UPDATED 17:05 EDT / OCTOBER 25 2016

Apple CEO Tim Cook And App Store Success APPS

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 didn’t please investors. Shares were down nearly 3 percent, to about $115 a share, 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 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, but were expecting 39 percent margins.

Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, said he thinks part of the higher first-quarter forecast could come from sales of Mac computers. On Thursday, Apple is expected to introduce new MacBooks, the first big refresh of the line in years.

Third straight decline

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.

Apple's high-end iPhone 7 Plus phones are in short supply.

Apple’s high-end iPhone 7 Plus phones are in short supply.

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 help restore Apple’s revenue growth, to about 5 percent. “The underlying demand looks good on both products, but particularly the 7 Plus,” Cook said, and he added that 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.

“We take the company’s multiple references to iPhone 7 plus demand likely outstripping supply in Dec-Q as affirmation of the near-term lift to the iPhone business,” Moskowitz said in a note to clients after the earnings.

Services a hidden gem

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. Macquarie Securities analyst Ben Schachter said in a note to clients Tuesday night that App Store gross revenues for the year were 22 percent bigger than Mac sales and 35 percent larger than iPad sales.

Moorhead called it a “banner quarter” in services. “The company should be bullish on this as it provides an annuity not necessarily tied to device sales,” he said.

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,” Schachter told clients. He expects services next year to net $27.6 billion, or 11 percent of revenues, but contribute 25 percent of gross profit. “With overall iPhone hardware sales relatively healthy, we expect investors to focus more and more on the trajectory of the services business,” he wrote.

Open to acquisitions

Cook emphasized in his opening comments Apple’s work in machine learning, an area of intense interest by other tech giants such as Google Inc., Microsoft Corp., IBM Corp., Facebook Inc. and Amazon.com Inc., some of which are seen as ahead of Apple. “Machine learning is making our products smarter,” he said, including Siri and the iPhone’s camera, photo apps and battery life.

On the conference call, Cook was pointedly asked if Apple has a firm sense of its new-product possibilities for the next three to five years, or if it’s not sure and will simply respond quickly to new developments. His reply: “We have the strongest pipeline we’ve ever had and we’re very confident in it. We have a strong sense of where things go and we’re very agile to shift as we need to.”

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)

A message from John Furrier, co-founder of SiliconANGLE:

Your vote of support is important to us and it helps us keep the content FREE.

One click below supports our mission to provide free, deep, and relevant content.  

Join our community on YouTube

Join the community that includes more than 15,000 #CubeAlumni experts, including Amazon.com CEO Andy Jassy, Dell Technologies founder and CEO Michael Dell, Intel CEO Pat Gelsinger, and many more luminaries and experts.

“TheCUBE is an important partner to the industry. You guys really are a part of our events and we really appreciate you coming and I know people appreciate the content you create as well” – Andy Jassy

THANK YOU