Apple’s on the defensive about growth

One of the interesting things about Apple’s earnings call today was just how defensive the company seemed.

The company really wanted listeners to know that it’s quarter was really much better than it seemed at first glance and its guidance wasn’t as bad as it appeared. And there were all kinds of reasons why things didn’t look as good as investors might have hoped.

Of course, some might call those reasons excuses. Apple CEO Tim Cook and CFO Peter Oppenheimer kept repeating that the company’s holiday quarter had one fewer week than the same period a year earlier. They repeatedly mentioned that Apple supplies of products, including the iPad mini, were “constrained.” They mentioned the weak market for PC sales. And they noted that Apple’s sales in its second quarter last year were boosted by a one-time build up of iPhone inventory, making year-over-year comparisons more difficult.

But even if you take those explanations at face value, they don’t hide the fact that Apple’s growth rates are clearly slowing down.

The iPad was a rocket that ignited Apple’s growth in an unbelievable way. Very few companies post annual sales growth of 50 percent or more a quarter on a regular basis. And it’s almost unheard of for a company with more than $40 billion in annual sales to post those kinds of growth rates. And yet, that’s what Apple did repeatedly following the iPad launch.

In its fiscal 2009, Apple posted $42 billion in sales. In fiscal 2012, the company recorded $157 billion in sales. That represents a 55 percent average annual growth rate for three straight years.

But that growth is now clearly gone.  For the last three quarters, Apple’s sales have grown 27 percent or less on an annual basis. And now the company expects its growth to fall to 10 percent or less.

Worse, though, is that the company’s phenomenal earnings growth now seems to be at a complete end.

In the just-completed quarter, Apple’s net income was basically flat with the same period a year earlier. Thanks to a jump in outstanding shares, its earnings per share actually fell by 6 cents a share.

And, again, next quarter will be even worse. Apple didn’t give specific earnings guidance. But taking the figures they did offer for revenue, gross margin, operating expenses and the like, my back-of-the-envelope calculation is that the company expects to post a profit of between $8.75 billion and $9.7 billion. Assuming that Apple’s share count remains the same, that would work out to be somewhere between $9.24 and $10.24 a share.

That result would be way down from the same period last year. In its fiscal second quarter last year, Apple earned $11.6 billion, or $12.30 a share.

So what’s going on?

Cannibalization is clearly a factor. Sales of iPads are replacing sales of Macs. And sales of iPad minis are replacing sales of full-priced iPads.

On the call, Cook said Apple doesn’t worry about cannibalizing its own products. Better that the company steal sales from itself than that they go to someone else. And, Cook said, there’s a lot larger potential market for the iPad than the Mac, thanks to the former’s lower price point.

But the problem for Apple is that it’s going to have to sell far, far more of those iPads to make up for the lost revenue.

Apple gets more than $1,300 for each Mac it sells. But it gets only about $466 for each iPad it sells. So for each Mac sale it loses, Apple has to sell nearly three iPads to see the same revenue.

Until recently, that’s been more a theoretical problem than an actual one. Mac sales were growing both in real terms and relative to the broader market. But in two of the last three quarters, the money Apple sees from selling Macs has fallen on an annual basis. And it’s been more than a year since Mac sales have grown faster than a 6 percent annual clip.

So, cannibalization of Mac sales does seem to be happening.

But now, Apple seems to be seeing cannibalization in its iPad line itself as sales shift from the original, big iPad to the new iPad mini.

The average amount Apple saw for each iPad it sold fell by some $126 from the holiday quarter of 2011 to the just completed quarter. The big difference between the two periods? Apple launched the mini.

Apple didn’t break out how many minis it sold, but the figures it did provide suggest that the growth in sales of the big iPad is slowing markedly. Even with the mini, Apple’s iPad sales grew by 48 percent on an annual basis in the  quarter. That’s nothing to sniff at, of course, but its far off then more than 100 percent growth of a year ago.

And, more importantly, it means that big iPad sales grew significantly less than 48 percent. Again, that’s a problem for Apple because it has to sell more iPad minis to make up for any lost big iPad sales. Worse, the company has said that the profit margin it sees on the mini is “significantly less” than the company average. That means to make up for the lost profits, it has to sell lots more minis.

So there may be a good reason Apple officials seem defensive. All the excuses they may offer can’t hide the fact that Apple’s rocket ride of growth is petering out.

(Photo courtesy AFP/Getty Images.)


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