Apple's holiday surprise: big sales, not so big profits

[October 26, 2016]  By Jeffrey Dastin and Anya George Tharakan

(Reuters) - Apple Inc posted its third successive quarter of declining iPhone sales on Tuesday and forecast slimmer-than-expected profit margins over the upcoming holiday season even as it projected record sales, sending its shares down.

The world's most valuable publicly traded company said improved sales from China were around the corner, despite revenue falling almost 30 percent from the country in the latest quarter. It said sales so far to India have only scratched the surface.

But a slight miss on fiscal fourth-quarter revenue and a projection of gross profit margins a touch behind analyst targets reflected broader concerns that Apple may have lost its tech superiority, even with the refreshed iPhone 7.

"In essence, in China and elsewhere, while Apple’s products are still seen favorably, the distance between Apple and its competitors is nowhere near as great as it once was," Neil Saunders, head of retail research firm Conlumino, wrote in a note.

Apple shares fell 2.8 percent to $114.99 in after-hours trading.

Chief Financial Officer Luca Maestri said in a phone interview with Reuters it was "impossible to know" if there was any effect yet from rival Samsung Electronics Co Ltd halting production of its fire-prone Galaxy Note 7 phones earlier this month.

He also said that Apple was "supply constrained" and selling all the smartphones it could make.

"It's clear that Apple is bullish about growth in the iPhone, but there's little evidence of that growth in the actual results announced today," said analyst Jan Dawson of Jackdaw Research.

"Given that the iPhone 7 and especially the iPhone 7 Plus is in short supply, Apple is going to be a little constrained in its ability to take full advantage of the strong demand we're seeing," he added.

NATURAL PAUSE

Apple said it sold 45.51 million iPhones in the three months ended Sept. 24. That beat the average analysts' estimate of 44.8 million, according to research firm FactSet StreetAccount.

Revenue fell 9 percent to $46.85 billion, a touch behind Wall Street targets, according to Thomson Reuters I/B/E/S. Apple forecast revenue of $76 billion to $78 billion for the current, holiday-dominated quarter, ahead of the consensus estimate of $75.08 billion.

If it hits that estimate, this quarter would be Apple's biggest on record by sales, ahead of the $75.9 billion revenue it posted in the year-ago period.

However, Apple offered a conservative outlook on profit margins, 38 to 38.5 percent, versus expectations of nearly 39 percent, said Mariann Montagne, senior investment analyst and portfolio manager at Gradient Investments.

"I think people were a bit surprised," said Montagne, whose firm holds Apple shares.

A customer buys the new iPhone 7 smartphone inside an Apple Inc. store in Los Angeles, California, U.S., September 16, 2016. REUTERS/Lucy Nicholson - RTSO2V4

Apple shares have outperformed the market over the last three months, and Edward Jones analyst Bill Kreher said the shares were taking a "natural pause" even though results were positive. The stock hit a 12-month low of $89.47 in May and has marched up since as investor confidence returned.

HOPES FOR CHINA

Apple is still optimistic about its business in China, CFO Maestri said. While gross domestic product growth in the country has slowed, the economy is still growing, the middle class is expanding and smartphone ownership remains low, he said.

Maestri said high demand for Apple's newest iPhones made the company confident about results in the first quarter.

The company's net income fell to $9.01 billion, or $1.67 per share in the quarter from $11.12 billion, or $1.96 per share, a year earlier. That beat the average estimate of $1.66 per share.

Apple's fortunes are strongly tied to the success of the iPhone, which accounts for two-thirds of its revenue.

Chief Executive Tim Cook also said on a call with analysts that India was poised to boom in smartphone sales as a more powerful 4G cellular network was put in place this year and next.

He also hinted at potential future areas of business, commenting that media content creation and ownership was a great opportunity. Cook declined to say whether Apple was working on a car, as has been widely reported, but he called the industry "interesting."

(Additional reporting by Anya George Tharakan in Bengaluru; Writing by Peter Henderson; Editing by Ted Kerr and Bill Rigby)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.