Apple Forecast Shortfall Shows Cost of Year-End Product Rush

November 07 [Wed], 2012, 16:01
Oct. 26 (Bloomberg) -- Apple Inc. traded industry-leading margins for a revamped product line in time for the holiday shopping season, a sign of the rising costs of rivalry with Samsung Electronics Co., Microsoft Corp. and Inc.

The trade-off was outlined yesterday when Apple said profit in the current quarter will be about $11.75 a share on sales of $52 billion. That compares with $15.49 a share on sales of $55.1 billion predicted by analysts surveyed by Bloomberg. Gross profit margin, the proportion of sales left after deducting production costs, will fall to about 36 percent, the lowest level in more than four years, Apple said.

Apple Chief Executive Officer Tim Cook has introduced a new iPhone and iPad, while updating the iPod and Mac computer lines. The overhaul stands to give Apple products an advantage against new phones and tablets from competing electronics makers, such as Samsung, which today reported record third-quarter profit on demand for its Galaxy smartphones. It also means rising production costs and narrower profit margins.

“They are going to have a big holiday quarter, a big March quarter, and then you have to wonder after that,” said Shaw Wu, an analyst at Sterne Agee & Leach Inc. “They could be doing this to address competition.”

Apple fell 0.9 percent to $604 at the close in New York. The shares have slumped 14 percent since reaching a record the week iPhone 5 went on sale, related partly to the company’s struggle to keep with with demand.

Costs Increasing

Profit last quarter rose to $8.67 a share, shy of the $8.75 projected by analysts. While revenue rose 27 percent to $36 billion, operating expenses rose 29 percent to $3.46 billion, a sign Apple spent more to refresh its entire product line ahead. Research and development costs rose 40 percent.

Apple has traditionally given a conservative financial outlook that falls short of analysts predictions, though heading into last year’s holiday shopping period it exceeded expectations.

“We’ve never introduced so many new form factors at once,” Apple Chief Financial Officer Peter Oppenheimer said on a conference call with analysts.

When a technology company introduces a new product, it typically encounters higher costs for components and equipment that can squeeze profit margins. For instance, Oppenheimer said the iPad mini has “significantly lower” profit margins than Apple’s overall level. He said costs would come down over time. Apple’s gross profit margin, the proportion of sales left after deducting production costs, was 40 percent last quarter, the lowest level since Apple’s first quarter of 2011.

No Corner-Cutting

“Clearly there are supply-chain costs and startup costs that are impacting gross margin, which is ultimately driving down the earnings,” said Shannon Cross, a Livingston, New Jersey-based analyst for Cross Research. “Is this a one-time incremental cost or is this a change to the business?”

Cook, who took over for Apple co-founder Steve Jobs last year, said the costs are necessary to make products that customers want to buy.

“We’re unwilling to cut corners to deliver the best customer experience in the world,” Cook said on the call. “We are managing the company for the long run.”

Investors will be on the lookout for an evidence that higher costs persist, said Andy Hargreaves, an analyst at Pacific Crest Securities LLC.

‘Compromised’ Surface

“The bigger concern would be if it’s just getting more expensive for them to build products,” Hargreaves said.

Apple also sold fewer iPads last quarter than some analysts predicted as consumers held off purchases before the release of the iPad mini. Pre-orders for the smaller tablet started today. The company sold 14 million iPads, compared with 15.3 million projected by analysts surveyed by Bloomberg.

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