By Daisuke Wakabayashi 

Apple Inc. said its quarterly profit fell 27% as the company grappled with the first prolonged slump in iPhone sales since the product was introduced in 2007.

Revenue fell for a second straight quarter, along with sales of its flagship smartphone, which is awaiting an expected refresh in September. Its current models have failed to meet the booming sales of its first batch of large-screen iPhones, sapped by sluggish growth in the smartphone market, cooling demand in China and customers holding on to handsets for longer periods because of changes in carrier contracts.

Apple said net income was $7.8 billion in the fiscal third quarter that ended June 25, down from $10.68 billion in the year-ago period. Earnings per share fell to $1.42 from $1.85. Revenue declined 14.6% to $42.36 billion from $49.6 billion a year earlier.

Shares rose 4.6% to $101.30 in after-hours trading as results beat expectations. Analysts polled by Thomson Reuters estimated that Apple would post earnings of $1.38 a share on revenue of $42.1 billion.

Apple's iPhone doldrums comes as Chinese rival Huawei Technologies Co. gains ground in the global smartphone market, increasing the competitive threat for Apple and Samsung Electronics Co. Richard Yu, Huawei's head of consumer products, on Tuesday expressed confidence it would reach its target to ship 140 million smartphones this year, up 30% increase from 2015. Huawei said it shipped 60.6 million smartphones in the six months through June, up 25% from a year earlier.

After breaking an eight-year run of growing iPhone sales in the three months through March, Apple followed with another decline in the June quarter. The company said it sold 40.4 million units of iPhone during the three-month period, compared with sales of 47.5 million units a year earlier.

Apple's iPhone sales came in slightly above analysts' estimates of 40 million iPhones during the March quarter, according to 30 analysts polled by FactSet.

In an interview, Apple Chief Executive Tim Cook said iPhone demand was better than what the sales figures showed, because it reduced inventory of the smartphone by more than four million units in its retail channels. He said he also was encouraged by iPad revenue returning to growth for the first time in 10 quarters and the continued strong growth in revenue for Apple's services.

"There are a number of encouraging signs in the results," Mr. Cook told The Wall Street Journal. "This last quarter was surprising because it was better than we expected from so many different points of view, not just one thing."

Apple had a boost in sales from the March 31 introduction of the small iPhone SE, a less expensive model with a four-inch display. However, the lower price for the iPhone SE dragged on Apple's gross margins, a closely watched measure of profitability reflecting the percentage of revenue that remains after manufacturing costs. The iPhone SE starts at $399 without a two-year contract, compared with $649 for the iPhone 6S. The lower price pushed down the average selling price of all iPhones to $595 in the quarter from $662 a year earlier.

Apple said its gross margin was 38% in the latest quarter, in line with its estimated range of 37.5% to 38%. For the current quarter ending in September, Apple said it expects a gross margin of between 37.5% and 38%. It anticipates revenue coming in between $45.5 billion and $47.5 billion, which would mark another decline from last year. Analysts estimated revenue of $45.7 billion for the September quarter with a gross margin of $38.4%.

Apple is at a critical juncture in its history. Revenue fell for a second straight quarter after a 13-year run of growth. While it remains the most valuable company in the world by market capitalization and generates more profits than any company around, its main hardware products -- the iPhone, iPad and Mac -- are in decline, its new products aren't successful enough yet to pick up the slack, and there are concerns that it has lost its innovative touch.

At the same time, Apple faces many aggressive competitors in China -- including Huawei -- where the government is taking a more critical view toward the company. In Europe, the company is facing a tax probe that may result in a tax bill in the billions, and it has publicly clashed with the U.S. government over its stance on privacy.

As iPhone revenues slow, sales of Apple's other products haven't compensated for the shortfall. Apple said iPad sales fell for a 10th-straight quarter, although revenue increased because of its pricier iPad Pro. Apple said it sold 9.95 million iPads during the quarter, down 9%.

The decrease in revenue also reflected a slowdown in sales growth in China, where sales had been prospering. Sales to Greater China, which includes Hong Kong and Taiwan, fell 33% to $8.85 billion. In the same quarter a year earlier, Apple's Greater China sales rose 112%.

Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com

 

(END) Dow Jones Newswires

July 26, 2016 16:51 ET (20:51 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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