Apple said it expects double-digit growth in its services business in its first quarterPhoto Credit: Reuters

Apple Offers Modest Growth Outlook After iPhone Sales Help Beat Profit Expectations

Apple executives did not give any indication of how the iPhone might fare, including in China, where the company's new AI features are not available.

01 Nov 2024, 11:44 by Reuters · Gadgets 360

Highlights

Apple's quarterly sales received a boost from strong iPhone sales
Questions remain whether the ongoing momentum is sustainable
Apple says it expects overall revenue to "grow low to mid single digits"

Apple's AI-enhanced iPhone made a strong start, pushing quarterly sales ahead of Wall Street expectations, but a modest revenue forecast raised questions about whether that momentum will hold over the holiday sales season.

A decline in China sales during the fourth quarter also concerned some analysts and investors, helping send shares down 1.4% in after-hours trade, despite surprisingly large overall profit and revenue in that period.

Chief Financial Officer Luca Maestri told analysts during a conference call that Apple expects overall revenue to "grow low to mid single digits" during its fiscal first quarter, which ends in December. Analysts had expected revenue growth of 6.65% to $127.53 billion during the quarter, according to LSEG data.

Apple did say it expects double-digit growth in its services business in its first quarter, leading some analysts to ask executives during a call if overall hardware revenue might decline.

Executives did not address that question, or give any indication of how the iPhone might fare, including in China, where Apple's new AI features are not available. Apple has not said when they will be available.

Prior to management's call with analysts, Tom Forte, an analyst at Maxim Group, attributed Apple's share drop to fourth-quarter China sales coming in below expectations.

"We see the potential for sustained weakness in China," he said.

Apple said overall fourth-quarter sales were $94.93 billion, ahead of Wall Street targets of $94.58 billion, according to LSEG. Earnings of $1.64 per share, excluding a massive one-time tax charge in the European Union, topped analyst expectations of $1.60 per share.

Fourth-quarter sales of Apple's iPhone, the company's main product, were up 5.5% to $46.22 billion, compared with analyst estimates of $45.47 billion. Other product lines missed expectations.

Apple's fourth quarter ended Sept. 28, meaning it reflects only a few days of sales of its iPhone 16 series that went on sale Sept. 20. Apple Chief Executive Tim Cook told Reuters that iPhone 16 sales grew faster than iPhone 15 sales did a year earlier, with both phones on sale for the same number of days in the fourth quarter.

Cook also said Apple customers are downloading a new version of its iPhone operating system with what it calls Apple Intelligence features at twice the rate they had the year before.

"We've had great feedback from customers and developers already," Cook said. "We're off to a good start."

AI Strategy

The rollout of Apple's artificial-intelligence strategy, which it revealed this year, hinges on how well its new phones sell.

Rather than introduce AI in a standalone app or service, Apple has sprinkled Apple Intelligence throughout its most recent operating systems as new features, such as the ability to help re-write an email in a more professional tone. Those features will mostly be available on iPhone 16 models, which feature more powerful computing chips, although the pro versions of the iPhone 15 both work with Apple Intelligence.

While some of those Apple Intelligence features arrived this week, others have been delayed, which has led some Wall Street analysts to wonder whether consumers will be slower to upgrade their devices this year while flagship software features trickle out.

Apple's rivals Microsoft and Meta both said this week they expect continued increases in spending to support their AI strategies. Apple said payments for property and equipment - a measure of its capital expenditures - were up $2.91 billion from the previous quarter to $9.45 billion.

Apple's lower spending comes in part because it uses third-party data centers for some AI work. Some aspects of Apple Intelligence do rely on Apple's own data centers, but the company is using its own in-house chips to power those features.

"There would be some (financial) benefit to us by using our own silicon, obviously, but that's not the reason we're doing it. We're doing it because we can provide the same standard of privacy and security that we can provide on device," Cook said.

Sales in Apple's services business, which includes iCloud storage and Apple Music, were $24.97 billion, compared with analyst expectations of $25.28 billion, according to LSEG. Mac and iPad sales were $7.74 billion and $6.95 billion, respectively, compared to estimates of $7.82 billion and $7.09 billion, according to LSEG data.

Sales in Apple's home and wearables business, which includes its Apple Watch and AirPods devices, fell to $9.04 billion, compared with estimates of $9.2 billion, according to LSEG.

Earnings per share were 97 cents including the charge related to a one-time multi-billion-euro European tax payment.

© Thomson Reuters 2024