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Apple, Inc: New Products Are Coming, But June, September Quarters May Be At Risk

 April 24, 2013 03:45 PM
 


(By Mani) Apple, Inc. (NASDAQ: AAPL) reported a decent March quarter (Q2) results, but provided a disappointing June quarter outlook. After two quarters aided by last fall's flurry of new products, the next two quarters could be difficult.

Fears regarding a soft fiscal third quarter were justified. Apple forecasts revenue of between $33.5 billion and $35.5 billion, while analysts expect $39.34 billion. It anticipates gross margin between 36 percent and 37 percent.

Meanwhile, the lower phone mix pulls the gross margin down as does lower revenue, partly offset by reduced manufacturing costs as products age.

[Related -Apple Inc. (AAPL): How Q1 Earnings Will Fare?]

"We estimate iPhone sales of 23.5mn as no new products appear," UBS analyst Steven Milunovich said in a client note.

Chief Executive Tim Cook said that there would be new products introduced in the fall and throughout 2014. This means that the would be pressure on June and September quarters.

Moreover, does "fall" literally mean after Sept. 22? Note that expenses will be up sequentially in June due to higher R&D spend and marketing. Apple is ramping R&D and marketing in the June quarter, which may mean September announcement of the iPhone 5S and low-end iPhone.

"Consequently, we expect new phones and iPads mostly in Sep, so F4Q might not be much better than the June quarter," Milunovich noted.

There are reports that Apple is struggling with display and fingerprint authentication technologies and iOS7; although, Asia analysts are not picking up on major delays. CEO Tim Cook maintained that Apple has a strong pipeline of new products, but it sounds as if they are coming later than expected in the fall and throughout fiscal 2014.

[Related -Apple Inc. (AAPL): iPhone Trending into Another Carl Icahn Disappointment?]

For the next six months, there wouldn't be any catalysts to lift the shares, which already was dragged down to the $400 levels as investors were not too happy about the share buybacks and dividend hike. They want innovation and margin growth, which was a feature when Steve Jobs lead the Cupertino, California-based company.

Apple had reported better-than-expected quarterly earnings for June, but the profit slipped 18 percent. Earnings per share (EPS) were $10.09 per share for the second quarter, down from $12.30 per share in the year-ago quarter. Revenue grew 11 percent to $43.60 billion. Wall Street analysts, on average, expected EPS of $10.07 per share on revenue of $42.6 billion.

The company's iPhone sales rose 7 percent to 37.4 million units, also coming in above market expectations of around 34 million units. iPad sales surged 65 percent to 19.5 million units. Apple sold 3.95 million Macs, down 2 percent from the year-ago quarter. iPod sales dropped 27 percent to 5.63 million units.

Gross margin contracted to 37.5 percent from 47.4 percent in the year-ago period.

Wall Street reacted to the news with price-target cuts and rating downgrades.

More than 30 analysts cut their price targets on Apple's stock following the report, according to data from Thomson Reuters. Current targets range from $420 to $888 while the median stands at $600.

BMO Capital Markets have cut its rating to "market perform" from "outperform," and slashed price target to $435 from $440.

Meanwhile, JPMorgan has removed Apple from its focus list while cutting its price target to $545 from $725 after the company's quarterly results. It keeps an "overweight" rating on the shares.

Unless Apple strikes gold with innovation, increased competitiveness in the smartphone market, would pressure average selling prices and margins.

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