Apple forecast disappoints
Apple Inc. easily beat Wall Street expectations in its most recent quarter, but the company’s outlook for the next three months and concerns about the iPhone’s ability to continue delivering robust sales clouded its solid earnings report.
The Cupertino, Calif., company on Tuesday reported profit of $10.7 billion on revenue of $49.6 billion for its fiscal third quarter.
That outpaced its results from a year earlier, when profit was $7.7 billion on revenue of $37.4 billion.
The growth was fueled by record third-quarter sales of iPhones and Macs, all-time record revenue from services and what Apple called the “successful launch of Apple Watch,” although it didn’t provide specific sales figures for its newest product category.
For the three months that ended June 27, Apple sold 47.5 million iPhones, 10.9 million iPads and 4.8 million Macs.
Still, it wasn’t the blowout quarter that Apple is used to, and the company
provided a lower-than-expected outlook for the current three-month period. It estimates fiscal fourthquarter revenue will be between $49 billion and $51 billion and gross margin between 38.5% and 39.5%. On that news, Apple’s stock fell as much as about 8% in after-hours trading.
Analysts are worried whether Apple can keep up the momentum when it comes to the iPhone, which accounts for the lion’s share of revenue at the company. The release of the bigger-screen iPhone 6 and 6S last fall led to blowout sales; last quarter, revenue from iPhones totaled $31.37 billion, up 59% year over year.
“There’s new questions regarding the sustainability of the current iPhone cycle,” said Bill Kreher, senior technology analyst at Edward Jones. “The impetus is on Apple to produce another hit product, or another hit smartphone, in the fall.”
Multiple analysts raised iPhone-related concerns during Tuesday’s conference call, leaving Chief Executive Tim Cook to defend the company’s plans.
“There’s a lot of headroom left for upgraders,” he said. “From our point of view, the iPhone is doing outstanding.”
Pressed later in the call for more details on the iPhone’s future, he said: “We think the phone has a lot of legs to it — many, many years,” he said. “There’s tons of innovation left in the phone. I think we’re in the early innings of it.”
He laid out a multipronged approach to keeping iPhone sales strong, saying the company wanted to entice first-time smartphone buyers, persuade others to upgrade their old iPhones and also persuade owners of rival smartphones to make the switch. China will continue to be a priority for Apple, with Cook saying the rapidly transforming country would eventually become the company’s biggest market.
The company’s fiscal third quarter was especially noteworthy because it included the launch of the Apple Watch in April.
Although analysts and investors would love to know how many watches the company has sold, Apple said last year that it did not intend to break out specific Watch sales numbers as it does for the iPhone, iPad and Macs.
Instead, the Apple Watch has been lumped into the company’s “other” category, which includes iPods and accessories.
“It seems appropriate to start it that way,” Cook said in October when he announced the plan to bundle Watch sales figures with those of other products. “Also, to be straight, I’m not very anxious in reporting a lot of numbers on Apple Watch and giving a lot of detail on it because our competitors are looking for it.”
That explanation hasn’t appeased analysts, who say there are competitive concerns with releasing iPhone and iPad sales figures but that hasn’t stopped the company. Apple said its “other” category pulled in $2.64 billion in revenue last quarter.
Analysts will have to “figure out how to extrapolate from that number,” said Tim Bajarin, a longtime Apple watcher and president of Creative Strategies. His estimate is that Apple sold 4.1 million to 4.3 million Apple Watches in the quarter, but he expected a huge variation in estimates.
Indeed, Angelo Zino, an analyst with S&P Capital IQ, estimates Apple sold only 2 million Watch units in the quarter.
“I think the figures overall are pretty negative,” he said. “I do believe Apple will eventually be successful in the wearables category. It will just take time.”
Cook did offer some hints as to the Watch’s performance during the analyst call.
“Sales of the Watch did exceed our expectations, and they did so despite supply still trailing demand at the end of the quarter,” he said. He added that Watch owners were almost universally pleased with the product.
Gross margin for the quarter was 39.7% compared with 39.4% in the year-ago quarter. International sales accounted for 64% of revenue.
Shares of Apple closed down $1.32, or 1%, to $130.75 during regular trading on Tuesday.