Apple Earnings Sag on Lower iPhone Price Points

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Apple on Tuesday reported lower earnings in the third-quarter as the global saturation of smartphones continued to put pressure on its core iPhone business. However, officials remained upbeat. The company reported stronger-than-expected metrics and has been able to grow its software and services business while expanding into key overseas markets.

Apple reported net income of US$7.8 billion, or $1.42 a share, in the third quarter, compared with 10.7 billion or $1.85 in the year-ago quarter. Revenue fell to $42.4 billion in the quarter, compared with $49.6 billion in the year-ago quarter.

International sales accounted for 63 percent of revenue during the quarter, and overall gross margins slipped to 38 percent, compared with 39.7 percent a year ago.

"We are pleased to report third-quarter results that reflect stronger customer demand and business performance than we anticipated at the start of the quarter," said Apple CEO Tim Cook.

The launch of the iPhone SE was very successful, according to Cook, and company executives were thrilled by customers' and developers' responses to software and services it previewed at WWDC last month.

Apple's services business grew 19 percent year-over-year, noted Chief Financial Officer Luca Maestri, and App Store revenue was the highest ever recorded as the installed base of users continued to grow, and transacting customers hit an all-time record number.

The company returned more than $13 billion to investors through share buybacks and dividends, he added, and Apple now has completed almost $177 billion of its $250 billion capital return program.

Apple's fiscal fourth-quarter revenue will come in at between $45.5 billion and $47.5 billion with gross margins of between 37.5 percent and 38 percent, the company forecast.

The board of directors declared a cash dividend of 57 cents a share to shareholders as of Aug. 8, payable on Aug. 11.

The financial performance could indicate a shift away from total dependence on iPhone sales to drive growth.

For the first time in 10 quarters, Apple offset depressed iPhone sales with increased revenue from iPad sales, services revenue and App Store purchases, noted Charles King, principal analyst at Pund-IT.

"With the company subjected to shifting trends and increasing competition in global smartphone markets, this pressure is unlikely to lessen any time soon," he told the E-Commerce Times, and it "increases pressure to develop a wider variety of successful products."

The iPhone SE accounted for 16 percent of U.S. iPhone sales, while the iPhone 6s claimed 39 percent, and the iPhone 6s Plus stood at 26 percent, according to Consumer Intelligence Research Partners. The firm based its analysis on a survey of 500 U.S.-based Apple customers, which it released last week.

Thirty-three percent of iPhone SE buyers upgraded from older iPhones, including the iPhone 4s and prior models, the data show.

The SE may have attracted owners of legacy iPhones rather than taking away owners of Android and other operating systems, CIRP concluded.

The impact of the iPhone SE's release may have been to drive down average selling price and gross margins of iPhones, CIRP partner Michael Levin told the E-Commerce Times.

In fact, the average selling price for iPhones fell to $595 as the new iPhone SE rolled out, and a channel reduction of 4 million higher-end iPhones occurred, Apple's Maestri noted during the earnings call.

Growth in Apple's key U.S. and Western European markets is approaching the point of saturation, observer Ryan Reith, program vice president for mobile device trackers at IDC.

As it grows its business in emerging markets and faces more consumers who don't want to lock into subsidized long-term contract phones, there will be increasing pressure on prices, he explained.

"With all those changes come new product offerings," Reith told the E-Commerce Times. "Consumers become aware there's a different way I can actually buy a phone."

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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