Apple
Inc. posted its first holiday-quarter
decline in revenue and profit in over a decade and warned the slowdown in its
core iPhone business and weakness in China has spilled into
this year.
The
company’s revenue dropped 4.5% to $84.31 billion for the three months ended
Dec. 29, while its profit fell slightly, to $19.97 billion. Apple has been
stung at home by smartphone owners’ increasing reluctance to upgrade to pricier
devices and by competition in China from lower-priced, feature-rich phones. Its
iPhone sales fell 15% in the quarter.
The
underwhelming report on Tuesday extends one of Apple’s most tumultuous periods
under Chief Executive Tim Cook. Its month began when he unexpectedly slashed
Apple’s revenue forecast for the first time in more than 15 years, sparking
investor fears about growth.
Aside
from the setbacks to the business, Apple is also scrambling to fix a technical glitch in its FaceTime video-chat
system that let callers eavesdrop on users of iPhones, iPads and
Macs. The bug, which was exposed on social media Monday, is an embarrassment to
a company that has touted its commitment to privacy.
Amid
the turmoil, Mr. Cook projected confidence on the earnings call. “Macroeconomic
factors will come and go, but we see great upside in continuing to focus on the
things that we can control,” he said.
The
CEO, who is usually reluctant to discuss future products, said the company has
a strong pipeline of products and services with new announcements slated for
later this year. “Apple innovates like no other company in the world and we are
not taking our foot off the gas,” Mr. Cook said.
Apple’s
shares fell 1% during the day but jumped nearly 6% to $163.50 in after-hours
trading. The stock is down about 30% since hitting a peak in early October, and
the company has since ceded its position as the world’s most valuable company
to both Amazon.com
Inc. and Microsoft
Corp.
The
after-hours increase lifted shares that have underperformed this year relative
to the other technology giants, which are less dependent on China for sales.
Shares of Amazon, Microsoft and Alphabet Inc. have risen this year, helping reverse some
of the heavy losses the tech sector suffered late last year as revenue growth
slowed and controversies over the responsibility of internet platforms
intensified.
Apple’s
greatest challenges are twofold: Ignite sales of an iPhone business that makes
up nearly two-thirds of its sales, and drive enough growth in smaller
businesses such as services and wearables to offset a maturing smartphone
market.
Customers
have been reluctant to pay up for flagship iPhones that have risen in starting
price by more than 50% in recent years to nearly $1,000. Demand for the iPhone
XR, a lower-priced option released in October, has fallen short of the
company’s expectations, forcing it to slash production.
Sales
of the iPhone, which accounts for two-thirds of total revenue, fell to $51.98
billion from $61.1 billion a year earlier.
“They’re
in a bit of a midlife crisis,” said Steve Milunovich, an analyst at Wolfe
Research, an equity research firm. “The iPhone has matured. Patience is
required.”
The
iPhone woes were particularly pronounced in Greater China, where Apple’s total
sales fell 27% to $13.17 billion. Local smartphone rivals like Huawei
Technologies Co. and Xiaomi Corp. are increasingly releasing competitive
phones at lower prices, while WeChat, an all-in-one app for messaging, payments
and more, reduces the difference between Apple’s iOS and Android.
Apple
also is grappling with a broader economic malaise in Greater China, a market
that includes Hong Kong and Taiwan and accounts for one-fifth of total sales.
In 2018, China’s economic expansion slowed to its weakest pace in nearly three
decades, as the trade fight with the U.S. exacerbated a downturn in big-ticket
investments, property sales and retail business.
Those
micro- and macroeconomic factors in China contributed to iPhone shipments
falling 22% to 11 million units during the three months ended in December,
according to Strategy Analytics, a market research firm. Similar factors have
cut into the revenue prospects of other technology firms, including Samsung
Electronics Co. , Intel
Corp. and Nvidia
Corp.
The
downturn in China caught Apple by surprise in November and December, Apple
finance chief Luca Maestri said. He expects the weak economic conditions there
to continue to pose challenges for the company.
Mr.
Maestri said the strength of the U.S. dollar has increased iPhone prices
overseas, making the cost of the newest handsets pricier than they are in the
U.S. For example, in China, he said the yuan weakened 9% relative to the
dollar, crimping sales.
“We’re
seeing fewer upgrades than in the past,” Mr. Maestri said. He added that the
company has lowered the price of the iPhone XR in China to negate the effect of
currency changes.
Apple
expects revenue of $55 billion to $59 billion for the March quarter, below the
average consensus estimate of $59.98 billion, according to FactSet. Analysts
expect the number of iPhones sold in the March period will decline at the
steepest level in the company’s history.
Strong
performance of Apple’s other businesses is accentuating Apple’s iPhone
dependency. Sales of Macs, iPads, Services and other products rose by 19%.
Growth
of Apple’s services business slowed during the period, stoking investor concern
about a business that has been a bright spot amid soft iPhone demand. The
segment, which includes app-store sales, streaming-music subscriptions and
insurance on devices, increased its revenue 19% to $10.88 billion, a
deceleration from six quarters of more than 20% growth
Mr.
Maestri said the business was affected by a slowdown in app sales in China,
where the government is approving new games, and a deceleration in AppleCare,
insurance the company offers on new devices.
As
the company pushes to increase its services revenue, it has emphasized the
digital privacy of its products over technology peers. The FaceTime bug
allowing users to access the microphones of other Apple devices, however,
showed that it is vulnerable to privacy shortcomings.
Messrs.
Cook and Maestri didn’t address the bug during their call with analysts. Apple
disabled the Group FaceTime feature late Monday and said it expects to release
a software fix this week.
Apple
said total active devices increased 8% last year to 1.4 billion, a deceleration
from the more than 15% compounded annual growth rate between 2015 and 2018. The
company for the first time disclosed that iPhones accounted for 900 million of
its active devices, an increase of 75 million last year.
Mr.
Maestri said the company is on track to hit its goal of $50 billion in total
services revenue by 2020. “We think the business will continue to grow nicely
going forward,” he said.
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