Andy Castonguay, Principal Analyst at Informa Telecoms & Media comments on Apple’s financial results

Apple announced strong continued growth in sales across its portfolio of smartphones and tablets during its earnings call yesterday, but failed to turn the tide on profitability causing a significant US$51 slide in its stock price in after-hours trading. The company’s flagship iPhone product line sold a record 47.8 million units in 4Q12, an increase of 29% year-on-year, on the back of the iPhone 5 launch and strong continued volumes of iPhone 4 units. Sales of the new iPhone 5 model helped bolster Apple’s declining average revenue per unit from a 2Q low of US$622.89 to US$641.57 in 4Q, but was still off 2.7% from 4Q11.

The growing competitive pressures Apple is facing in the smartphone market means that the average revenue per iPhone will come under increasing scrutiny as the company expands its business in China and other growth markets where demand for lower-priced models is expected to outstrip iPhone 5 sales.

Apple’s market leadership in the tablet market continues with a 48.1% year-on-year increase in overall tablet sales following the 2012 launches of the updated iPad model and the introduction of the iPad Mini. That outstanding volume increase was offset, however, by a sharp 21.3% decline in average revenue per unit from 4Q11. The lower price point and slimmer margins for the iPad Mini highlight the broader strategic challenges that Apple will face in 2013, namely how to enhance volume in an expanding set of countries without incurring a precipitous drop in profitability.

While overall revenue grew by 18%, gross margin fell from 44.7% to 38.6%, resulting in a relatively flat profit mark of US$13.06 billion. Despite strong unit sales, Apple’s flattening profit future sent the company’s stock downward to US$463 in off-hours trading, a full 34% off its 2012 peak of US$705.

Apple’s 4Q performance was not only hampered by supply-chain restraints, but also by increasing competition from Samsung and other manufacturers vying for the premium consumer market. With modest but growing sales of Windows Phone devices as well as a revived product line expected from BlackBerry, Apple’s products have begun to lose their “innovative” top luster, even while still representing the competitive standard in the industry.

Apple’s next generation of devices and iOS will need to push into new, exciting design territory to firmly reestablish its claim as the industry’s innovation bellwether or risk continued declines in stock value and position in the vanguard of mobile device design.