iPhone Sales Declined in Q2 2023 as Services Revenue Saw Record Growth With 1 Billion Subscriptions

Apple on Thursday forecast that a sales slump would continue into the current quarter, sending shares down despite beating Wall Street sales and profit targets in the fiscal third quarter.

Apple shares dropped about 2 percent after the company predicted what could be the fourth quarter in a row of declining sales. For the just-ended period, strength in services drove the profit beat, but weaker-than-expected sales of Apple's most famous device, the iPhone, underwhelmed investors. Executives said iPhone sales would improve in the fourth quarter, but did not say how much.

Apple is in a delicate position, with its entrenched iPhone battling for share against Android rivals in a mature market, while its next big product - the Vision Pro mixed-reality headset announced in June - is not yet in the hands of consumers.

Apple said sales for the fiscal third quarter ended July 1 fell 1.4 percent to $81.8 billion (roughly Rs. 6,77,034 crore) and earnings per share rose 5 percent to $1.26 (roughly Rs. 104). That topped analyst expectations of $81.69 billion (roughly Rs. 6,72,568 crore) and $1.19 (roughly Rs. 98) per share, according to IBES data from Refinitiv. Weaker iPhone sales were balanced by strong sales in the services segment that contains Apple TV+ and by sales in China that grew 8 percent year over year.

Apple Chief Financial Officer Luca Maestri said the company expects a year-over-year revenue performance in the company's fiscal fourth quarter ending in September similar to the drop the company reported on Thursday. That sales forecast is below analyst expectations of roughly flat fiscal fourth-quarter sales of $90.19 billion (roughly Rs. 7,46,412 crore), according to Refinitiv data.

"There is a real concern about when volume picks up and what the horizon is for iPhone sales growth," said Daniel Newman, chief executive and principal analyst at research firm Futurum Group.

Apple pegged the gross profit margin in the September quarter at 44 percent to 45 percent, above analyst expectations of 43.4 percent, according to Refinitiv data. While Apple expects growth in its service segment that contains Apple TV+, iPad and Mac sales will fall by "double digits," Maestri said on the call.

Apple's research and development spending also hit $22.61 billion (roughly Rs. 1,87,131 crore) for the fiscal year so far, about $3.12 billion (roughly Rs. 25,822 crore) higher than at this point in the previous year.

Apple Chief Executive Officer Tim Cook told Reuters in an interview that the increased R&D spending was in part driven by work on generative artificial intelligence, the same field that is driving spending at other big technology companies.

"We've been doing research across a wide range of AI technologies, including generative AI, for years. We're going to continue investing and innovating and responsibly advancing our products with these technologies to help enrich people's lives," Cook said. "Obviously, we're investing a lot, and it is showing up in the R&D spending that you're looking at."

CHINA STRENGTH

In the meantime, Apple appeared to outperform what has been the weakest smartphone market in China in almost a decade. Overall smartphone sales declined 8 percent in China in the calendar second quarter to their lowest levels since 2014, according to Counterpoint Research. By contrast, Cook told Reuters that Apple's iPhone sales in China grew by "double digits" and that sales were also high in other segments in China.

That helped Apple push sales in its greater China region to $15.76 billion (roughly Rs. 1,30,436 crore), from $14.60 billion (roughly Rs. 1,20,835 crore) in last year's same quarter.

"This was really done by attracting a quarterly record of switchers to the iPhone, as well as having a strong upgrader activity," Cook said. "We also set quarterly records in China for both wearables, home and accessories and services."

Apple said iPhone sales were $39.67 billion (roughly Rs. 3,28,328 crore), below analyst expectations of $39.91 billion (roughly Rs. 3,30,295 crore), according to Refinitiv data. Cook said the installed base of iPhones hit a new high but gave no numbers.

"The company continues to face headwinds caused by waning growth in the smartphone market," said Insider Intelligence analyst Jeremy Goldman. "All eyes are now on its earnings call for any potential Vision Pro or AI-related announcements that could further push the boundaries of their business model."

Apple's services segment, which includes its Apple TV+ service which has announced a deal to carry Major League Soccer, had $21.21 billion (roughly Rs. 1,75,544 crore) in revenue, compared with analyst estimates of $20.76 billion (roughly Rs. 1,71,814 crore), according to Refinitiv data.

Cook said Apple now has 1 billion subscribers on its platform, which includes both Apple services and third-party apps, up from 975 million a quarter ago.

The company's wearables business, which includes the Apple Watch and AirPods, had revenue of $8.28 billion (roughly Rs. 68,529 crore), compared with analyst estimates of $8.39 billion (roughly Rs. 69,439 crore), according to Refinitiv data.

Mac and iPad sales were $6.84 billion (roughly Rs. 56,611 crore) and $5.79 billion (roughly Rs. 47,918 crore), respectively, compared with analyst estimates of $6.62 billion (roughly Rs. 54,791 crore) and $6.41 billion (roughly Rs. 53,049 crore), according to Refinitiv data.

"Almost half of the Mac buyers during the quarter were new to the product, and we continue to see strong upgrader activity to Apple Silicon," Cook told Reuters. 

© Thomson Reuters 2023