Sales and Profit Surge for Apple, but Its Margins Slip

Sales and Profit Surge for Apple, but Its Margins Slip
By VERNE G. KOPYTOFF and ASHLEE VANCE
Copyright by The New York Times
Published: October 18, 2010
http://www.nytimes.com/2010/10/19/technology/19apple.html?th&emc=th


SAN FRANCISCO — Strong sales of iPads, iPhones and even Mac computers produced record revenue and profit for Apple in its fourth quarter.

It was not enough, however, to sustain Wall Street’s exuberance for the consumer electronics company that has seemed to do everything right in analysts’ eyes. The company’s shares fell about 6 percent in after-hours trading on Monday after the company announced its results.

Apple said that it sold 14.1 million iPhones in the quarter, ended Sept. 25, an increase of 91 percent from a year earlier. Consumers bought 4.2 million iPads, the tablet computer it introduced in April. Mac sales totaled 3.9 million, up 27 percent.

But buried among quarterly results that any company would be more than happy to emulate was a decline in gross profit margins. Investors disliked the small blemish, sending Apple’s shares down.

“There’s a lot of hype built up into Apple’s earnings,” said Shannon Cross, the managing director of Cross Research. She added, “Everything must go down at some point, I suppose. Clearly, there was pressure on the iPhone gross margins and the iPad.”

Apple’s success has helped to propel its shares up over the last year, to close on Monday in regular trading at $318, a high.

Otherwise, analysts remained enthusiastic about Apple, based in Cupertino, Calif. Indeed, it was a quarter that highlighted the company’s dominance in consumer electronics. The company said net income for the quarter rose 70 percent, to $4.31 billion, or $4.64 a share, from $2.53 billion, or $2.77 a share, a year earlier. Revenue rose 67 percent, to $20.34 billion, from $12.21 billion.

On average, analysts had expected Apple to report net income of $4.06 a share on revenue of $18.86 billion.

Apple’s profit margins are the envy of the consumer electronics industry. The problem was that the company’s newest products ware not as profitable as its computers and iPod music players. Strong sales of lower-margin products — the iPad among them — caused the decline, according to Apple executives.

The company said gross margins fell to 36.9 percent, from 41.8 percent in the quarter a year ago. Apple predicted that its margins would slump a bit more, to 36 percent, in the current quarter. Executives repeatedly played down the importance in a conference call with analysts by saying that they were happy with where they were.

The iPod was the only product in Apple’s lineup that showed a decline, with 9.1 million sold, down 11 percent.

Steven P. Jobs, Apple’s chief executive, made a rare appearance on the regular quarterly conference call. He said he made an exception in honor of the company’s record quarter.

But he used the occasion to attack Apple’s rivals, including Google, whose Android software powers a growing number of mobile phones. Sales of mobile phones using the Android operating system surpassed those for the iPhone in the United States in the third quarter.

Just as a variety of Windows-based PCs held Apple computers to a tiny market share for decades, a variety of Android phones may one day make iPhones a bit player, some analysts have said. Mr. Jobs waved off suggestions that Google’s strategy would win, casting its approach as fragmented because of the variations of Android that he said are used by different phone carriers.

“With iPhone, every handset works the same,” Mr. Jobs said. He added, “We think Android is very, very fragmented and getting more fragmented by the day.”

Mr. Jobs also criticized several companies that planned to challenge the iPad. He said that their plans to sell a device with a seven-inch screen would create a poor customer experience compared with the iPad, which has a 10-inch screen. The touch screen will be so small, Mr. Jobs said, that users will be unable to easily use their fingers to reach apps on the device.

Peter Oppenheimer, Apple’s chief financial officer, said that a surprising number of businesses and schools had also been buying Apple’s products. IPhones provided the biggest piece of Apple’s revenue, with $8.8 billion in sales, followed by notebook computers with $3.2 billion. IPads and related accessories accounted for $2.9 billion.

International sales accounted for 57 percent of all revenue in the quarter.