back to article Apple beats revenue estimates but margins are falling

Apple has beaten some of the gloomier analyst expectations in its second quarter's results filing, with revenues of $43.6bn for the quarter generating $9.5bn in profits. But margins are falling and the company warned that next quarter it may clear only $33.5bn to $35.5bn in revenues – its biggest fall in a decade. The company …

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Anonymous Coward

Finally paying the price

for investing a smaller portion of their profits in R&D that others?

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Portion of profits is silly

Funding R&D based on portion of profits is silly even though this is often used as a metric.

You pretty much need to spend the same amount on R&D whether you build an iphone or a Zune phone. The difference for a good seller is having to scale up your support supply and manufacturing infrastructure.

Some market segments have rules of thumb where they spend 5-10% on R&D, but that would be an obscene amount of development for Apple and would be largely pointless. You can only deploy a certain number of products into the market place without causing complete confusion for your customers.

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Anonymous Coward

Re: Finally paying the price

You can't buy a technological revolution. If Apple thought they could come up with "the next big thing" by dumping all their money into R&D, don't you think they would have done so already?

The fact that Apple can't think of anything better to do with $100B than a stock buyback should be a depressing sign for the industry as a whole, not an indication that Apple is poorly run.

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Re: Finally paying the price

They should have put a retina screen in the iPad mini!

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Re: Finally paying the price

Don't worry, they will.

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FAIL

Re: Finally paying the price

AAPL stock is underpriced now, so it's a good investment for Apple to buy it back - Tim Cook

That is the position of Apple's management and plenty of companies have done this. Apple, being so large and having so much cash means that the $ number is also very large - mind boggling in fact.

Your argument is a false dichotomy, by investing in itself, Apple in no way compromises its R&D ability or financial capability to spend on R&D.

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Holmes

Share buy-back

"We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases"

LOL.

Any student of investment analysis knows that a buy-back has positive effect on a company's share price because it means having the cash sitting around in a bank earning sub-cost of capital returns won't be dragging down the company's value anymore.

An equally valid interpretation is that management have recognised that they have no use for this excess cash (ie. they can't ever see investing it in R&D/new products) so they give it back to the shareholders who can choose to put in bank deposits themselves rather than being forced to have it in a bank deposit by company dictat. Anyone can put cash in a bank account. You don't need to pay £££s to Cock et. al. to do it for you. If there's no foreseeable future use for it stop destroying shareholder value and give it back to the shareholders for them to invest in other projects themselves according to their own appetites for risk.

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Paris Hilton

Re: Share buy-back

> Any student of investment analysis knows that a buy-back has positive effect on a company's share price because it means having the cash sitting around in a bank earning sub-cost of capital returns won't be dragging down the company's value anymore.

IANAEconomist, so this may be a dumb question - AAPL are "investing" $100Bn in a share buy-back. Current market cap is $380Bn (give or take), so they are effectively buying back ~25% of the company. I'm guessing this will have a positive effect on the share price as it will restrict the amount of stock available to trade, thus making the "shiney-shiney" stock harder to obtain, thus inflating its value. Isn't that the main reason for share price going up in these circumstances? On the upside, it gives AAPL more clout in the AGM as it is unlikely to be outvoted due to its shareholding (I assume these are the same sorts of shares?). So, all this does is prop up the plunging share price.

As a side note, Motorola had a 12% market share in the smartphone market in q2 2011 (when Goog announced the acquisition). That market equalled 107m units, so Moto sold just shy of 13m units and was bought for $12.5bn. In contrast, Apple sold 19m units in that quarter and was even then trading around the $350-380 range - i.e. a market cap slightly lower than it is today. Was Apple worth 28x Moto at the time? Yes, Moto had issues and Apple was a rising star, but still, 28x? IMHO, Apple is still overvalued and all Cook is doing is stemming the share-price slide with this buy-back. It merely delays the inevitable.

Another spin is that perhaps they are instead preparing for a new round of stock option deployments to senior directors...? :)

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@JetSetJim

What you're saying is true on the margins, but when you have a truly massive pile of cash, one far behind any that you could actually use for any investments in your business, much of that cash counts for $0 in Wall Street's mind because of the danger it represents. Making so much money you don't know what to do with it is great, until you realize they really don't know what to do with it. The buyback gives them something to do with it (well, part of it) and limits the risk they do something stupid with it, like make some huge acquisition to enter a new market, or just because they thought it was a good idea at the time.

Not that there was ever really all that much risk of Apple doing so. The largest acquisition they ever made was the $400 million they spent on NeXT in 1997. That's small stuff on the scale of the buyouts that companies like HP and Microsoft have engaged in over the past decade, most of which have turned to shit. On the other hand, for that $400 million Apple got the OS that became OS X and iOS, and got back Steve Jobs who turned the company around. By that measure it must rank as one of the most successful acquisitions in Wall Street history...

