous years such as 2011 and 2012 when Apple saw holiday sales swell by more than 70 percent. While Apple’s devices have upended the technology industry, Chief Executive Officer Tim Cook has overseen a stock fall of 25 percent in the past year as profit declined for the first time in a decade. The world’s most-valuable company is grappling with competitors led by Samsung Electronics Co. (005930) that are exerting pricing pressure through lower-priced smartphones and tablets.

“The question is, can they return to growth?” said Walter Piecyk, an analyst at BTIG in New York. “You had a company that was growing, and then it went negative.”

Photographer: David Paul Morris/Bloomberg

An employee arranges Apple Inc. iPhone 5c and 5s devices during the launch at the company's new store in Palo Alto. Close

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Photographer: David Paul Morris/Bloomberg

An employee arranges Apple Inc. iPhone 5c and 5s devices during the launch at the company's new store in Palo Alto.

There are signs Apple will regain its footing in 2014, with profit margins stabilizing and sales in countries like China expanding, said Piecyk. The company generated $5.73 billion in China last quarter, up 5.6 percent from a year earlier, while sales in Japan rose 41 percent to $3.34 billion after it forged a deal with the country’s largest carrier, NTT Docomo Inc. (9437), to sell the iPhone.

Bright Spots

“The product line is seeing strong demand,” said Laurence Balter, an analyst at Oracle Investment Research. “They need to get back on a positive climb.”

Apple fell 2.5 percent to $516.68 at the close in New York.

The company is rolling out new iPhones and iPads for the end-of-year shopping season, which is Apple’s most important quarter. Cook, speaking on a conference call yesterday, said the new iPhone 5s is backlogged and that he expects new iPads to be similarly popular.

Apple will begin selling a new iPad Air Nov. 1, followed later in the month by an updated iPad mini with a high-definition screen.

“It’s going to be an iPad Christmas,” Cook said on the call. He also hinted that products are in development for release next year, including new categories where the company doesn’t currently do business.

Battling Competitors

New products would help expand Apple’s sales as the smartphone and tablet markets have become more crowded. Apple had about 13.4 percent of the global smartphone market last quarter, down from 15.6 percent last year, according to market researcher Strategy Analytics. Samsung’s share rose to 35.2 percent from 32.9 percent. Apple’s share of the tablet market has also declined, as rivals introduce new products and lure customers with lower-cost alternatives.

The competition has hit Apple’s gross margins, as the company faced higher costs to introduce its new iPhones and iPads ahead of the holidays. The company forecast margins of 36.5 percent to 37.5 percent for the current quarter, compared with analysts’ projection for 38 percent on average, according to estimates compiled by Bloomberg. Gross margins are closely watched by investors because it indicates how well the company is managing costs.

Chief Financial Officer Peter Oppenheimer said margins would have been better, if not for a new accounting method Apple is using for software.

IPhone, IPad

Sales for the 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. Apple sold 4.6 million Mac computers.

Profit for the 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.

“This is a company that has routinely blown the doors off their estimates, so meeting or just exceeding is probably a disappointment,” said Jack Ablin, chief investment officer at BMO Private Bank, which has $66 billion under management.

Margins Bottoming?

CFO Oppenheimer said gross margins are being weighed down by higher costs for new products, currency pressure from conversions in Japan and Australia, 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.

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.

If Apple hits the high-end of its forecast for gross margins in the current quarter, it would the first time in five quarters they haven’t declined. Margins hit a record 47 percent in 2012.

“Apple is laying down some markers that it’s not a broken growth company,” said David Rolfe, chief investment officer at Wedgewood Partners Inc.

Cash Hoard

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.

Without addressing Icahn directly, Cook said on the conference call that the board discusses what to do with cash on an “ongoing basis.” Apple 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.

Apple ended the past quarter with $146.8 billion in cash and investments, up $100 million from the prior quarter. The company paid out $2.8 billion to shareholders in dividends in the quarter and bought back $5 billion of its own shares.

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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