Apple Forecasts Another Plunge In Revenue, Says iPhone Production Issues Over

Apple Inc (AAPL.O) on Thursday predicted that revenue would drop for a second successive quarter but that iPhone sales were likely to pick up as production had gone back to normal in China after COVID-related lockdowns.

While striking an upbeat tone on sales of services and iPhones, CEO Tim Cook said an uncertain economy is likely to weigh on categories like gaming and digital advertising.

Overall, Apple’s leaders sought to reassure investors that despite the company being battered by up-and-down sales cycles for its flagship device and vulnerable to supply chain shocks, the world’s biggest listed company continues on a steady – if somewhat slower – rise.

In the immediate aftermath of some of the firm’s worst financial results in years, at least some investors seemed to place their confidence in Cook, imposing only small share price declines. For the just-ended quarter, Apple’s profits fell behind Wall Street expectations for the first time since 2016, weighed down by iPhone sales plummeting for the first time since 2020.

The stock fell about 2% after Chief Financial Officer Luca Maestri said that iPhone sales were likely to ramp up compared with the quarter ended Dec. 31. That did not quite wipe off a 3.7% rise during regular trade.

Alphabet (GOOGL.O) and Amazon.com (AMZN.O) also plunged about 4% after posting results. They also gained during regular trade.

Sales And Profits Miss Expectations

Apple sales dropped 5% to $117.2 billion and were down in every part of the world in the quarter. Sales from each product category fell, except for gains in iPads and services. Earnings per share were $1.88.

Analysts had anticipated sales of $121.1 billion and profits of $1.94 per share, IBES data from Refinitiv showed. In an interview, Cook told Reuters that the production disruptions that troubled Apple’s key quarter had now ended.

“Production is now back where we want it to be,” he said.

During its fiscal first quarter ended Dec. 31, Apple encountered a wave of challenges that left Wall Street projecting lower sales. Chief among those were supply chain pressures when COVID shutdowns at a production plant in Zhengzhou, China, dampened production of iPhone 14 Pro and Pro Max devices, both premium-priced models that would essentially help push Apple’s margins higher.

Cook said the lockdowns in China presented a dual challenge where both supply and demand were restricted, with greater China sales plunging 7% to $23.9 billion.

But product snags are now a thing of the past. “They still feel demand will be soft, but they’ve rectified production, which means that if demand does go up unexpectedly, they can ramp” to meet it, said Ben Bajarin of analyst firm Creative Strategies.

Foreign Exchange Headwinds

The strong U.S. dollar also weighed on Apple, which obtains more than 50% of its sales from outside the Americas, but the impact was less than expected as the dollar eased from 2022’s highs.

Apple had cautioned investors that such foreign-exchange issues would place a 10% drag on sales but said on Thursday that the actual impact was 8%. Apple forecasts a 5% impact on foreign exchange rates in the fiscal second quarter.

“I would point out that 8% is still a very severe headwind,” Cook told Reuters. “I wouldn’t want to underestimate that. We would have grown on a constant currency basis.”

In addition to supply chain problems for the iPhone, Wall Street analysts had predicted iPhone sales to drop in 2023 as part of a larger pattern in which the iPhone 14 family unveiled last year sells more slowly after two consecutive years of strong sales of iPhone 12 and 13 models. Apple said iPhone sales were $65.8 billion, an 8% fall from the prior year and the first drop since 2020.

Only Two Growth Sectors

Only two segments rose. The firm’s services segment, which includes software businesses like the App Store and content businesses such as Apple TV+, grew 6% to $20.8 billion in revenue. And sales of the iPad surged 30% to $9.4 billion, compared with analyst predictions of $7.8 billion, according to Refinitiv data.

“The report was not good. The guidance wasn’t great either. But it doesn’t seem to matter. This market has just a relentless ‘buy the dip’ mentality,” said Dennis Dick, a trader at Triple D Trading who does not have a position in Apple stock.

Cook told Reuters that the firm currently has a base of 2 billion active devices, a rise from 1.8 billion a year earlier. The company currently has 935 million paid subscriptions, a rise from 900 million the prior quarter, and services sales hit a record in several markets, including China, he said.

Sales of the company’s Mac computers, which had shot up during the wave of working from home during the pandemic, dropped 29% year over year to $7.7 billion. The wearables and accessories segment, which includes the AirPods and Apple Watch, declined 8% to $13.5 billion.