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JLV
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disagree

>In the opinion of this hack it might be better investing this in new products and technologies rather than buying off investors and Wall Street

Title says it all.

Apple's stock may yet tank quite a bit more. After all there was no clear reason it was worth about $100 of capitalization per person alive on the planet. But they still have more than enough cash laying around to invest.

Too many companies are one-hit wonders (looking at you, MS) that strike it big and then throw huge amounts of cash around to find the next big thing, without much success. Flailing around with lavish R&D, acquisitions and new products looks like a company with growth prospects, so high tech companies typically follow this path. But it can still destroy value overall (Autonomy, anyone?).

Realistically, what should Apple invest that "missing $11B" into, rather than rewarding its investors? iTV?

No, this is not as exciting, but it is more realistic and honest than pretending double digit growths are forever when you are this big already. And margin shrinkage? Excellent news for the customers, thank you Samsung!

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Re: disagree

More interestingly- the drop in share price came after the decision to pay Dividends...

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FAIL

Re: disagree

While MS isn't the fastest actor on the market, you can note their successes:

- DOS

- Windows

- Office (especially but not only Excel)

- MS SQL server (has most of the low-end business market

- Azure seems to be gaining a footing, finally

- Sharepoint has major enterprise usage

(Bing has 16.5% market share now, its all-time high, though they've dumped huge amounts of money into this)

So no, MS not a "one-hit wonder", as you can see from rising profits:

http://www.forbes.com/sites/greatspeculations/2013/04/19/microsoft-shakes-off-pc-slump-as-office-and-servers-sales-swell/

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Re: disagree

DOS was a one-hit wonder.

Windows' "success" was driven initially by the success of Office (it used to only run on Windows) and the external ecosystem that evolved around it. ie. Windows, itself, was never intrinsically 'successful'.

Office WAS a success. No one is buying 2010, 2013 or 365.

SQL Server is just cheaper than Oracle. That's why it's a 'success': its price.

Azure is a joke.

Sharepoint is a joke.

Bing - let's face it, it's still struggling to be relevant.

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Linux

Re: disagree

Really, turn off the nitrous, it's making you dizzy.

I'll include the link once again to see if you can click and read:

http://www.forbes.com/sites/greatspeculations/2013/04/19/microsoft-shakes-off-pc-slump-as-office-and-servers-sales-swell/

In short, Office 365 and Office 2013 appear to be doing just fine.

Bing is now the 2nd largest search engine even though still losing money

Azure is gaining traction, especially with the addition of LInux services.

Re: SQL Server, I'm sure it ticks you off that Honda became a success because of its price - laughed all the way to the bank.

Sharepoint may be a "joke" in your eyes, but it's heavily used.

I hardly think the only reason for Windows 7 success was Office.

And oops, I left out Xbox, which at one point beat the 2 competitors 18 months in a row.

Your Microsoft hatred certainly has the better of you.

Maybe you want to tear your shirt and lament the lack of Linux success on the desktop....

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Fashions change

Apple have a high fashion quotient, it carried them for a while, but they do seem to have lost their way when they can't retain customers like they used to. I suspect an analysis of Samsung customers moving to Apple vs the opposite would show some innovation was long overdue.

I believe they are a very decent mid-market device company charging high premium prices shored up by great marketing.

A buy back is a great idea, it will defend the share price and get rid of a bunch of cash. It will also dissuade shareholders from forcing a dividend distribution. Smart move.

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Anonymous Coward

Re: Fashions change

What are you on about? They added customers! They just had lower margins.

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They should have told people to suck it up on dividends and put the money to better use.

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Holmes

@ Eadon - Re: Visionary gap

>

. . .

I guess iWatch is their next frizzle.

. . .

<

Fixed it for you.

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Huh?

"... spend $100bn in a share buy-back operation..."

Funny, when I read it the buy-back was being expanded to $60bn from $10bn. The $100bn also included the 15% per quarter dividend increase.

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Heh

Maybe they should've paid dividends earlier? Though it was obvious that Apple revenue was going to stall eventually. No company can keep up growing on revenue infinitely.

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Anonymous Coward

Re: Heh

Revenue stall?

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Honest

If they don't have a vision with a $1011 price tag then they are doing the right thing in handing back the money. It's probably better value than going through a lot of visionary CEOs, each spending the dosh on the latest vision / management fad / acquisition / ...

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Anonymous Coward

Plenty of cash...

" it might be better investing this in new products and technologies rather than buying off investors and Wall Street. "

Looks to me like they have easily enough cash to do both. Pity the cash pile doesn't directly lead to a method of stopping all the copy cats out there....

