Its quarterly results stunned the tech industry – and its Chinese
competitors, who have now been eclipsed in their home market. But
reaching the financial pinnacle creates some questions – and even
problems – of its own
When Apple became the most profitable company in history last week, analysts could hardly contain their excitement.
“Stunning”, “outstanding”, “a monster” were some of the analysts’
reactions to numbers showing the Silicon Valley firm had made $18bn
(£12bn) in just three months – by selling 34,000 iPhones an hour around
the clock from October to December. It now has $178bn cash in the bank.
But after all the commotion, the questions began. For a company that
has come back from the brink of bankruptcy less than 20 years ago, how
long can the good news continue? Here are the six big questions facing
the world’s biggest corporate success.
Financially, is this the peak?
Apple was 90 days away from bankruptcy when Steve Jobs rejoined it in 1997– as he later revealed – but Apple
now tends to downplay its financial success ahead of quarterly profit
announcements in order to surprise investors and analysts.
This quarter’s profits were on another scale, though. Sales in the
three months to the end of December were up 30% to $74.6bn. Those
profits of $18bn were up 37%.
It was the fastest quarterly growth since March 2012, but then Apple
was half the size it is now. As Apple’s chief financial officer, Luca
Maestri, said: “For a company of our size that is not a small feat.”
Katy Huberty, an analyst at Morgan Stanley, said it was a “quarter
for the record books” and increased her share price target from $126 to
$133, indicating she believes there is more growth to come. The shares,
which jumped 5% in after-hours trading following Apple’s results, closed
at $117 on Friday.
The big challenge now, says Geoff Blaber, vice-president of research
for CCS Insight, is to find the next growth opportunity. “Western Europe
and north America are becoming saturated: to have room for growth Apple
has to rely on taking growth from [Google’s] Android operating system
based devices,” he says. “The big, big, focus is on China and to a lesser extent India.”
Analysts polled by Thomson Reuters expect Apple’s revenue in the year
to September to grow 22%, but growth to slow to 4% in the following
year.
Are there many more people left who want an iPhone?
Apple sold a record 74.5m mobiles in the quarter, 46% more than in the same period a year earlier. “Demand for iPhone has been staggering, shattering our high expectations,” chief executive Tim Cook said. “This volume is hard to comprehend.”
The phones accounted for two-thirds of Apple’s revenue, and were
worth more than Microsoft and Google’s latest quarterly sales combined.
“Seems like the whole world wants an iPhone,” Steven Milunovich, an
analyst at UBS, wrote in a note to investors, pointing out that
consumers had demanded even more phones but Apple couldn’t produce them
fast enough until recently.
However, Toni Sacconaghi, an analyst at Bernstein Research, cautions
that Apple’s growth may be too reliant on the seven-year-old product
line. “A bet on Apple is increasingly a bet on the iPhone,” Sacconaghi
says. “The good news is, iPhones are great. The bad news is, right now
that’s driving over 100% of the revenue growth of the company.”
How important is China?
Very: iPhone sales are exploding in the country. Apple overtook local
producer Xiaomi to become China’s biggest smartphone seller in the last
quarter. Chinese sales, which had been weak for Apple until it released
the latest bigger-screen phones, came in at $16.1bn, up 70% on last
year – when it also did not have a deal giving it access to China
Mobile’s estimated 760 million subscribers.
Revenues in China are quickly catching up with the amount it collects in the whole of Europe, where sales were $17.2bn, up 20%.
“I was there [in China] right after the launch in October, and the
excitement around the iPhone 6 and 6 Plus [was] absolutely phenomenal,”
Cook said during his call with analysts. “You can tell that we’re a big
believer in China.”
Apple plans to double the number of its stores in greater China to 40
by mid-2016. “It’s an incredible market,” he said. “People love Apple
products. And we are going to do our best to serve the market.”
Only a year earlier, in October 2013, Apple was the No 6 smartphone
maker in China, trailing Xiaomi, Huawei, Lenovo, Samsung and Yulong,
according to research firm Canalys.
