Apple saw record iPhone sales in its fiscal first-quarter earnings. But the number fell short of Wall Street expectations by at least 5 million, according to average analyst estimates.
The iPhone gravy train is slowing in terms of what Wall Street believes Apple is capable of. Apple's stock fell by more than 8 percent at its lowest point in after-hours trading on the NASDAQ, from $550 per share to about $504 per share.
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The iPhone remains the core part of the company, raking in more than half of the company's quarterly revenue. It's Apple's cash cow: Keeping that momentum ticking over is key to its quarterly profits.
There's clearly a disconnect. Either Apple reported record figures, and Wall Street was blowing its potential way above the company's reach. Or, despite "record" sales for the quarter, it still could have done better.
Apple's chief financial officer Peter Oppenheimer indirectly rebuffed the claims on the follow-up conference call with analysts, saying that despite supply constraints, he is "pleased with underlying business growth."
The overall lukewarm mood of the investors on the call notwithstanding, both Oppenheimer and Apple chief executive Tim Cook, who was also on the line, were quick to calm concerns — mostly by pointing fingers.
Blame the iPhone 5s' demand, and also blame the carriers. But don't panic: China will save the day.
Reason 1: iPhone 5s demand was "higher than expected"
Oppenheimer said that in spite of the weaker-than-expected second-quarter guidance for the March quarter, "the underlying performance of the business is stronger than what the guidance might supply."
It's the first fiscal quarter that Apple reported earnings for two iPhones, rather than the traditional one, thanks to the introduction of the iPhone 5c. The performance of the lower-cost smartphone was on almost everyone's minds, amid concerns that the device isn't selling.
However, he said, the supply for the iPhone 5s was "tough." Cook also confirmed that the company sold far more iPhone 5s smartphones than iPhone 5c handsets. Cook believed that the "unique" features of the iPhone 5s, notably the fingerprint sensor dubbed Touch ID, was one of the driving reasons behind the higher attention of the premium model.
Earlier analyst estimates found that about one in three Apple smartphones are the lower-cost $99 iPhone 5c. But the company did not confirm what the exact mix was, nor did it break out the ratio of how many iPhone 5c devices were sold out of the 51 million.
"On the 5s, sell through year over year grew despite adding a new phone underneath it. That's in spite of it being in short supply for most of the quarter," Cook said.
In other words, even though inventory levels were low before the device launched because Apple underestimated how popular the premium device would be — which shows in the record-breaking 51 million sales for the quarter — a great deal more customers were pushed to the higher-end iPhone 5s because the general view appeared to be that the iPhone 5c was an underdog.
Reason 2: North American carriers "changed upgrade policies"
Apple might have had an even better than "record" quarter if it wasn't for those "pesky kids." Notably, those North American carriers that Cook cited as being partly to blame because of upgrade policy changes.
The Apple boss said the business in North America "contracted somewhat" year over year by about 1.2 percent, according to the earnings release.
Cook said that because carriers changed their upgrade policies (without going into detail or pointing the finger of blame at any specific carrier), this would have an impact on the first-quarter earnings. He said it would also affect the second quarter.
Essentially, iPhone users couldn't upgrade to the newer smartphone when they wanted to. Customers are often locked into their contract for 12 months or more, and many potential U.S. and Canadian customers haven't quite synchronized with Apple's product release cycle. "That's a major factor playing into North America's results," he said, noting that it may take as long as another six months for it to "wash through."
It's a good job the emerging market, namely China, offset much of the U.S. and Canada losses in the iPhone business.
Despite analysts' shortfall, China will drive second-quarter iPhone sales
There was one key takeaway that Cook reiterated above all else. China didn't underperform. It's just that it has yet to show its real potential.
"If you look at it from a common sense point of view, China Mobile has more subscribers than anyone in the world." —
Apple CEO Tim Cook
The China Mobile deal, bringing in a potential of about 700 million customers in mainland China, could see a significant boost in smartphone sales in the coming quarter. Without directly attributing the miss in analyst expectations for the holiday quarter just reported, Cook said the deal had only been in place for "about a week."
Cook confirmed that it was the "best week [Apple] has ever had for activations in China," likely attributing the falling short of analyst expectations to the lack of availability, as the iPhone is only selling in 16 mainland cities. That's expected to eventually rise to more than 300 cities.
The growth spurt in that week alone probably added the icing on the cake for iPhone sales during the quarter, pushing past the 47.8 million iPhones sold in the same quarter a year ago.
The emerging markets, particularly China, are not being underestimated by the company. "One of the most important things in the iPhone business is to do really well in emerging markets," Cook said on the call.
And that's all Apple needs: To position itself in a place where it can offset the declines in certain countries in other regions.
In the fiscal second quarter of 2012, Apple sold 37.4 million iPhones, down slightly year over year. Apple's first quarter accounts for the holiday period, therefore a significant bump in sales. The second quarter will dip naturally quarter over quarter.
But the weak second-quarter guidance notwithstanding, the China Mobile deal could boost sales, if not to record iPhone sales for the second quarter, offsetting what would otherwise likely be a year-over-year decline.