Apple (AAPL) reported fiscal second-quarter earnings that beat Wall Street's significantly lowered expectations, but barring any major product innovations, Apple's days of experiencing hyper-growth are over.
Earnings of $10.09 per share on $43.6 billion in revenue would be historic for any company; just one not named Apple. Revenue rose from $39.2 billion in the year-ago quarter, but earnings fell sharply, falling 18% year-over-year. Yes, the company sold more iPhones and iPads than it did a year ago, but iPhone growth is slowing at just 6.6% year-over-year. That's hitting overall growth, no matter what way you look at it. CEO Tim Cook acknowledged as much on the earnings call. "We know that it didn't meet everyone's expectations and those we’ve achieved incredible and scale financial success, we acknowledge our growth rate have slowed and our margins have decreased from the exceptionally high level we experienced in 2012," Cook said on the call.
In 2012, Apple experienced a perfect storm, as it was firing on all cylinders, experiencing exceptional growth in its iPhone and iPad categories, its two most important products. Then, the company refreshed its entire product at once in September and October, causing concerns about the growth rate, gross margins and innovation. Gross margins came in at 37.5% for the quarter, compared to 47.4% a year ago. That's an enormous drop, and something investors have been concerned about, as evidenced in the 40% decline in the share price since the September iPhone 5 launch.
As 2013 continues, I'd expect the gross margin numbers to remain flat, though Apple does have a tendency of squeezing out every last bit of cost savings, as component prices continue to drop. Gross margin guidance for the June quarter is expected to be between 36% and 37%, which reflects a sequential decline in margins. CFO Peter Oppenheimer explained this was caused by the "loss of leverage around sequentially lower revenue, and second a different product mix." That's not something investors want to see.
Due to the slowing growth rate, Apple unveiled the largest buyback program in history, adding $50 billion to its $10 share repurchase program. The company also raised its quarterly dividend by 15% to $3.05 per share, rewarding investors with a total of $100 billion returned to shareholders over the next three years. Apple believes its stock is incredibly cheap, and even accessed the debt markets to show investors it's serious about this initiative.
Apple hinted at some products or announcements it may have in the pipeline, including mobile payments, a low-end iPhone, and a potential deal with China Mobile, Of these, a deal with China Mobile would reset the expectations, because of the vast size of China Mobile's network. Apple is being besmirched by the law of large numbers, with annual revenues approaching $200 billion. Apple needs to reinvigorate growth in its iPhone segment, which accounted for 52.6% of Apple's revenue this quarter, and a deal with China Mobile would do that. The problem is it's not here now, though Cook did acknowledge Apple has plans "to further our distribution" in China.
2013 may wind up being a lost year for Apple if the company is going to release new products in the fall of 2013 and 2014 as Cook said on the call. That would reset the bar for 2014, but it's hard to see how any of these initiatives have the same exceptional growth Apple is used to seeing year in and year out.
Apple is still an incredibly attractive business with a great dearth of talent and innovation left. Cook is the right man to lead Apple, and though the stock price is not reflecting Apple's future potential, it is reflecting a slowing growth rate. Unless Cook and team have something up their sleeve that can change investors' minds drastically, it's hard to see Apple as the stalwart it once was.