Apple reported its first quarter financial results on Thursday, beating earnings per share forecasts but missing on revenue expectations. The tech giant also warned investors that it expects lower iPhone sales in the current quarter due to softening demand.
Q1 Performance Rundown
Apple posted earnings per share of $1.98 on revenue of $96.6 billion in its fiscal first quarter spanning October through December 2023. Analysts were expecting EPS of $1.94 on revenue of $98 billion. This compares to earnings of $1.87 per share on revenue of $92.7 billion in the year-ago period.
Highlights from Apple’s latest quarter, which encompasses the busy holiday shopping season, include:
- iPhone revenue fell 8% annually to $65.8 billion, missing expectations
- Services revenue grew 6% to $16.9 billion, slightly below forecasts
- Wearables/accessories sales dropped 8% year-over-year
- iPad revenue surprisingly increased 30% amid resilient demand
- Gross margin came in at 39.5%, down from 43.8% last year
“Despite strong consumer demand and overall holiday spend, macroeconomic uncertainty caused our iPhone revenue to decline as customers extended the lifecycle of their devices,” said Apple CFO Luca Maestri.
Slowing iPhone Demand Weighs on Outlook
In addition to the mixed first quarter results, Apple said it expects revenue in the range of $89 billion to $93 billion in the current second quarter. This outlook notably includes an expectation for iPhone sales to drop between 5% to 8% year-over-year.
Apple is anticipating the global smartphone market will continue contracting in 2023. Developed markets like the U.S. have become quite saturated with iPhones, leading customers to hold onto their devices longer. At the same time, demand is slowing in China and other emerging markets amid high inflation and broader economic uncertainty.
This disappointing iPhone sales guidance for the second quarter overshadowed many of the positives from Apple’s latest earnings report. It suggests the supercycle of iPhone upgrades seen over the past couple years is coming to an end for now.
“We expect worsening macro conditions and a global recession will lead consumers to further pullback their discretionary purchases, including delaying smartphone upgrades,” according to Bank of America analyst Wamsi Mohan.
Mixed Reaction from Wall Street
The lackluster guidance for iPhone sales in the coming months appears to be overshadowing beats on profits and iPad sales last quarter. Apple’s stock was down around 2.5% in early trading, though some analysts remain confident in the company’s ability to weather economic storms.
“Apple really stands head & shoulders when it comes to putting up good numbers irrespective of the negativity around,” according to investment advisor Nabila Popal.
Others see more pain ahead for Apple amid the weakening demand outlook.
“Apple disappoints on services revenue and the next quarter guidance looks outright weak,” noted analyst Holger Zschaepitz on Thursday. “The services business was supposed be the new profit machine but even that shows now signs of slowing demand.”
|Share Price Change
|Initial jump in pre-market trading after Q1 earnings beat
|Decline during market open after soft Q2 iPhone sales guidance
Looking ahead, Apple’s iPhone 14 series with expected updates like an always-on display, improved cameras, and satellite connectivity may help reaccelerate upgrades later this year. But in the meantime, the smartphone juggernaut is feeling the effects of consumers tightening their belts during uncertain economic times.
Battling Worsening Macro Backdrop
The entire technology sector has been facing intensifying economic headwinds over the past year, with worrying signs of a downturn accelerating. Surging inflation and rising interest rates have begun impacting consumer and enterprise spending across many areas.
Both Alphabet and Meta Platforms got hammered last week after reporting disappointing Q4 results and cautious commentary about digital advertising spending in 2023. Amazon also posted lackluster Q4 earnings amid sluggish online shopping trends.
Apple has so far held up better than Big Tech peers in the face of these worsening macro challenges. But it is not immune, as the disappointing Q2 guidance shows.
Table/smartphone sales are typically very sensitive to the economic cycle. And a glut of premium mobile devices now available is allowing more budget-conscious users to delay iPhone upgrades.
While Apple expects to weather the economic storms better than rivals, it is still anticipating stress from various areas like supply chains, hiring, currency exchange rates. CFO Luca Maestri warned that gross margins may continue compressing in the coming quarters.
On the bright sides, services and iPad demand showed surprising resilience last quarter. And Apple’s higher-end customers tend to be more insulated from inflation compared to the overall population.
But analysts widely expect Apple’s incredible growth pace over the past three years is decelerating in 2023 along with the rest of tech. Much will depend on the duration and severity of the expected global economic downturn.
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