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Apple CEO Tim Cook speaks during an Apple product launch in San Francisco. Apple sold a record number of iOS devices in its fiscal quarter, but Wall Street was disappointed by profit margins.
Apple reported quarterly earnings for its first fiscal 2013 quarter on Wednesday after the markets closed. On the surface, the results were astonishing: Apple sold a record number of iPhones and iPads — 48 million and 23 million, respectively. It wasn't able to build enough iPad Minis to meet demand. It raked in $54.5 billion in revenue and netted a profit of $13.1 billion.
But. But. But...CEO Tim Cook set investors up for disappointment during his opening comments on an earnings call for analysts. "You're going to hear a lot of impressive numbers," he said. "But the most important thing to us is that customers love our products, not just buy them."
The numbers are monumentally impressive, but Cook emphasizes that in a weird way, Apple is now relying on customers' devotion to its products — and also to the Apple ecosystem that includes software like iTunes and new technologies like the Internet-based iCloud. Were the numbers somehow not impressive enough? Why the focus on soft values rather than on the bottom line?
The numbers weren't impressive enough. Apple is slipping on gross profit margin. Analysts were seeking about 40 percent. While at 38.6 percent, Apple didn't miss by that much, the previous year's quarter saw almost 45 percent. And the company is saying it could see lower gross margins in its next quarter: 37.5 percent on the low end.
The magic that supports Apple's share price — and the factor that sent Apple on its run to a stock price of over $700 last year — is its profit margins. It grosses in the 40-percent-plus neighborhood and retains 25 percent as net. Business 101: Make a lot more on your sales of products than what it costs you to make and market them. Ideally a lot more.
In this, Apple has been beating pretty much everyone in the business. As that gets chipped away, Apple's share price will suffer. It'll feel pressure to innovate and reinvent new markets (for what it's worth, Apple sold a record number of Apple TVs in the quarter, 2 million boxes, and Cook says TV is an area of "intense interest" but that was about as much as he was willing to say on the subject of Apple changing the way we watch TV in the future).
But Apple is a company that runs on innovation. The big question is whether bearish investors like Jeff Gundlach are right and the innovation surge at Apple has stalled, or whether the company will be able to create the Next Big Thing.
Or, as Cook noted during the question session, the company can chase growth in emerging markets, mainly China. But today, the company's stock is in free fall - down by more than 10 percent to about $460 in after hours trading.