| SAN FRANCISCO, July 23
SAN FRANCISCO, July 23 Investors breathed more
easily after Apple Inc turned in a quarterly report
card with a pleasant iPhone sales surprise. 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 percent more than analysts had
The company's shares climbed 5 percent in after-hours trade,
partly on Apple saying it will buy back stock at a faster pace.
But revenue from all Apple products in greater China
plummeted 43 percent from the previous quarter and 14 percent
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 percent from
more than 42 percent 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 percent 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
Apple's average selling price during the quarter was $581,
which is about $27, or 4 percent, 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."
CHINA DROPS OFF
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.
Even excluding China, Apple's revenue in the Asia Pacific
region was down 35 percent sequentially.
Apple CEO Tim Cook - who has presided over a 20 percent drop
in the California-based company's share price so far in 2013 -
blamed the shortfall partly on the economy and said he remained
bullish on China.
The "economy clearly doesn't help us, nor others," Cook told
analysts on a conference call.
He said however that the revenue numbers didn't tell a
complete picture. Apple books revenue when it sells to
resellers, who then sell the products to consumers. Sales to
consumers - or sell-through in industry parlance - were down
just 4 percent from the year-ago quarter in China.
By that same measure, mainland Chinese sell-through sales
were actually up 5 percent year-over-year, though that was a
deceleration in growth, Cook said.
Finally, sales of the iPad - the device that catapulted
tablet computing into the mainstream - underperformed. Apple
shipped 14.6 million tablets in the quarter, a few million below
Some investors argue that Apple's hold on the market it
created may slip as the field gets increasingly crowded, with
the smartphone makers as well as Google Inc and
Amazon.com Inc piling in.
Cook however drew attention to usage data showing the iPad
still commands a dominant share of Web traffic.
"iPad accounts for 84 percent of the Web traffic from
tablets," he said. "So if there are lots of other tablets
selling, I don't know what they are being used for."
But Frank Gillett, principal analyst at Forrester, warned
that the iPad numbers bear watching going forward.
"You are to wonder if we are reaching saturation," he said.
"But you can't believe that as the idea of a tablet is very
Given all those factors, the immediate stock rally should
not be seen as proof that concerns surrounding the stock have
abated, some analysts said.
"It's nice to see a bit of a beat for a change," said Hudson
Square Research analyst Daniel Ernst. But "earnings are still
down year over year."
"It's going to take a new product introduction before we see
earnings turn positive," Ernst said. "It's a step in the right
in the direction, with low expectations."