* Revenue, earnings miss Street targets
* Rare disappointment, shares dive
* CFO blames rumors of new iPhone, customers wait
* CEO sees big opportunity in China
By Poornima Gupta and Edwin Chan
SAN FRANCISCO, Oct 18 Apple Inc
stunned Wall Street by reporting results that missed
expectations for the first time in years, blaming rumors of the
new iPhone for hurting demand in the September quarter.
Shares of Apple fell 7 percent in extended trading on
Tuesday, wiping some $27 billion off the value of the world's
largest technology company.
It was Apple's first quarterly earnings under Chief
Executive Tim Cook, who took over from Steve Jobs in August at
a critical juncture for the company. Apple is battling Google
Inc in the mobile arena, as well as other challengers
such as Samsung and Amazon.com Inc .
"Investors are going to start to speculate that there is
change under way now that Jobs is gone, and that there's
trouble ahead. We don't share that point," said Channing Smith,
co-manager at Capital Advisors Growth Fund, which holds Apple
"The iPhone is where the weakness was and it's an
explainable one. The strong demand for the iPhone 4S set up
strong demand for the holiday season."
Apple said it sold 17.07 million iPhones in its fiscal
fourth quarter ended Sept. 24 -- well short of the roughly 20
million forecast by analysts. The iPhone is Apple's flagship
product, yielding some 40 percent of annual sales.
Revenue rose 39 percent to $28.27 billion, lower than the
average analyst estimate of $29.69 billion, according to
Thomson Reuters I/B/E/S. It was the first time Apple missed
revenue expectations since the fiscal fourth quarter of 2008.
Net profit was $6.62 billion, or $7.05 a share. That fell
shy of expectations for earnings of $7.39 per share. The last
time Apple missed EPS estimates was in the first quarter of
2001, according to Thomson Reuters I/B/E/S.
"Expectations for this company were red-hot, that is why we
downgraded it," said BGC Partners analyst Colin Gillis, who
lowered his rating on the shares days before. "The reality is
their business is not an annuity. They have to sell their
quarter's worth of revenue every 90 days."
"They had a big upgrade cycle with the iPhone, the numbers
came in weak. They need to set records every time they report
to keep up the momentum."
Apple executives said consumers had postponed purchase
decisions until the crucial holiday quarter because of
speculation that a new phone was on the way. Apple unveiled the
iPhone 4S in early October, and it hit stores last Friday.
Apple -- which typically offers projections so conservative
they are disregarded -- on Tuesday forecast December quarter
revenue and earnings above Wall Street's estimates.
"There's no question this was a transition quarter ahead of
the 4S," said WP Stewart portfolio manager Michael Walker.
"With the early pace of iPhone 4S sales, my guess is that
disappointment is relatively short-lived."
"I'm not going to call Q3 a throwaway quarter for iPhones,
but it was definitely a transition."
A PERIOD OF TRANSITION
Cook started his first earnings conference call as CEO by
honoring Jobs, who died on Oct. 5 after a years-long battle
against pancreatic cancer.
He said he was "very confident" of posting record iPhone
sales in the current quarter. The company moved 4 million
iPhone 4S units -- more than double its predecessor -- in its
first three days, despite lukewarm reviews.
Another area for optimism for Apple was iPads. The company
moved 11.12 million units during the quarter despite attempts
by various manufacturers, including Samsung, to capture a slice
of the tablet market. Now Amazon.com has also entered the fray
with its Kindle Fire tablet.
Acknowledging the competition, Cook said it was "reasonable
to say" none of Apple's rivals have gained any traction, and he
expected the tablet market to be bigger than personal computer
in the long term.
Cook also told analysts that Greater China -- mainland
China, Hong Kong and Taiwan -- was becoming an all-important
region for Apple as it has "quickly become No. 2 on our list of
top revenue countries very, very quickly." Revenue from the
region increased four-fold to $4.5 billion during the quarter.
The new CEO fielded questions on Apple's cash pile of over
$81 billion, saying the money provided flexibility for
acquisitions and investing in the supply chain.
"That said, I'm not religious about holding cash or not
holding it," he added. "It's a topic for the board on an
Apple's Mac sales saw a large spike during the September
quarter but it failed to lift earnings. Apple sold 4.89 million
Macs, up 27 percent from a year ago.
Gross margin came to 40.3 percent -- a tad higher than Wall
Street's forecast of 39.74 percent. International sales
accounted for 63 percent of the quarter's revenue.
"We expected iPhone sales to decline in the September
quarter from the June quarter as a result of the announcements
we made ... in June, where we said we would launch iOS 5 and
iCloud in fall," Peter Oppenheimer, Chief Financial Officer,
said in an interview with Reuters.
"That basically created the rumor of the day across the
September quarter, especially at the end."
Apple said it expected December quarter earnings of $9.30 a
share on revenue of about $37 billion. Wall Street is
projecting $9.01 for the period, but it was unclear if that was
"What is interesting is the guidance is less conservative
than usual for their next quarter. It's a timing issue, where
it looks like the business that people thought would be in the
September quarter is occurring in the December quarter," said
Sterne Agee analyst Shaw Wu.
Apple shares fell to $394.78 in after-hours trading, after
closing at $422.24 on the Nasdaq.