“This is an amazing result, given that the average selling price of
Apple’s handsets is nearly double those of its nearest competitors,”
Canalys says. “While Chinese smartphone vendors are quickly gaining
ground internationally, Apple has turned the tables on them in their
home market.”
Can it afford for the Apple Watch to fail?
It has been five years since Apple launched its latest truly new
product – the iPad – in 2010. To live up to its name for innovation, and
diversify revenues away from reliance on the iPhone, Apple needs the Apple Watch to be an unqualified success.
Cook announced that the watch would go on sale in April, giving the
company a boost in its third quarter when it will not benefit from
Christmas or the Chinese new year, which will have helped the previous
two quarters. “We’re making great progress in the development of it,” he
said.
Apple describes the new product – often referred to as the iWatch,
although it has not been officially named – as the “most personal device
ever” and it is thought it will be able to monitor its wearer’s health
as well as connect to an iPhone to provide several other functions. Cook
said app developers had already impressed him with “some incredible
innovation”.
Carolina Milanesi at Kantar Worldpanel ComTech says the watch will
help Apple extend its sales into a much wider market. “They have been
very smart in pushing it as jewellery and design rather than how
technologically smart it is,” she says. “They are concentrating more on
impressing the design and fashion world than the tech bloggers.
“I think this will be a much more irrational buy than with an iPad. With an iPad you wanted an iPad: this is going to be more of a fashion statement.”
She said the launch would benefit from the fashion and marketing
skills of Angela Ahrendts, the former Burberry boss Apple hired last
year on a $73m pay package as its head of retail.
Apple poached a string of big names from fashion and design to join
its watch team, including Patrick Pruniaux, former vice-president of
sales at Tag Heuer and former Yves Saint Laurent boss Paul Deneve, who
is now Apple’s “vice president of special projects”.
Has Tim Cook emerged from the shadow of Steve Jobs?
Few chief executives were as intimately connected to their companies
as Jobs was with Apple, and Cook faced a tough battle to win over
investors who feared he lacked the co-founder’s vision and showmanship.
Activist investors David Einhorn and Carl Icahn have tried to
interfere with Cook’s management, but he has stood his ground. He’s also
shown his steely side by axing Scott Forstall, the former head of its
iOS mobile operating system, over the failed launch of the Apple Maps
app, as well as replacing the head of the company’s stores, John Browett
– the former Dixons boss – after less than a year in the job.
Jobs and Cook are “such different personalities”, says Milanesi, who
has followed Apple for more than a decade. “The reception under Cook has
been very positive: he is very impressive in operations and managing
the product chain.”
Milanesi says Cook has also done a lot to make Apple feel like a more
approachable brand. “With Jobs it was aspirational but somewhat
untouchable and distant,” she says. “It seems much more open and
accessible under Tim, and that’s important as they want to extend the
product range to a wide section of consumers.
“His big test will be the Apple Watch, as it’s the first product to be launched under his leadership.”
Will Apple’s huge cash pile become a liability?
Apple is making much more money than it can spend, to the extent that
it has built up a $178bn cash pile. It added $23bn to the coffers in
the last quarter and nearly all of it is banked overseas. Taking it back
to the US to return it to shareholders would incur a big tax bill.
To appease investors Apple has been buying back shares, but by
borrowing against the cash rather than using the capital. It bought back
$45bn of shares last year but hasn’t made much of a dent in the cash.
It has $35bn of debt.
Blaber says Apple needs to maintain a large surplus to give it “the
muscle and flexibility to invest in new categories”. But its latest and
biggest acquisition – Dr Dre’s headphones and streaming business Beats
Electronics – cost it $3bn.
The size of Apple’s cash holding has attracted the attention of
politicians. Cook has told Congress the company will eventually bring it
back onshore, but only when there is a “dramatic simplification of the
corporate tax code” including a “reasonable tax on foreign earnings that
allows the free flow of capital back to the US”.
