- Apple reported fiscal third-quarter results that beat Wall Street expectations for both earnings and sales, driven by stronger services sales that grew 8% on an annual basis.
- Overall sales still fell 1% year over year, however, and revenue in the company's iPhone, Mac, and iPad lines were all down from a year earlier.
- Apple shares fell more than 2% in extended trading.
Apple on Thursday forecast that a sales slump would continue into the current quarter, sending shares down despite beating Wall Street sales and profit targets in the fiscal third quarter.
Apple shares dropped about 2% after the company predicted
what could be the fourth quarter in a row of declining sales. For the
just-ended period, strength in services drove the profit beat, but weaker than
expected sales of Apple's most famous device, the iPhone, underwhelmed
investors. Executives said iPhone sales would improve in the fourth quarter,
but did not say how much.
Apple is in a delicate position, with its entrenched iPhone
battling for share against Android rivals in a mature market, while its next
big product - the Vision Pro mixed-reality headset announced in June - is not
yet in the hands of consumers.
Apple said sales for the fiscal third quarter ended July 1
fell 1.4% to $81.8 billion and earnings per share rose 5% to $1.26. That topped
analyst expectations of $81.69 billion and $1.19 per share, according to IBES
data from Refinitiv. Weaker iPhone sales were balanced by strong sales in the
services segment that contains Apple TV+ and by sales in China that grew 8%
year over year.
Apple Chief Financial Officer Luca Maestri said the company
expects a year-over-year revenue performance in the company's fiscal fourth
quarter ending in September similar to the drop the company reported on
Thursday. That sales forecast is below analyst expectations of roughly flat
fiscal fourth-quarter sales of $90.19 billion, according to Refinitiv data.
"There is a real concern about when volume picks up and
what the horizon is for iPhone sales growth," said Daniel Newman, chief
executive and principal analyst at research firm Futurum Group.
Apple pegged the gross profit margin in the September
quarter at 44% to 45%, above analyst expectations of 43.4%, according to
Refinitiv data. While Apple expects growth in its service segment that contains
Apple TV+, iPad and Mac sales will fall by "double digits," Maestri
said on the call.
Apple's research and development spending also hit $22.61
billion for the fiscal year so far, about $3.12 billion higher than at this
point in the previous year.
Apple Chief Executive Officer Tim Cook told Reuters in an
interview that the increased R&D spending was in part driven by work on
generative artificial intelligence, the same field that is driving spending at
other big technology companies.
"We've been doing research across a wide range of AI
technologies, including generative AI, for years. We're going to continue
investing and innovating and responsibly advancing our products with these
technologies to help enrich people's lives," Cook said. "Obviously,
we're investing a lot, and it is showing up in the R&D spending that you're
looking at."
CHINA STRENGTH
In the meantime, Apple appeared to outperform what has been
the weakest smartphone market in China in almost a decade. Overall smartphone
sales declined 8% in China in the calendar second quarter to their lowest
levels since 2014, according to Counterpoint Research. By contrast, Cook told
Reuters that Apple's iPhone sales in China grew by "double digits"
and that sales were also high in other segments in China.
That helped Apple push sales in its greater China region to
$15.76 billion, from $14.60 billion in last year's same quarter.
"This was really done by attracting a quarterly record
of switchers to the iPhone, as well as having a strong upgrader activity,"
Cook said. "We also set quarterly records in China for both wearables,
home and accessories, and services."
Apple said iPhone sales were $39.67 billion, below analyst
expectations of $39.91 billion, according to Refinitiv data. Cook said the
installed base of iPhones hit a new high but gave no numbers.
"The company continues to face headwinds caused by waning growth in the smartphone market," said Insider Intelligence analyst Jeremy Goldman. "All eyes are now on its earnings call for any potential Vision Pro or AI-related announcements that could further push the boundaries of their business model."
Apple's services segment, which includes its Apple TV+
service which has announced a deal to carry Major League Soccer, had $21.21
billion in revenue, compared with analyst estimates of $20.76 billion,
according to Refinitiv data.
Cook said Apple now has 1 billion subscribers on its
platform, which includes both Apple services and third-party apps, up from 975
million a quarter ago.
The company's wearables business, which includes the Apple
Watch and AirPods, had revenue of $8.28 billion, compared with analyst
estimates of $8.39 billion, according to Refinitiv data.
Mac and iPad sales were $6.84 billion and $5.79 billion,
respectively, compared with analyst estimates of $6.62 billion and $6.41
billion, according to Refinitiv data.
"Almost half of the Mac buyers during the quarter were
new to the product, and we continue to see strong upgrader activity to Apple
Silicon," Cook told Reuters.
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