Apple has announced that it expects a continued sales slump in the current quarter, causing a drop in its shares despite exceeding Wall Street’s sales and profit targets in the fiscal third quarter. Although the company reported a beat in profits due to strong sales in services, the underwhelming sales performance of its flagship product, the iPhone, led to investor disappointment. While Apple executives mentioned an anticipated improvement in iPhone sales for the fourth quarter, they did not provide specific details.
This news places Apple in a delicate position, as its iPhone faces stiff competition from Android rivals in a mature market. Additionally, its next major product release, the Vision Pro mixed-reality headset announced in June, is yet to reach consumers.
For the fiscal third quarter ending on July 1, Apple reported a 1.4% decline in sales, totaling $81.8 billion, and a 5% increase in earnings per share, amounting to $1.26. These figures exceeded analyst expectations of $81.69 billion in sales and $1.19 per share, according to Refinitiv’s IBES data. Weaker iPhone sales were offset by strong sales in the services segment, which includes Apple TV+, and a growth of 8% in Chinese sales compared to the previous year.
Despite beating profit expectations, Apple’s Chief Financial Officer Luca Maestri stated that they anticipate a similar year-over-year revenue performance in the next quarter, aligning with the sales decline reported on Thursday. This projection falls below analysts’ expectations of approximately flat sales of $90.19 billion for the fiscal fourth quarter, according to Refinitiv.
Daniel Newman, CEO and principal analyst at research firm Futurum Group, highlighted concerns about the volume and future growth of iPhone sales. The gross profit margin for the September quarter is estimated to be between 44% and 45%, surpassing analysts’ expectations of 43.4%, according to Refinitiv data. However, Apple anticipates double-digit declines in the service segment, which encompasses Apple TV+, iPad, and Mac sales.
Apple’s research and development (R&D) spending has also increased, with $22.61 billion allocated for the fiscal year, a $3.12 billion rise compared to the previous year. CEO Tim Cook explained that the increased R&D spending is partly driven by advancements in generative artificial intelligence, a field that has seen increased investment across major technology companies.
Despite overall weakening smartphone sales in China, Apple managed to outperform the market trend. While smartphone sales in China declined by 8% in the second quarter, reaching their lowest levels since 2014, Apple reported double-digit growth in iPhone sales in China. The company’s sales in the greater China region amounted to $15.76 billion, surpassing last year’s $14.60 billion sales for the same quarter. Apple CEO Tim Cook attributed this success to attracting record numbers of switchers to the iPhone and high sales in other segments.
Apple’s specific numbers for iPhone sales were $39.67 billion, falling slightly short of analysts’ expectations of $39.91 billion. Cook mentioned that the installed base of iPhones has reached a new high but did not provide specific figures.
Analyst Jeremy Goldman from Insider Intelligence commented on Apple’s challenges in a slowing smartphone market and the anticipation for potential announcements related to the Vision Pro or AI during its earnings call.
In terms of services, Apple’s segment, which includes Apple TV+, reported revenue of $21.21 billion, exceeding analysts’ estimates of $20.76 billion. Apple’s platform, including both its services and third-party apps, now boasts 1 billion subscribers, up from 975 million in the previous quarter. The wearables business, which includes the Apple Watch and AirPods, generated $8.28 billion in revenue, slightly below analysts’ estimates of $8.39 billion. Similarly, Mac and iPad sales reached $6.84 billion and $5.79 billion, respectively, surpassing analysts’ expectations of $6.62 billion and $6.41 billion.
Apple CEO Tim Cook highlighted the strong upgrader activity for Macs and the continuation of Apple Silicon’s popularity among customers.