AAPL Apple Inc

By Robert McMillan 

Apple Inc. posted its first annual revenue decline in 15 years, but projected a return to growth in the current quarter behind strong sales of its new iPhone 7.

Apple has grown to be the most valuable company in the world over the past decade on the tremendous success of the iPhone. But that formula proved less effective in the past year amid lukewarm sales of the iPhone 6S models and slowing growth in smartphone sales world-wide, especially in China, Apple's biggest growth market in recent years.

For its fiscal fourth quarter, ended Sept. 24, Apple reported its third consecutive decline in revenue and profit. Net income fell 19% to $9 billion, or $1.67 a share, from $11.1 billion, or $1.96 a share, in the same period a year earlier. Analysts polled by Thomson Reuters had expected earnings of $1.65 a share.

Revenue fell 9%, to $46.9 billion, mostly ahead of the launch of the iPhone 7, which went on sale a week before the end of the quarter.

The iPhone accounted for 63% of Apple's revenue in the just-completed fiscal year, but growth in the smartphone market has slowed recently and consumer buying habits are changing. In the fourth quarter, Apple said it sold 45.5 million iPhones, 2.5 million fewer than a year earlier.

But Apple projected revenue of $76 billion to $78 billion in the current quarter, which includes the holiday-shopping season and sales of the new phone. That would be an increase from $75.9 billion in the same period a year earlier. Before Apple's announcement, analysts had been expecting revenue in the current quarter of $74.9 billion, according to FactSet.

Apple also projected gross margin, a closely watched measure of profitability, of 38% to 38.5%, ever so slightly up from 38% in the just-completed quarter.

"We return to growth in the quarter despite the supply shortages that we've currently got," said Apple Chief Executive Tim Cook.

Mr. Cook said the response to the iPhone 7, released in September "has really been off the charts." He said there are waits for some models, particularly the high-end iPhone 7 Plus. Neil Cybart, an independent analyst who follows Apple, said there is an eight-week wait for some models.

Mr. Cook also touted improvements in the company's services business, which includes Apple Music, iTunes and the App Store, where revenue grew 24% from a year earlier. Apple Music revenue rose 22%, Mr. Cook said, calling services "our huge highlight in the quarter."

Apple faces multiple challenges as it looks to augment the success of the iPhone. Sales of Macintosh computers, for which Apple is expected to introduce new models later this week, fell 17% from a year earlier. IPad sales, which have fallen in recent years, were flat. Sales of Apple's "other products" category, which include the Apple Watch, fell 22% from a year earlier. And Apple's secretive automotive project has yet to produce results.

Still, Apple remains the most profitable U.S. company, with net income of $45.7 billion for the fiscal year it just ended. The company reported holding $237.6 billion in cash and investments, up from $231.5 billion three months earlier.

It also may be benefiting from rival Samsung Electronics Co.'s decision to cancel its Galaxy Note 7 smartphone after a series of battery fires and overheating incidents.

Asked in an interview how Samsung's problems influenced Apple's outlook, Mr. Cook said, "We've had a large number of Android switchers that are looking for better experiences. We want to offer anybody who would like to come over a great experience."

In after-hours trading, Apple shares fell 2.8%, after rallying more than 20% over the past three months amid growing optimism about the iPhone 7 and Samsung's travails.

Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., said investors may have been disappointed that Apple's projections for the current quarter weren't even more bullish.

Mr. Cybart, the independent analyst, said the revenue projection for the current quarter implies that Apple expects iPhone unit sales to increase more than 5% from a year earlier, when the iPhone 6S was its newest model.

Apple is running out of large untapped markets where it could reproduce its breakneck success in China in recent years. Sales in greater China, which includes Hong Kong and Taiwan, declined 30% to $8.8 billion in the most-recent quarter. In the same quarter a year earlier, Apple sales to the region grew 99%.

UBS Securities LLC says 80% to 90% of China's potential high-end smartphone buyers already have a phone.

Mr. Cook hopes India, where iPhone sales grew by more than 50% during the most recent year, will prove to be another giant market.

"We still believe we're just kind of scratching the surface there," he said. Apple includes India in its Asia Pacific region, which reported $2.7 billion in sales, roughly even with a year earlier.

Write to Robert McMillan at Robert.Mcmillan@wsj.com

(END) Dow Jones Newswires

October 26, 2016 02:47 ET (06:47 GMT)

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