Apple forecasted a sales slump into the current quarter on Thursday, sending shares lower despite exceeding Wall Street sales and profit targets in the fiscal third quarter.
Apple’s stock dropped about 2% after the company forecasted a fourth quarter of declining sales. Strength in services drove the profit beat in the most recent quarter, but weaker-than-expected sales of Apple’s most famous device, the iPhone, disappointed investors. Executives predicted that iPhone sales would increase in the fourth quarter, but did not specify how much.
Apple is in a difficult position, with its entrenched iPhone fighting for market share against Android rivals in a mature market, while its next big product – the Vision Pro mixed-reality headset announced in June – is still not in consumers’ hands.
Apple reported that sales for the fiscal third quarter ended July 1 fell 1.4% to $81.8 billion, while earnings per share increased 5% to $1.26. According to Refinitiv IBES data, this surpassed analyst expectations of $81.69 billion and $1.19 per share. Weaker iPhone sales were offset by strong sales in the services segment, which includes Apple TV+, and sales in China, which increased 8% year over year.
Apple Chief Financial Officer Luca Maestri stated that the company expects year-over-year revenue growth in its fiscal fourth quarter ending in September, similar to the drop reported on Thursday. According to Refinitiv data, this sales forecast falls short of analysts’ expectations of roughly flat fiscal fourth-quarter sales of $90.19 billion.
“There is real concern about when volume will pick up and what the horizon for iPhone sales growth is,” said Daniel Newman, chief executive and principal analyst at research firm Futurum Group.
According to Refinitiv data, Apple forecasted a gross profit margin of 44% to 45% in the September quarter, exceeding analyst expectations of 43.4%. While Apple expects growth in its service segment, which includes Apple TV+, iPad and Mac sales will fall by “double digits,” according to Maestri on the call.
Apple’s R&D spending has also reached $22.61 billion for the fiscal year so far, about $3.12 billion more than at this point last 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 have been conducting research on a wide range of AI technologies, including generative AI, for many”We will keep investing, innovating, and responsibly advancing our products with these technologies to help enrich people’s lives,” Cook said. ok said. “Obviously, we’re investing a lot, and it is showing up in the R&D spending that you’re looking at.”
Apple Outperforms China’s Market
Meanwhile, Apple appeared to outperform what had been China’s weakest smartphone market in nearly a decade. According to Counterpoint Research, overall smartphone sales in China fell 8% in the calendar second quarter to their lowest levels since 2014. In contrast, Cook told Reuters that Apple’s iPhone sales in China increased by “double digits,” and that sales in other segments were also up.
This helped Apple increase sales in its Greater China region to $15.76 billion, up from $14.60 billion in the same quarter last year.
“This was really accomplished by attracting a quarterly record of switchers to the iPhone, as well as strong upgrader activity,” Cook explained. “In China, we also set quarterly records for wearables, home and accessories, and services.”
According to Refinitiv data, Apple’s iPhone sales were $39.67 billion, which fell short of analyst expectations of $39.91 billion. Cook stated that the installed base of iPhones had reached a new high, but provided no figures.
“The company continues to face headwinds from waning smartphone market growth,” said Insider Intelligence analyst Jeremy Goldman. “Everyone’s attention is now focused on its earnings call for any potential Vision Pro or AI-related announcements that could further push the boundaries of their business model.”
According to Refinitiv data, 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 to analyst estimates of $20.76 billion.
Cook stated that 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.
According to Refinitiv data, the company’s wearables business, which includes the Apple Watch and AirPods, had revenue of $8.28 billion, compared to analyst estimates of $8.39 billion.
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 said.