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After Earnings Miss, Apple Looks to Holidays for Help

By Rachelle Dragani MacNewsWorld ECT News Network
Oct 26, 2012 12:46 PM PT

Apple is setting its sights on the holiday season after an earnings report that fell short of expectations for the second straight quarter but a continuing tough economy could dampen those hopes.

After Earnings Miss, Apple Looks to Holidays for Help

Apple's profit rose 24 percent for the quarter that ended in September, with a net income of $8.2 billion, or $8.67 per share, up from the $6.62 billion, or $7.05 per share it brought in a year earlier. The results, however, fell short of analysts' forecasts of $8.75 in earnings per share.

Apple sold 26.9 million iPhones, up 58 percent from the same time a year ago and more than analysts had predicted. The newest smartphone from the company, the iPhone 5, was only available for about a week of the quarter. Apple experienced a backlog for the new phone and forecast that sales will rise significantly over the next quarter as supply catches up.

iPads were another factor in the report: The 14 million iPads it sold were fewer than expected. The company attributed the slow sales to speculation surrounding the iPad mini, set to hit shelves at the beginning of next month.

Those devices, Apple's two flagship mobile products, were revenue drivers, but not on a large enough scale to impress investors this quarter.

"Any way you look at this, it was a pretty tough quarter," Edward Zabitsky, principal and CEO at ACI Research, told MacNewsWorld.

Apple did not respond to our request for further details.

Apple Premium

The hope for Apple's upcoming holiday season lies in its new product lineup, which in the past few months has seen a broad upgrade, culminating with the launch of in the iPad mini. The device has a starting price of US$329, higher than its most popular competitors.

Apple's premium pricing is nothing new, but in an economy that is still struggling it might not be the wisest strategy, said Trip Chowdhry, senior analyst for Global Equities Research.

"Higher gasoline prices are hurting consumers," Chowdhry told MacNewsWorld. "Consumers have no money left to buy their favorite gadget, whether it is their next iPhone, Windows PC or Android phone. Apple will not be immune to the undercurrent of economic sluggishness."

That's especially true in a case like Apple's iPad mini, said Chowdhry. The new, smaller tablet was priced starting $130 higher than its closest competitors, Amazon's Kindle Fire and Google's Nexus 7.

Apple defended its pricing decision in a conference call discussing the earnings report, where analysts and investors asked several questions about the iPad mini's price. CEO Tim Cook and Peter Oppenheimer, the chief financial officer, said Apple's smaller tablet far outweighs its competition and shouldn't be compared price-wise.

Additionally, some consumers might not see the iPad mini as competing against the Kindle or an Android tablet, but rather as a more affordable version of the iPad, said Shaw Wu, analyst at Sterne Agee. The price difference between its 7-inch tablets might be significant, but the pricing difference between Apple's larger and smaller iPads might be just enough for a debating consumer to spring for the mini.

"Keep in mind that competitors have a tough enough time competing against higher-priced iPads, and we think an iPad mini that is $70 less will make it even more difficult," Wu told MacNewsWorld.

Changing Scene

Finding the magic price point for its gadgets isn't the only thing Apple needs to consider going forward, though, said Zabitsky. Apple's rise to success included moments of innovation in a tech landscape that was eager for new user interfaces, devices and ways of computing.

That sparked dramatic differences from its competitors in the industry, who are now embracing the creative approach to computing, while Apple continues to live within its own ecosystem, he noted.

"When you look at Microsoft's Windows 8, there are some pretty cool and dynamic features, and you're getting updates in real time. Apple didn't tell us we needed that. All of a sudden with this product there are all these unknown factors, most of which will fail, but there is still innovation around Windows that you haven't seen in 17 years," Zabitsky said. "That means things are looking a lot different than even 7 or 8 months ago, and Apple's growth seems to be slowing."

By relying on sky-high product sales each quarter rather than focusing on how to further integrate its hardware and software with emerging Web-based services, Apple could continue to see quarters that look more like its most recent two, said Zabitsky.

"The Web is a core part of life now, and that is the transition everyone is facing," he observed. "Microsoft came at it late, but they've embraced the Web, and they and others are understanding you don't need to be the social media network of choice but you need to understand the world has changed and you have to make those services available as soon as you turn on your computer."

When Apple launched iOS, it understood how to enhance the concept of a mobile operating system, and consumers jumped on board. Now, other operating systems are raising the bar with open networks that let manufacturers and developers work together to create high-quality products. In this new environment, Apple must turn innovative again to risk going flat, Zabitsky asserted.

"Apple is really just involved with incrementalism now," he noted. "It is going to have to come back with a whole slate of changes to really embrace the cloud -- and not just their own little cloud."

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