Apple's holiday surprise: big sales, not
so big profits
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[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.
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"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.
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![](../images/102616pics/news_s27.jpg)
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
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"I think people were a bit surprised," said Montagne, whose firm
holds Apple shares.
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)
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