Profits gloom, no new gizmos. What is eating Apple?
The cash-rich company has diverted attention from its lack of new products with blockbuster payouts. But is it just buying time?
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Thursday 25 April 2013
Among the late Steve Jobs' many distinguishing talents was what observers called his "reality distortion field": his fabled ability to convince anyone of practically anything. The way he told Apple's story, the way he introduced each Apple product, it seemed as if the company could only keeping growing.
Even when he admitted in 2010 that the iPhone 4 lost some reception because of what the rest of us saw as a glaring design flaw, he defended the gadget as possibly the best product ever made by Apple. Despite near-universal criticism, he guided the company through what everyone else saw as an unmitigated fiasco by handing out some plastic cases.
Two years on, the iPhone franchise is facing increased competition – but it remains strong, with the company selling more than 37 million in the first three months of this year against just over 35 million in the same period last year.
His successor, Tim Cook, hasn't had as much luck in convincing everyone that Apple remains as full of promise as it once was. He has been particularly unsuccessful with investors. The share price, which stood just north of $400 yesterday afternoon, is well below the high of more than $700 seen last September.
But this week, he did manage to divert attention from the growth concerns that have held back the stock by using the ultimate reality distortion device when it comes to Wall Street: cash. Lots and lots of cash.
Announcing quarterly results that showed a dip in profits for the first time in a decade (even though sales climbed, highlighting an erosion in margins), Mr Cook said the company would return a massive $100bn (£65bn) to shareholders by 2015. It is doing this by raising its dividend by 15 per cent, and by expanding the scope of its share buyback programme to $60bn. All told, the move marks a $55bn increase to the programme announced last year. There are few companies that can do this. Apple, despite its quarterly net profit easing to $9.5bn from $11.6bn last year, has a cash pile of around $145bn.
That has often riled investors, most notably the hedge fund manager David Einhorn, who have argued for the money to be released to shareholders. Although Apple is going to borrow to fund the move, it can only do this because of the massive balance.
Like Mr Jobs and his product launches, which were never complete without eye-catching superlatives, Apple said the move represented the "largest single share repurchase authorisation in history".
The move was welcomed by Wall Street. Mr Einhorn, whose Greenlight Capital recently took Apple to court over the cash hoard, applauded the step. "This positive development … demonstrates the conviction of Apple's management and board in the company's future," the fund said.
But those who have been following Apple over the past 10 record-breaking years would have noticed that the policy marked a break from Mr Jobs' strategy of conserving the company's cash reserves while driving growth by launching high-profile products.
Although Mr Cook was careful to add that "this is the same culture and company that brought the world the iPhone and the iPad, and we have a lot more surprises in the works", the focus very quickly turned to the payout, obscuring concerns that only days ago dominated the headlines. But the fact remains that while there have rumours about an Apple TV, or even an Apple wristwatch, it is companies such as Samsung with its Galaxy phones and tablets that have been attracting the attention of consumers.
Even Facebook managed to attract the spotlight with its Facebook Home software suite, which transforms gadgets running on Google's Android operating system into always-on social media devices.
Apple, however, has only managed to tweak its iPad, launching a mini version to compete in the increasingly competitive tablet market.
While it remains a robust business, the company seems to be changing into a more mature one where, as the Forrester analyst Sarah Rotman Epps said after the results were released, "the highs are not as high and lows are not so low". The blockbuster payout certainly appears to have bought Mr Cook some time.
However, when the shareholder euphoria fades, attention is prone to turn back to the pipeline. "They need something that breaks into new verticals, whether it's TV or something that's wearable, that opens up a new revenue stream," Ms Epps said, underscoring the sense that Mr Cook's task is only half done.
But despite its billions, firm will borrow to fund the big payout
There was a curious wrinkle in Apple's announcement that it would step up its payout to shareholders. Even though it is sitting on enough cash, which will total $100bn (£65bn) by 2015, to fund the move, the tech giant plans to borrow money.
The explanation is simple: taxes. In the conference call following the results, the company's chief financial officer, Peter Oppenheimer, said: "Over $102bn of our total cash was offshore at the end of the March quarter."
Bringing that money back into the US would have tax consequences – something that Apple can avoid by borrowing. Given its cash balance, and the fact that it generates many billions every quarter, it can do this without putting its business at any risk.
"We will access the US debt markets over time and have recently secured credit ratings from S&P and Moody's," Mr Oppenheimer explained. "We are continuing to generate significant cash offshore and repatriating this cash would result in significant tax consequences under current US tax law."
Estimates of just how much Apple would have to pay to bring its cash back into the US vary, given the many ways that companies can structure their tax arrangements, but are well into the tens of billions.
According to one estimate, based on the statutory corporate tax rate of 35 per cent, it would cost the company $35bn to bring the money back. Borrowing would be far cheaper, particularly in light of the buoyant state of the corporate debt markets.
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