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Apple’s sales slump persists, shares fall 2% despite surpassing sales expectations.

Apple Forecasts Sales Slump, Shares Drop

By Stephen Nellis

(Reuters) – 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.

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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.

(Reporting‌ by Stephen Nellis in⁣ San Francisco and Yuvraj Malik in Bengaluru; Editing by Peter Henderson and Matthew Lewis)

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