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Re: Plenty of cash...

Leaving aside the clear dig at Samsung, that its the price of success. Build something that makes money, and sometime else will produce something similar very quickly. Sometimes it will even be better (for certain values of "better").

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ZIRP fail

Apple is funding the "capital return program" using debt because it doesn't want to pay tax on repatriated profits.

FFS.

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Alien

Which is why you are a hack

>In the opinion of this hack it might be better investing this in new products and technologies rather than buying off investors and Wall Street

Apple march to the beat of their own drum. They say that they've new stuff in the pipeline which will start to be released in the Autumn. They don't want to have repeats of the maps debacle or the supply constrictions of the new iMac. They will release when they are good and ready.

Of course that doesn't sit well with journalists that depend on tech company announcements to generate copy. El Reg in particular has a problem with the fruity clan because they got excluded from the party.

Alien because at times journos are from another planet.

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Re: Which is why you are a hack

El Reg in particular has a problem with the fruity clan because they got excluded from the party.

IIRC though, El Reg got excluded for failing to swoon over Apple's tech and offering slightly more realistic reviews, something that doesn't seem to have changed since (clickbait aside)

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LPF
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Steve Jobs must be turning in his grave...

He would tell wallstreet to go F itself if they didn't like his plan. falling Margins ? ONE PERCENT! Screw share buyback, use that money to invest and grow the company, anyone who does not like it can sell the shares and go find a better prospect.

This is a prime example fo a company giving and and joining the race to the bottom.

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False dichotomy

"In the meantime Apple is using its enormous cash pile to placate investors and support the share price. In the opinion of this hack it might be better investing this in new products and technologies rather than buying off investors and Wall Street."

Why are journalists so generally incapable of constructing a logical and coherent position?

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Must stop commenting on Apple articles

Just on the share buy back. I always find this a bit confusing, but Warren Buffett explains it quite well.

'I would run the business [Apple] in such a manner as to create the most value over the next five to ten years. You can’t run a business to push the stock price up on a daily basis. Berkshire has gone down 50% four times in its history. When that happens, if you have got the money you buy it [stock].

When Steve called me, I said, Is your stock cheap? He said, yes. I said, Do you have more cash than you need? He said, a little. [laughs] I said, then buy back your stock. If you could buy dollar bills for 80 cents, it’s a very good thing to do.'

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Re: Must stop commenting on Apple articles

Buffett notwithstanding, companies have a history of terrible timing when it comes to share buybacks. They are currently fashionable as a way of propping up share prices in a market where growth is sluggish but they are also expensive. Buybacks can make sense to companies with large cashpiles as yields on cash are so low: this is one of the reasons for Dell wanting to use its cash to go private. Apple is currently relatively cheap when compared with other tech stocks using the P/E metric but $ 400 a share is still a lot of money and we're still waiting to see those new, high-margin products. Of course, it's also worth thinking about how buybacks may benefit Apple staff with shares vesting.

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Re: Must stop commenting on Apple articles

It does also suggest to me that they have a lot of confidence that the new products are going to generate some big hype/revenue/profits.

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Re: Must stop commenting on Apple articles

"$400 a share is still a lot of money"

The shares are $400 because Apple rarely does stock splits (three times since 1980 AFAIK). It doesn't mean much in isolation.

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Re: Must stop commenting on Apple articles

Incidentally if you think $400 is high type - berkshire hathaway share price into your favourite search engine.

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Lower margins are inevitable

Apple have led the way in the consumerisation of IT, and margins on consumer goods are lower. This trend will continue.

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Honesty

Why don't Apple just admit that they intend to consolidate their place in the market and that there won't be any groundbreaking new products in the near future? The key pieces to Steve Jobs' masterplan seem to be in place: iTunes | Apple Store — iPhone — iPad — Cloud | Central Server facility to process the data of Apple customers.

Apple can then concentrate on eliminating problems that exist in the whole user experience (which is what they sell), maybe remembering that they sell expensive computers to devoted and neglected users and taking time to either develop a new vision for they way we live or finding such a person with a vision.

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Anonymous Coward

"We believe so strongly that repurchasing our shares represents an attractive use of our capital..."

Except they're not actually using their mahoosive pile of offshore cash to buy back their shares. Oh no... that would mean actually paying some fucking tax on it. Instead, they're borrowing more money... presumably because the interest they pay on said loan then becomes tax deductable.

I despair at who to blame for this. Apple for being tax avoiding shits, or the politicians for allowing this to happen by not fixing the tax laws...

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Already

...incredibly sick of the term Peak Apple

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Mushroom

It's life...

Lower sales and lower margins are simply the consequence of other players getting savvy and competing strongly. Monopoly today and in the coming years will be far less achievable.

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