Consumer electronics giant Apple reported worse than expected EPS and revenue for the fiscal first quarter ended Dec. 31 Thursday. Apple’s overall sales for the quarter were about 5% lower than last year’s and were the first year-over-year sales decline since 2019. Apple’s biggest driver of revenue, iPhone sales missed expectations of $65.78 billion vs. $68.29 billion estimated, down 8.17% year-over-year. The key services segment sales beat with $20.77 billion vs. $20.67 billion estimated, up 6.4% year-over-year.
Apple CEO Tim Cook said three factors impacted the results, a strong dollar, production issues in China affecting the iPhone 14 Pro and iPhone 14 Pro Max, and the overall macroeconomic environment.
Apple (NASDAQ: $AAPL) Reported Earnings After Close Thursday
Apple Fiscal Q1 23 Earnings
Apple’s first year-over-year quarterly revenue decline since 2019, and the biggest annual quarterly revenue drop since September 2016.
Highlights
- EPS: $1.88 vs. $1.94 estimated, down 10.9% year-over-year
- Revenue: $117.15 billion vs. $121.10 billion estimated, down 5.49% year-over-year
- iPhone revenue: $65.78 billion vs. $68.29 billion estimated, down 8.17% year-over-year
- Mac revenue: $7.74 billion vs. $9.63 billion estimated, down 28.66% year-over-year
- iPad revenue: $9.40 billion vs. $7.76 billion estimated, up 29.66% year-over-year
- Other Products revenue: $13.48 billion vs. $15.23 billion estimated, down 8.3% year-over-year
- Services revenue: $20.77 billion vs. $20.67 billion estimated, up 6.4% year-over-year
- Gross margin: 42.96% vs. 42.95% estimated
““During the December quarter, we achieved a major milestone and are excited to report that we now have more than 2 billion active devices as part of our growing installed base” Cook said
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iPhone Sales
iPhone revenue fell 8.2% from last year to $65.78billion and below analyst estimates of $68.3 billion. China sales fell 7.8% to $25.78 billion.
Cook said that the supply of iPhone 14 Pro and iPhone 14 Max were significantly reduced during the quarter, meaning there were fewer to sell to customers. Apple’s primary iPhone assembly plant in China was affected by covid lockdowns during the quarter, which Apple warned investors about in November.
“We put out an update on that on November 6th and it lasted through most of December,” Cook said “So we had a big hole there.” Cook said.
Mac
Sales of Mac computers declined 29% year over year to $7.7 billion, compared with expectations of $9.6 billion, according to Refinitiv data.
Cook said that Mac sales were down because it was difficult to compare the quarter to last year’s quarter, in which the company released new high-end MacBook Pro laptops. There were no similar launches during this year’s December quarter, Cook pointed out.
Sales of iPad tablets, Mac computers and wearables were affected by supply constraints, Mr. Cook said. Apple is now over one year into its transition to Apple silicon, and already the vast majority of Mac sales are from M1-powered devices.
iPad
Apple’s iPad has been hampered by supply issues. Apple reported that iPad sales grew nearly 30% year-over-year after it released a low-end, inexpensive model as well as a new high-end model during the quarter. It’s a redeeming area in Apple’s hardware business, and is a reversal of last December quarter, in which Mac revenue surged and iPad fell.
For perspective iPad is by far Apple’s smallest category at 6% of total sales whereas iPhone, meanwhile, accounts for 58% of sales.
Services
The business includes several different lines, including Apple’s online services like Apple Music and Apple TV+, revenue from the App Store, hardware warranties, and search deals with companies like Google.
Apple’s services business reported 6% growth, beating analyst expectations. The company now has 935 million paid subscriptions, up from 900 million the quarter before, and that services sales set a record in several markets, including China, Cook said.
Apple management said that cloud services, payments including Apple Pay and Apple Card, and music were strong components of services. Cook added that Apple employees are beta testing a buy-now-pay-later feature that will be part of services.
“It will be launching soon,” Cook said.
Apple recently increased prices for Apple Music and Apple TV+, but the increases started during the December quarter. Cook said the price increases were “disconnected” from Apple’s services performance.
Other Products: Wearables Home and Accessories
Apple’s Other Products category include wearables, home and accessories division include the Apple Watch, Apple TV, AirPods, Beats headphones and the HomePod.
The segment Cook said was hurt by the challenging macroeconomic environment Apple’s other products category declined over 8%.
Cook said that the increase in the install base because people switched to iPhone from Android and bought Apple Watches for the first time.
“We attribute that to having a lot of switchers and a lot of first-time buyers in the case of the Apple Watch,” Cook said. “And so obviously you need to bring in people that are not currently active on a device in order to grow.”
Supply Constraints
Supply chain pressures increased when COVID lockdowns at a production facility in Zhengzhou, China, slowed production of iPhone 14 Pro and Pro Max devices, both premium priced models that would traditionally help drive Apple’s margins higher.
In an interview with Reuters, Cook said that production disruptions “lasted through most of December” but that “production is now back where we want it to be.” Cook said the lockdowns in China created a dual challenge where both supply and demand were constrained, with greater China sales falling 7% to $23.9 billion.
“When things started to reopen in December (in China), we did see an increase in traffic to our stores as compared to November and an increase in demand as December rolled around,” Cook told Reuters.
Apple has been one of the few companies upfront about supply constraints, so their impact does not come as a big shock. Mr. Cook had warned in April were “slightly less” than what was predicted. Apple had warned in April that Covid-related supply disruptions around Shanghai and silicon shortages would hit the company’s inventory and hinder sales by between $4 billion and $8 billion. Chief Financial Officer Luca Maestri also had warned that foreign-exchange rates and paused sales in Russia following the war in Ukraine would also limit growth.
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Outlook
Apple did not provide guidance for the current quarter ending in March. It hasn’t provided guidance since 2020, at first citing uncertainty caused by the pandemic. Analysts expected Apple to guide to about $98 billion in sales in the company’s fiscal second quarter.
Cook said that Apple is cutting costs and hiring more slowly. Apple has not announced a layoff unlike many rival tech companies.
“We’re also recognizing the environment that we’re in is tough. And so we’re cutting costs. We’re cutting hiring, we’re being very prudent and deliberate on people that we hire,” Cook said.
Apple is said to be preparing to enter the AR/VR space with its own headset that will likely launch sometime in 2023. That could serve as the next major product for the company and open up broader opportunities for services and content sales.
Mr. Cook has said the company is seeing inflationary costs in wages, logistics and certain silicon components.
Analyst Reactions
Source: Apple, AlphaStreet
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