Apple’s profit shows signs of slowing down

New York TimesApril 23, 2014 

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People walk past Apple's Fifth Avenue store in Midtown Manhattan in New York City in this April 2014 file photo. Apple is orchestrating a $3.2 billion acquisition of Beats Electronics, the headphone maker and music streaming distributor founded by hip-hop star Dr. Dre and record producer Jimmy Iovine, according to a published report, even as Apple's incredible profit growth has shown signs of slowing down.

JOHN MOORE — GETTY

Apple’s remarkable growth streak – now more than a decade old – is starting to show its age.

Apple reported on Wednesday that its revenue for the last quarter climbed 5 percent, to $45.6 billion, from $43.6 billion in the same period the year earlier.

The company continues to generate lots of profit. Apple’s earnings were $10.2 billion, up from $9.5 billion in the same quarter a year ago. But the increase was still small compared with the tremendous profit growth that the company had even just a couple of years ago.

The latest results are almost certain to put pressure on Timothy D. Cook, the company’s chief executive, to release products in new categories – perhaps with a so-called smart watch or even an Apple television – to lift the company’s financial growth.

On Wednesday, Apple used other means to please investors. The company said it would also buy $30 billion of its stock on top of the $60 billion it announced last year. It also raised its quarterly dividend by 8 percent and said it would split its stock. In after-hours trading, Apple’s shares were up 8 percent.

In a call with analysts, Cook said the increased buyback was “a signal of the board and management team’s strong confidence in the future of Apple.”

The company sold 43.7 million iPhones – up from 37.4 million last year. But sales of its iPads, at 16.35 million, were slightly down, from 19.5 million last year, despite a major redesign for the bigger tablet introduced in the fall.

It was almost certain that Apple’s stratospheric rise, largely on the back of the iPhone, would plateau. It is the law of large numbers.

“If Apple grew the next five years like it did the previous five years, it would be approaching the GDP of Australia,” said Toni Sacconaghi, an analyst for Sanford C. Bernstein.

“Psychologically, it’s more the issue that here is this incredibly high-flying company two years ago growing at 50 percent or more,” he said. “And now, at least in this given quarter, it’s basically not growing.”

Apple’s net income was slightly above the expectations of Wall Street analysts. They had expected revenue of $43.5 billion, according to a survey of analysts by Thomson Reuters.

The big question that hovers over the company is whether it can maintain even modest growth. For years, Apple has blazed new trails for the tech industry with its iPhone and iPads. But analysts and investors wonder whether the company has already peaked.

Apple’s iPad sales are slowing down much faster than many expected. Apple sold about 3 million fewer iPads in the last quarter than it did in the same period last year. That may be because many cheap tablets that cost half as much as an iPad, like Amazon’s Kindle Fires, have improved so much in quality, said Tero Kuittinen, managing director at Frank N. Magid Associates, a strategic consulting firm.

Apple had modest growth from iPhone sales, selling about 6 million more over the quarter than it did in the same period last year. Its recent partnership with China Mobile, the largest phone carrier in the world, most likely helped sales.

But a potential problem for Apple is that smartphone sales are slowing down industrywide, notably in China. Smartphone sales there are expected to grow only 20 percent this year, compared with growth of 60 percent in 2013, according to IDC, the research firm. Many people with stable incomes have already bought smartphones there.

“Overall Chinese smartphone growth has dropped a lot faster than people expected,” Kuittinen said. “That’s one of those curveballs that hits the whole industry every now and then.”

The spring quarter is looking to be even rougher for Apple. The company is widely expected to introduce new iPhones with larger screens this fall, so many consumers may be holding out on buying iPhones until the new models come out.

“That’s when the pressure is going to be the most intense,” Kuittinen said.

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