Apple shares drop despite better-than-expected iPhone sales, Q1 outlook

Apple shares drop despite better-than-expected iPhone sales, Q1 outlook

by Robert Hof | Oct 25, 2016 | 0 comments

Apple shares drop despite better-than-expected iPhone sales, Q1 outlook

Despite slowing sales of iPhones as consumers waited for new models, Apple Inc. today reported better-than-expected sales of the devices and forecast current-quarter results higher than Wall Street is forecasting.

Still, it’s clear that Apple is still struggling with a broad decline in smartphone sales, which make up two-thirds of its overall revenues, as consumers bought fewer than a year ago. That contributed to the first annual decline in sales and profits for Apple since 2001.

The company reported quarterly earnings of $9 billion, or $1.67 a share, on revenues of $46.9 billion. Thomson Reuters said analysts it polled had expected the consumer electronics giant to earn $1.65 a share, down 16 percent from $1.96 a year ago, on revenues of $46.9 billion, down 9 percent, in the fiscal fourth quarter ended Sept. 24.

The fact that Apple only just matched expectations apparently didn’t please investors. Shares were down nearly 3 percent in after-hours trading following the report. Apple shares had been rising since the company reported better-than-expected fiscal Q3 results on July 26, and they were up 22 percent since June 30.

For the crucial first quarter, which includes the holidays, Apple said it expects revenues between $76 billion and $78 billion, with a gross margin between 38 percent and 38.5 percent and operating expenses between $6.9 billion and $7 billion. Analysts had forecast revenues of $74.9 billion, according to FactSet, $1 billion less than a year ago.

Chief Executive Tim Cook (above) put the best light on the results. “Our results for the September quarter were very strong,” he said on the earnings call. He noted that Apple hit the higher end of its revenue guidance and the top end of its gross margin guidance.

Still, the quarterly decline in revenues and profits was the third straight. Expectations for the quarter were fairly low because with the new iPhone 7 models released on Sept. 16, sales were bound to be slow leading up to the launch. Apple could see a boost in coming quarters from a surge in iPhone sales now that two new models have been released.

The company also could benefit from Samsung Electronics Co.’s disastrous iPhone rival, the Galaxy Note 7, which has been recalled and production stopped following high-profile cases of spontaneous combustion. “If Apple is able to take advantage of Samsung’s missteps by virtue of market share gains and thus sidestep the mixed demand trends in global smartphones, then our cautious near-term stance on iPhone sales velocity could be at risk,” Barclays analyst Mark Moskowitz said in a pre-earnings note to clients Tuesday morning.

Indeed, analysts on average think the new iPhones, and possibly successive models expected to be introduced next fall, could restore Apple’s revenue growth, to about 5 percent. “The underlying demand looks good on both products, but particularly the 7S,” Cook said, and he said the latter product may remain in short supply through the end of the calendar year.

Apple said it sold 45.5 million iPhones in the fourth quarter, a bit above Wall Street’s forecast of 45 million, about 5 million more than in the third quarter but about 2.5 million fewer than a year ago. The company also reported it sold 4.9 million Mac computers, just under forecasts of 5 million, and 9.3 million iPad tablets, a bit over expectations of 9 million. IPhones command about two-thirds of Apple’s overall revenues.

One bright spot was services, including revenues from iTunes music and movies and from apps in its App Store, are the other key business investors were watching. Revenues rose 24 percent from a year ago, to $6.3 billion.

Some analysts view services as a hidden gem for Apple. “We continue to believe that the software and services at Apple are the most underappreciated aspect of the Apple story, particularly the App Store,” Macquarie Securities analyst Ben Schachter wrote in a note to clients. “With overall iPhone hardware sales relatively healthy, we expect investors to focus more and more on the trajectory of the services business.”

Schachter expects services next year to net $27.6 billion, or 11 percent of revenues, but contribute 25 percent of gross profit. “We think the most significant opportunity over the long term is for growth beyond games and entertainment into home automation, enterprise, healthcare, autos, communications, AI apps, and other. In our view, the most critical aspect of this potential growth is investors don’t have to solely rely on AAPL for innovation in these areas.”

In response to a question on Apple’s acquisition strategy in the wake of AT&T’s bid for Time Warner, Cook also said Apple was open to acquisitions of any size, if they have strategic value. :We’re definitely open and we definitely look,” he said.

Photo: iOS7 via photopin (license)
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