Apple’s margin outlook surprises analysts

NEW YORK: At least three brokerages cut their price targets on Apple Inc. by up to $ 50 a share after the iPhone maker surprised analysts by forecasting lower gross margins for the current quarter.
Apple shares edged lower 0.1 percent to $ 608.85 in premarket trading.
For the December quarter, Apple forecast revenue of $ 52 billion, below estimates of $ 55 billion, according to Thomson Reuters I/B/E/S. It expects margins of 36 percent, far lower than analysts’ expectations of 43 percent.
Analysts focused on the decline in margins and played down the significance of a fall in iPad sales in the last quarter, as users waited for the iPad mini, and they did not expect this to continue.
Apple’s forecast decline in gross margin, even assuming it was deliberately aiming low, still pointed to an unusual decline, Evercore Partners analysts Rob Cihra and Edison Yu said in a research note. Evercore cut its price target on the stock to $ 775 from $ 800.
Nomura Equity Research said it expected production costs to rise in the current quarter, after Apple redesigned so many of its products at once.
“The iPhone 5, iPod Touch, iPod nano, iPad mini and iMac all feature new form factors and our checks with the supply chain indicate that many of these are very complex to manufacture and are likely resulting in reduced production efficiencies,” Nomura analysts said in a note as they lowered their price target to $ 660 from $ 710.
Apple heads into the current quarter after refreshing almost all of its product lines, including introducing a lower-priced 7.9-inch “iPad mini” and an upgraded fourth-generation full-sized iPad.
Apple said it expects 80 percent of revenue in the current quarter to come from new products but did not increase the product prices to offset higher costs and maintain its margins.
Analysts, however, expect gross margins to recover by June next year as rising volumes trim manufacturing and component costs.
When the iPhone 4 was launched, Apple suffered a 480 basis point decline in corporate gross margins but it recovered entirely within two quarters, Raymond James analyst Tavis McCourt said.
He cut his price target on the stock by $ 30 to $ 700.
Apple had struggled to deliver large quantities of the iPhone 5 since its launch in late September, with waiting times stretching at times to three weeks in some regions.
AT&T Inc. recently blamed its disappointing subscriber growth in the third quarter on a shortage of iPhone 5, highlighting its dependence on Apple.
Apple CEO Tim Cook told analysts on a conference call that there was a heavy backlog for the latest iPhone but the company had mostly worked out kinks in its supply chain.
“We believe initial demand continues to look huge for Apple’s new 6th-gen iPhone 5, seeing a big jump coming in this Dec-qtr where our estimate remains unchanged at 49 million iPhones,” Evercore said.
Although fourth-quarter iPad sales of 14 million missed estimates, analysts said they expected sales growth in the December quarter and 2013. Apple shipped 26.9 million iPhones in the last quarter, just ahead of analysts’ predictions.
Evercore forecast Apple to ship 67 million for 2012 and 97 million next year, and said this would take sales of the tablet to around 27 percent of the size of the traditional PC market in 2013.
Analysts say the real test for Apple will come during the crucial year-end holiday shopping season, when competition will reach fever-pitch against new gadgets from Amazon.com, Google and Microsoft.
“Going into earnings we were wondering if the slowing economy will catch up with Wall Street, and it has,” said Channing Smith, co-manager of the Capital Advisers Growth Fund.
“Apple is very well positioned with the iPad and now the iPad mini. It has a great smartphone and we expect the iPhone 5 to sell very well. The outlook is conservative, but that’s not surprising. Err on the side of caution is a proven formula.”
Apple heads into the current quarter after refreshing almost all of its product lines, including introducing an upgraded, fourth-generation full-sized iPad. The December quarter will show how well consumers respond to its latest gamble — the iPad mini — which goes on sale on Nov. 2.
Quarterly revenue in China, Apple’s second-largest market, rose 26 percent, and jumped nearly 80 percent to $ 23.8 billion over the full year, contributing 15 percent of Apple’s total, Cook told analysts.
Apple plans to launch the iPhone 5 in China in December, hoping to staunch market share loss in what is set to become the world’s largest smartphone market this year.
Apple’s China smartphone market share almost halved to 10 percent in April-June as buyers waited for the iPhone 5.
Chief Financial Officer Peter Oppenheimer mostly attributed the lower margin and conservative guidance to a combination of a stronger dollar, higher costs associated with new products, and the fact that Apple’s next fiscal quarter has one less week than the same period a year ago.
Supply constraints holding up sales of the iPad and iPhone dominated discussions between analysts and Apple executives during the post-results conference call. Apple had struggled to deliver large quantities of the iPhone 5 since its launch in late September, with the waitlist for the device at one point stretching to three weeks in some regions.
“Our supply output is significantly higher than it was earlier in October,” Cook said, referring to the iPhone 5. “And I’m confident we’ll be able to supply quite a few during the quarter.”
Cook also opined on Microsoft’s new Windows 8-based Surface tablet. “I haven’t personally played with the Surface yet, but what we’re reading about it, is that it’s a fairly compromised, confusing product,” he said. “I suppose you could design a car that flies and floats, but I don’t think it would do all of those things very well.”
Despite the lackluster fourth quarter, Apple put up big numbers for the year, ending its fiscal 2012 with a 45 percent increase in revenue to $156.5 billion, while net income was up 61 percent at $41.7 billion.
For the final fiscal quarter, it posted net income of $ 8.2 billion, or $ 8.67 a diluted share, on revenue of $ 35.96 billion, versus $ 6.6 billion, or $ 7.05 a share, a year earlier. Analysts had expected on average that Apple would earn $ 8.75 per share.
Apple ended the quarter with $ 121.3 billion in cash and securities, of which $ 83 billion was offshore.