Apple on Thursday reported a tough December quarter, including the company’s biggest quarterly drop in revenue since 2016 and falling sales in its iPhone, Mac and wearables businesses.
At first, the results didn’t sit well with investors, with Apple shares falling 4% in after-hours trading after missing earnings.
But shares rallied briefly on Thursday after Apple’s CFO Luca Maestri began to provide data during a call with analysts, suggesting that Apple’s performance will improve in the current quarter, even if overall sales are still down from last year. .
Apple has not issued recommendations since the start of the pandemic. But its data points — or “directional information,” as management calls it — allow analysts covering the stock to gain insight into how the company is performing and update their models.
Here’s how Apple’s Thursday forecast announcements break down.
“On the iPhone side, we expect our March quarter year-over-year revenue to accelerate compared to our December quarter year-over-year revenue,” Maestri said.
The iPhone is Apple’s largest product segment, accounting for 56% of sales in the most recent quarter. Apple said on Thursday that iPhone sales fell by more than 8% compared to the same period last year. This comment suggests that they will not continue to fall as quickly in the March quarter.
Apple executives said part of the reason for the drop in November and December was that the company was unable to produce enough high-end iPhones due to Covid restrictions on Chinese factories and that production had resumed.
However, there is a risk that customers who couldn’t find a new phone during the holiday season will simply give up instead of buying one this quarter. Apple CEO Tim Cook said it was “very difficult to assess” the possibility when analysts asked on the call.
“Overall, we expect March quarter year-over-year revenue figures to be similar to December quarter,” Maestri said. “This shows an acceleration in our core performance compared to last year as the December quarter benefited from an extra week.”
Until Thursday, analysts expected Apple’s fiscal second quarter sales to be around $98 billion.
Apple reported a 5.49% drop in revenue on Thursday. Last year, in the March quarter, Apple reported sales of $97.28 billion. A similar drop in the March quarter this year would add about $92 billion to sales.
So, on the surface, it should have been disappointing.
But as Apple explained, the 5.49% drop would actually be an improvement over the December quarter because Apple’s December quarter results were artificially boosted by the extra week. In other words, earnings in December 2022 were even worse than they appeared.
In addition, the Covid shutdown at factories in China was a major factor in the shortfall, but Apple said on Thursday that its production had returned to a level it was happy with, suggesting that supplies would not be as big a hurdle for the March quarter as it was in December.
“On the services side, we expect revenue to grow year-over-year, but we will also face macroeconomic challenges in areas such as digital advertising and mobile gaming,” Maestri said.
Services revenue was one of the few pleasant surprises for Apple on Thursday, as its $20.77 billion in sales beat Wall Street’s consensus expectations. The segment includes the App Store, warranties, iCloud and Apple Music, among others.
Last year, Apple reported services revenue of $19.82 billion in the March quarter, so the company expects an increase from here, even as executives said conditions remained challenging with declining game and advertising sales.
“For Mac and iPad, we expect both product categories to experience double-digit year-over-year revenue declines due to difficult comparisons and macroeconomic headwinds,” Maestri said.
That marks a significant shift for the iPad, which was Apple’s fastest-growing hardware business in the December quarter, with sales up nearly 30% year-over-year to $9.4 billion. Apple now predicts that the business will go from 30% growth to a drop of more than 10%.
By contrast, Mac business fell nearly 29% in the December quarter, but Cook told analysts that was partly because the company released new notebooks and Apple announced new Mac desktops and notebooks in January. Based on these comments, Mac sales in the March quarter will fall at least 10%, but will likely improve.
“We expect gross margin to be between 43.5% and 44.5%. We expect OpEx to be between $13.7 billion and $14.9 billion.”
Apple’s margins remain much higher than they were before the pandemic. For example, in the quarter ended December 2019, the last full quarter before the announcement of the Covid pandemic, Apple reported a gross margin of 38.4%.
“We’ve been working hard on our cost structure and it’s paying off,” Maestri said.
On Thursday, Cook told CNBC’s Steve Kovacs that Apple actually hit its operating expense target for the December quarter.
“We act prudently and thoughtfully. If you look at our OpEx guidance, what we said we were going to do this quarter, we came in half a billion dollars below that,” Cook said. “So we cut costs.”