AAPL Apple Inc

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.

While the company reported strong sales of the smaller iPhone SE launched in March, overall its current models have failed to meet the booming sales of its first batch of large-screen iPhones, sapped in part by cooling demand in China and U.S. customers holding on to handsets for longer because of changes in carrier contracts.

The results, and Apple's expectations for the current quarter ending September, were better than what Wall Street feared, and the stock rose more than 6% in after-hours trading. Apple shares had been down 22% over the past year as of Tuesday's close.

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. 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 come as Chinese rival Huawei Technologies Co. gains ground in the global smartphone market, challenging 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% from 2015. Huawei said it shipped 60.6 million smartphones in the six months through June, up 25% from a year earlier.

Huawei's success speaks to the competitive pressures facing the iPhone. Apple doesn't challenge competitors in the low-price end of the smartphone market, but brands like Huawei that initially find success with less-expensive phones often later challenge Apple with more premium models.

Apple said it sold 40.4 million iPhones during the three-month period, compared with sales of 47.5 million units a year earlier. That followed a decline in March that broke an eight-year run of growing iPhone sales. The latest quarter's figure came in slightly above analysts' average estimates of 40 million iPhones, according to 30 analysts polled by FactSet.

In an interview, Apple Chief Executive Tim Cook said iPhone demand was better than 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."

With revenue slumping after a 13-year run of growth, Apple is at a critical juncture in its history. It remains the most valuable company in the world by market capitalization and generates more profit than any company around, but 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, Apple 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. Apple has said it pays taxes in accordance with the laws in whatever markets it operates in.

Mr. Cook said he doesn't buy the contention of some observers that Apple's best days are behind it. "People always doubted us," he said in the interview. "That's not a new thing and that ebbs and flows with the stock market, so we don't get too uptight about that."

A bright spot was Apple's revenue for services, including subscriptions to Apple Music, fees from Apple Pay and sales of apps. The company said services revenue rose 19% to $5.98 billion.

Apple said services revenue generated $23 billion in the past 12 months. Mr. Cook said he expects that the services business next year will generate enough revenue that it would be a Fortune 100 company if it was an independent company. That works out to a forecast of 22% growth, because the 100th-ranked company on the Fortune 500 is Northwestern Mutual with annual revenue of $28.1 billion.

Still, sales of Apple's other products haven't compensated for the shortfall from the iPhone.

While iPad revenue increased 7% because of its pricier iPad Pro, unit sales fell for a 10th-straight quarter, down 9% to 9.95 million. Sales of Mac computers fell 11%, marking a third-straight quarter of decline.

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. But the iPhone SE's lower price dragged on gross margins, a closely watched measure of profitability reflecting the percentage of revenue remaining 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%. It gave that same estimated range for the current quarter ending in September, and said 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%.

The recent decrease in revenue also reflected slowing 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%.

Mr. Cook said that stripping out currency impacts, sales in mainland China were down 2% in the quarter. Considering last year's massive surge, Mr. Cook said he is still optimistic about the market.

"Over the long haul, we're very bullish in China," said Mr. Cook. "There will be some potholes along the way and speed bumps, but I think China is an unbelievable place and I haven't seen anything that causes me pause on that."

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

(END) Dow Jones Newswires

July 26, 2016 19:35 ET (23:35 GMT)

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