X

For Apple, more success raises more questions

Apple posted quarterly results on Tuesday that virtually any other company would kill for. Yet CEO Tim Cook still found himself on the defensive.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
4 min read

Apple did sell as many iPhones as expected in the fiscal third quarter. Sarah Tew/CNET

By virtually any measure, Apple posted solid financial results. But for the investors who follow the company, solid just isn't good enough.

Apple's third quarter is typically its slowest. It's sandwiched between the Dad-and-grad shopping season, and the back-to-school and iPhone launch. Yet Apple on Tuesday posted a quarter that most of its rivals would be ecstatic to report. Its revenue was a third higher than the same period last year. It sold 47.5 million iPhones, 35 percent more than a year ago. Sales in China more than doubled. And Apple said it would generate $49 billion to $51 billion in revenue in the current quarter.

Then Apple's shares dropped 6.9 percent to $121.80 in after-hours trading, wiping away roughly $52 billion in market value. Today, it's down 5 percent to $124.16.

So what happened? That third-quarter revenue was only just in line with expectations, not much higher. And iPhone sales were about 2 million short of what Wall Street anticipated. Apple CEO Tim Cook acknowledged that China, while a huge market for Apple, could see some "speed bumps" because of economic woes. Its fourth-quarter forecast looked a little light too.

Welcome to the world of Wall Street, a.k.a. the game of heightened expectations. Apple, by far the world's most valuable company, plays by a different set of rules, one where investors aren't impressed unless they see a blow-out quarter -- every quarter. Instead of taking a victory lap, Apple CEO Tim Cook found himself on the defensive during the company's quarterly conference call with investors.

"We did exceptionally well in any way that you look at it," Cook said on the call. "From our point of view the iPhone is doing outstanding."

For Apple -- which also happens to have $203 billion in cash -- more success leads to more questions. Sure, Apple posted a record third quarter. What happens to iPhone demand in the long term? How many Apple Watches did people buy? Is China slowing down?

It also means more ways to disappoint, well, just about everyone.

"In a vacuum, Apple's results were good," Wells Fargo analyst Maynard Um said. "However, relative to expectations, results and guidance were disappointing, particularly with respect to iPhone units."

In some ways, it's a victim of its predictability. Everyone knows it will release its next iPhone in September, even if Apple hasn't confirmed it. And everyone knows the next device won't feature drastic changes like those in the iPhone 6. Because of that predictability, consumers who need new smartphones know to hold out for a few months for the new model -- or at least for the older models to get cheaper.

Apple CEO Tim Cook was on the defensive on Tuesday. Apple

In Apple's first quarter last year, its first full period of iPhone 6 sales, the company sold 74.5 million iPhones -- more than it has in a single quarter ever before. The question now becomes whether it can do it again with a device that incorporates mostly incremental changes, not something like bigger screens.

Earlier Tuesday, Verizon Chief Financial Officer Fran Shammo hinted at the next "iconic device" (his codename for the iPhone), and said he didn't expect volumes to be as dramatic as last year because of the lack of significant changes.

And if the Chinese economic speed bumps end up more like road blocks, Apple's smartphone sales are sure to suffer. The region became the company's biggest iPhone market in the March quarter.

"Following the China smartphone slowdown and PC weakness, iPhone was the only major bright spot driving tech demand this year," Jefferies analyst Ken Hui said. "With the last leg also getting shaky," he's feeling cautious about the Chinese tech market.

Cook tried to give other reasons to be bullish about the iPhone. He noted that only 27 percent of the iPhone base has upgraded to the latest model, giving it room to grow. And he noted that the rate of people switching from Android is at its highest level.

Then there's the Apple Watch. Even though Cook spent a lot of time talking up his happiness with Watch sales, he still didn't give any actual sales figures. Contrast that with 2010, when Apple touted early sales for the iPad -- its last new device in a new category -- four times within the tablet's first three months on the market. Apple says it's keeping Apple Watch sales figures a secret to protect it from rivals, but low sales levels likely also play a role.

Analysts commented that people likely didn't buy as many as they had anticipated. BTIG Research analyst Walter Piecyk and PiperJaffray analyst Gene Munster both believe Apple sold 2.5 million Apple Watches in the quarter -- below average projection for 4 million. And they're also cutting their estimates for later periods.

"Tim Cook indicated on the call that sales ramped throughout the quarter, but we decided to cut our September estimate to 5 million watches sold from 8.9 million and our December quarter estimate to 10 million from 13.9 million," Piecyk said.

But for Apple, it still all goes back to the iPhone. If it had sold millions more than analysts expected, the stock would be moving in a much different direction.

Cook on Tuesday largely pooh-poohed the worries about iPhone sales. "We think the phone has a lot of legs to it," he said on the call with analysts. "Many, many, many years. There's ton of innovation left in the phone. I think we're in the early innings of it, not in the late innings."

He better hope so.