Sales drop in Greater China market

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Apple reduced channel inventory by US$3.6 billion, exceeding the US$2-billion expected reduction, meaning sales were better than they appeared, Maestri said.

Customer demand “was better than what is implied in our results and better than we had anticipated,” he told Reuters in an interview.

Sales of the iPhone fell last quarter for the first time since the gadget’s release in 2007, dropping 16.3 per cent. Maestri projected the gadget’s average selling price to rise in the September quarter.

Sales of iPhones account for about two-thirds of Apple’s total sales. The iPhone lineup includes the iPhone 6S and 6S Plus, as well as the smaller and cheaper iPhone SE.

Apple’s quarterly net profit fell 27 per cent to US$7.8 billion, while revenue of US$42.36 billion beat analysts’ average estimate of US$42.09 billion, according to Thomson Reuters.

Sales in Greater China, once touted as Apple’s next growth engine, decreased 33.1 per cent, compared with a 112.4-per-cent growth in the year earlier quarter and a near 26-per-cent fall in the second quarter.

Investors are sensitive to any signs of trouble in China, one of the company’s largest markets by revenue.

Maestri attributed the drop to channel inventory reduction in the nation, foreign-exchange headwinds and a general downturn in the Chinese economy.

“It is very clear that there are some signs of economic slowdown in China, and we will have to work through them,” he said. “We understand China well and we remain very, very optimistic about the future there.”

Apple’s services business, which includes the App Store, Apple Pay, iCloud and other services, generated nearly US$6 billion in revenue, up 18.9 per cent from the previous year.

As iPhone sales level off, Apple is attempting to wring more revenue out of its existing base of users by emphasizing services such as the App Store, Apple Music, storage centre iCloud and mobile wallet Apple Pay. Such services emerged as Apple’s second-largest business after the iPhone for the first time in the company’s second quarter, eclipsing gadgets such as the iPad and the Mac.

That shift in the business bodes well for Apple because gross margins on services are better than the average for the rest of the company, Maestri said.

“It’s a great business because it is recurring in nature and more linked to our installed base,” he said.

The company forecast fourth-quarter revenue of US$45.5 billion to US$47.5 billion, largely above Wall Street’s average estimate of US$45.71 billion, according to Thomson Reuters.

The forecast, covering the quarter ending September, will likely include at least the first weekend of sales of the iPhone 7, which is expected to launch in September.

Up to Tuesday’s close, Apple’s shares had fallen about 8.2 per cent since the start of the year. Shares rose 7.1 per cent to US$103.57 in after-hours trade following publication of results.