Apple fails to dispel worries over hardware outlook and China sales

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Apple failed to dispel Wall Street’s concerns about a lacklustre outlook for its hardware businesses and potential pressure on its position in China as it announced quarterly earnings on Thursday, leaving its shares down nearly 3 per cent in after-market trading.

The slip came despite an unexpectedly strong acceleration in Apple’s services business and a return to growth for the iPhone, helping the US consumer tech group withstand the worst effects of weaker consumer demand.

The latest fall left Apple’s shares 13 per cent below the record hit just before its last earnings report three months ago. Investors have grown more cautious following a stock-price bounce of more than 50 per cent earlier in the year.

Revenue fell 1 per cent in the latest quarter, Apple said, extending its recent contraction to four quarters in a row. It also said that revenue in the current quarter was likely to be in line with the same period the year before. However, this quarter will also be one week shorter, hitting revenue by 7 per cent.

Thursday’s stock price reaction reflected “a vortex of noise” around the company’s financial guidance, as some analysts adjusted their forecasts to reflect the shorter period, said Gene Munster at Deepwater Asset Management. “If Apple had the same number of weeks, they’d be up 7 per cent — the business is healthy,” he said.

In the latest quarter, revenue from greater China, which includes Hong Kong and Taiwan, fell 2.5 per cent, to $15.1bn, nearly $2bn below expectations. The news added to worries that revived competition from Huawei and geopolitical tensions are weighing on one of its most important markets.

In a call with analysts, chief executive Tim Cook made a spirited defence of Apple’s position, arguing that the iPhone appeared to gain market share in mainland China in the latest quarter and increased sales when the overall market appeared to be contracting.

The tech group reported $89.5bn in revenue, 1 per cent less than the year before, as demand for other gadgets such as Macs and iPads fell. Revenue would have risen had it not been for a 2 percentage point decline caused by exchange rate moves, according to chief financial officer Luca Maestri.

Apple’s earnings per share rose 13 per cent to $1.46 thanks to the higher margin from services, such as commissions from App Store sales and the share of search advertising revenue it receives from Google.

Wall Street had been expecting revenue of $89.2bn and earnings per share of $1.39.

Maestri told the Financial Times that the jump in services growth reflected “digital demand growth essentially everywhere”, with stronger sales for the App Store, advertising, iCloud, video and AppleCare.

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. The performance boosted Apple’s gross profit margin for the period to 45.2 per cent, a record for the September quarter, Maestri said.

Along with an accelerating shift to higher-margin services businesses, which account for 24.9 per cent of overall revenue, Maestri said Apple had benefited from an increase of only 2 per cent in operating costs.

The fiscal year that ended in September marked Apple’s first revenue decline since a 2 per cent slip in 2019, with sales down nearly 6 per cent at $298bn. Gross margins for the full year reached a record 44.1 per cent.

Hardware revenue began to stabilise after a first half in which supply shortages and a weakening macroeconomic backdrop dented sales. However, it was not enough to prevent the year ending on a further decline. Most analysts are expecting a return to growth of about 6 per cent in the current fiscal year as services become the main driver of growth and the iPhone 15 sparks a recovery in handset sales.

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