Editor’s note: Beau Skonieczny is an analyst with the Computing Practice at Technology Business Research. He reviews Apple’s first quarter earnings report issued Tuesday.
HAMPTON, N.H. – Apple (Nasdaq: AAPL) continues to be challenged to grow on an increasingly large revenue base and fiercer competition in the device space from vendors like Samsung and Google. But despite these challenges, Apple grew revenue 11.3% year-to-year to $43.6 billion in 1Q13, led by iPad and iTunes, software and services, which were up 40% and 30%, respectively.
iPhone sales were up just 3% year-to-year, with growth limited by saturation in the high-end smartphone market, as well as increased competition from lower-cost Android phones.
Margins contracted in 1Q13, fueled mostly by product mix, as iPhone – Apple’s most profitable product line – accounted for 52.6% of revenues, down from 56.2% in 4Q12. Consequently, Apple’s corporate gross margin fell 110 basis points sequentially to 37.5%.
Despite Apple’s decreasing gross margin and slowing growth, TBR expects Apple’s margin performance to stabilize over the next couple quarters as it balances improved component and manufacturing cost efficiencies with slower revenue growth. Apple will continue to serve its large base of customers with product refreshes and an improving ecosystem of software and services.
Premium Mobile Device Market Is Nearing Saturation
As the market for premium-priced devices has become increasingly saturated over the past year, particularly in mature markets, Apple’s room for maintaining its astronomical growth is shrinking to less spectacular levels. However, this is not all bad news for Apple.
While margins have fallen, we think they will remain mostly stable going forward with a gross margin above 36% and year-to-year revenue growth hovering around the low teens. The iPad mini, which we expect will be upgraded to a retina version in 2H13, will continue to drive tablet growth for Apple, while an iPhone refresh expected for later this year will help drive healthy iPhone sales.
The fact that Apple is able to sustain growth with its yet unbeaten device margins is a testament to its ability to adapt to fierce competition and a challenged global market environment. While Apple’s earnings performance is coming back down to earth after a long stent of continuous and extremely profitable growth, we believe Apple is well positioned to continue serving its large base of existing customers through the strength of its ecosystem, supported by services, iTunes, applications, interface familiarity and consumer-oriented design principles.
In 1Q13, Apple reported that it captured over 74% of mobile app sales worldwide, supported by 850,000 iOS apps and over 350,000 dedicated iPad apps.
Emerging Markets Increasingly Important
Many consumers worldwide still have yet to purchase a smartphone. With limited discretionary spending and a lack of carrier subsidies in many emerging markets, the lower price points of Android handsets are increasingly appealing over premium priced products like the iPhone, helping to spur Android smartphone growth and market share gains. Apple has responded by dropping the price of the iPhone 4, benefitting growth particularly in China and APAC, where there is a large base of potential first-time smartphone buyers. Sales in APAC outside China and Japan were up 26% year-to-year as a result. Consequently, this led to an increased mix of lower priced iPhones, driving down the Average Selling Price (ASP) of iPhone by $28 from 4Q12 to $613 in 1Q13, the lowest it has been since 2Q09.
TBR expects Apple will navigate to new markets with a lower-cost iPhone model in an effort to compete in more price-sensitive markets, while still maintaining its premium product positioning. The company took a similar approach with the iPad mini, lowering the barrier to entry for tablet customers to enter the Apple ecosystem.
We believe a lower-cost iPhone targeting emerging markets would provide Apple with broader access to new consumer markets, opening up new avenues for revenue growth.
