Apple Needs to Do Something Big

According to IDC, the smartphone market is projected to grow from 918.6 million units estimated this year to 1.52 billion units by the year 2017. The researcher projects growth to be driven by emerging markets of Brazil and India and continuing strength of the Chinese market. iPhones were the best selling smartphone in the U.S. market, with a 39% share for the three-month period ending February compared with 35% a year ago. As Apple increases their retail presence worldwide, they saw an improvement in the Japanese market, where the iPhone became the lead selling smartphone for 2012. But their strategy for emerging markets remains unclear.

Apple’s Financials
While Apple’s (Nasdaq:AAPL) mobile devices may be seeing growth worldwide, the market expects more out of them. Q2 revenues grew 11% over the year to $43.60 billion, missing the market’s projected revenues of $44.30 billion. EPS of $10.09 fell 18% over the year and missed the Street’s projected target of $10.18.

During the quarter, sales from phone units grew 7% over the year to 37.43 million. Revenues from the segment grew 3% to $22.96 billion. The growth was attributed to the continued enterprise adoption of iPhones. Apple added several U.S. government agencies and other enterprises such as GlaxoSmithKline to their customer list. iPad sales grew 65% to 19.48 million units, with revenues growing 40% to $8.75 billion. Mac sales fell 2% over the year to 3.95 million units, but revenues grew 7% over the year to $5.45 billion. Apple sold 5.6 million iPods to generate $962 million, recording a 27% decline in volume and a 20% drop in revenues. Apple is seeing strong growth in their digital revenues, which rose 30% over the year to $4.11 billion. Retail revenues grew 19% to $5.24 billion, and they ended the quarter with 151 international stores for a total of 402 stores worldwide.

By region, Apple’s push into China is paying off. Revenues from Greater China grew 7.5%, and the rest of Asia-Pacific and Japan saw revenue grow 26% over the year. iPad sales were particularly high in these markets, with Greater China recording a 138% increase and Japan’s sales doubling over the year. Revenues from the Americas grew 7% and from Europe grew 11% over the year. Apple has yet to come up with a clear strategy to address the high-growth markets of Brazil and India. Many expected Apple to launch a less expensive version of their iPhone for these markets, but as of now, the company hasn’t given any clear indication of going that route. In India, though, they have released installment-based payment schemes for their devices, which have been released through their retail partners in the country and have helped them grow sales threefold in the past year.

For the current quarter, Apple projected revenues of $33.5 billion-$35.5 billion, with gross margin of 36%-37%. The market was looking for revenues of $38.6 billion with gross margin of 38.5%.

Apple’s Troubles
Apple’s lackluster performance is expected to continue as they seem to have run out of new products to launch during the year. Management has been talking about significant improvements in products since October, but they have yet to deliver. They are now projecting product launches for fall 2013.  Analysts estimate that products with significant impact may come only by the next year as Apple wants to improve display features and display flexibility for their next generation of products, and mass producing these technologies will take time. As a result, Apple’s new product launches will continue to center on upgrades for iPhones and iPads, which will probably fail to deliver the much needed excitement.

Last quarter, Apple spent $20 million to acquire indoor GPS start-up WifiSlam. WifiSlam’s products helped users identify the locations of their smartphones in real time up to 2.5 meters in accuracy. The technology has been used to develop indoor mapping solutions that cater to retail and social networking apps. But I believe that Apple needs to do something radical to turn the slump around. Apple ended the quarter with more than $145 billion in cash and equivalents balance. They announced plans to increase dividend payout and their stock buyback program from $10 billion through 2015 to $60 billion. Overall, Apple plans to return $100 billion cash to shareholders by the year 2015. But I would also like to see them use some of this cash pile to make some good acquisitions. As I said yesterday, spending $12 billion for Netflix may be a worthwhile investment.

Apple’s stock is trading at $403.38, with a market capitalization of $383.92 billion. It touched a 52-week high of $705.07 in October 2012. Investors have been punished harshly since.