Apple forecast a sales slump would proceed into the present quarter, sending shares down despite beating Wall Street sales and profit targets in the fiscal third quarter.
Apple shares dropped about 2% after the mixed results and outlook. Strength in services drove the profit beat in the third quarter, but weaker than expected sales of Apple’s most famous device, the iPhone, underwhelmed investors. Executives said iPhone sales would improve but didn’t say how much.
Apple is in a fragile 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 – just isn’t 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 comprises Apple TV+ and by sales in China that grew 8% 12 months over 12 months.
Apple Chief Financial Officer Luca Maestri said the corporate expects a year-over-year revenue performance in the corporate’s fiscal fourth quarter ending in September similar to the drop the corporate 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.
Apple pegged the gross profit margin in the September quarter at 44% to 45%, while analysts on average expected 43.4%, according to Refinitiv data.
Apple’s research and development spending also hit $22.61 billion for the fiscal 12 months up to now, about $3.12 billion higher than at this point in the previous 12 months.
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 identical field that’s driving spending at other big technology firms.
“We’ve been doing research across a big selection of AI technologies, including generative AI, for years. We’re going to proceed investing and innovating and responsibly advancing our products with these technologies to help enrich people’s lives,” Cook said. “Obviously, we’re investing lots, and it’s showing up in the R&D spending that you just’re taking a look at.”
While Big Tech rivals including Microsoft and Alphabet’s Google are spending billions on dueling chatbots and other AI technologies, Cook said that AI would show up in Apple products as latest features. One such feature, he said, will probably be the iPhone’s ability to transcribe voice mail messages in real time, starting this autumn.
Within 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. In 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 12 months’s same quarter.
“This was really done by attracting a quarterly record of switchers to the iPhone, in addition to having a powerful upgrader activity,” Cook said. “We also set quarterly records in China for each 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 latest high but gave no numbers.
“The corporate continues to face headwinds attributable to waning growth in the smartphone market,” said Insider Intelligence analyst Jeremy Goldman. “All eyes are actually on its earnings call for any potential Vision Pro or AI-related announcements that would further push the boundaries of their business model.”
Apple’s services segment, which incorporates 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 incorporates each Apple services and third-party apps, up from 975 million 1 / 4 ago.
“Services revenue was a shiny spot, reaching the very best quarterly sales amount on record thanks to soaring search-licensing revenue,” said Jesse Cohen, senior analyst at Investing.com.
The corporate’s wearables business, which incorporates 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 through the quarter were latest to the product, and we proceed to see strong upgrader activity to Apple Silicon,” Cook told Reuters.