Apple Made Space For Concerns With A Revenue Slowdown And Holiday Quarter Challenges

On Thursday, Apple Inc AAPL provided a lackluster outlook for its hardware business as it reported quarterly earnings that were weighted down by slower device sales. While Microsoft Corporation MSFT impressed with its latest report, Apple joined Alphabet GOOG in disappointing analysts despite delivering strong quarterly figures as space was left for growth-related concerns. Although Apple topped revenue and profit estimates, its revenue contracted for fourth straight quarter, a stretch it hasn’t made before it launched the iPhone back in 2007. Shares fell as executives implied that the tech titan may not return to growth during the holiday quarter.

Quarterly Highlights

During the September quarter, Apple reported revenue dropped 1% YoY to $89.5 billion, topping LSEG’s estimate of $89.28 billion but still showing that Apple’s revenue continues to shrink as demand for every hardware business except the iPhone declined YoY, with big drops for iPad and Mac segments. Revenue from greater China, its third largest market which includes Hong Kong and Taiwan, is also a reason for concern as it dropped 2.5% to $15.08 billion, missing estimates by $2 billion due to intense competition in the region with Huawei's comeback. The revenue slip came despite an unexpectedly strong acceleration in its services business as well as the iPhone’s return to growth, helping the US consumer tech group withstand the worst effects of weaker consumer demand. However, CFO Luca Maestri noted that revenue would have risen had it not been for a 2 percentage point decline caused by exchange rate moves. Services revenue rose 16.3 per cent in the quarter, double the rate of the preceding three months and well ahead of the 11.4 per cent most analysts had been expecting as it amounted to $22.31 billion, topping LSEG’s estimate of $21.35 billion and being a rare bright spot. The performance boosted Apple’s quarterly gross profit margin 45.2%, which is a new September quarter record and Apple has its  licensing deals with Google to thank, along with its Apple Care, iCloud, TV+, etc. A big chunk of the business comes from its deal with Google for the default search engine on its Safari browser which has been highlighted in recent weeks as part of the Department of Justice antitrust case against Google. This year’s payment to Apple is worth an estimated $19 billion. Cook also revealed that Apple had over 1 billion paid subscriptions, including both its own services and apps on the App Store that bill on a recurring basis. Net income for the quarter amounted to $22.96 billion, or $1.46 per share with earnings per share rising 13% to $1.46 thanks to the higher margin from Apple Store sale commissions and the share of search advertising revenue it receives from Google which fueled the services segment.

Full year results The fiscal year that ended in September ended with Apple’s first revenue decline since a 2 per cent slip in 2019, with sales down 3% at $383.29 billion. Full year gross margins were at a record 44.1%. Although hardware revenue began to stabilise after the first half of the year during which supply shortages and a tormented macroeconomic backdrop dented sales, it wasn’t enough to end the year the year without a further decline. However, CEO Tim Cook spiritedly defended Apple’s position, arguing that the iPhone appeared to gain market share in mainland China and increased sales while the overall market is contracting.

Outlook Was Lower Than What Wall Street Expected

Apple hasn’t provided any official guidance since 2020. But, Maestri did say that he expects flat revenue for the undergoing quarter which will be one week shorter compared to last year’s holiday quarter, disappointing Wall Street analysts that guided for 5% YoY growth. Although last year’s extra week made about 7% of quarterly revenue, Maestri’s expectations does imply that Apple is expecting challenges during the holiday season while facing a continued weakness on the Mac, iPad and Wearables front, despite a relatively positive outlook for iPhone sales.

Apple Is Also Simultaneously Aiming For Box Office And Streaming Glory

Apple has invested heavily on Scorsese’s latest creation, the Flower Moon. When it announced its collaboration with Paramount in 2020, the initial estimate of the film’s production costs were guided in the range between $180 million and $200 million. Bloomberg recently estimated costs of this bold cinema bet rose to about $250 million. Although this hybrid release model is a gamble, Apple’s intent is to convert theater-goers into Apple TV+ subscribers. Even if it results in minor setbacks as viewers might choose the immediate theater experience over waiting 45 days for an Apple TV+ release, Apple is strengthening its footprint in a very competitive industry.

Analysts Were Simply Expecting More From Apple

Last week, Microsoft fueled optimism that Big-Tech is rebounding but Google and Apple toned down the optimism. Alphabet posted Cloud figures that raised concerns that Google is not gaining ground against its larger rivals nor benefiting from AI tailwinds. As for Apple, analysts seem to think that it is lacking a clear path to growth this holiday season as its revenue contracted for the fourth consecutive quarter.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.