- Apple shares fell on the cautious outlook for the December quarter
- Investors were hoping that the company expects to benefit more from strong holiday sales
- The earnings report is also unlikely to calm down fears about iPhone 15 demand and China headwinds, although the services sales continue to shine
Apple (NASDAQ:AAPL) reported revenue and profit for the fourth quarter that topped the average analyst estimate. However, the company issued a soft revenue forecast for the holiday quarter, which sent shares lower in early New York trading on Friday.
Heading into earnings, investors were focused on hearing more about demand for iPhone 15, Services revenue growth acceleration, as well as increasing headwinds in China. While Apple managed to meet analyst expectations on most fronts, the underlying numbers paint a different picture.
Apple is experiencing stronger-than-expected headwinds in China, one of its key regions, while iPhone 15 demand is not as strong as initially anticipated. The only bright spot is Services, the business that continues to support the top line after overall sales fell for the fourth quarter in a row.
Apple’s FQ4 Earnings
Apple reported its revenue fell 0.7% year-over-year to $89.5 billion, just ahead of the Street at $89.28 billion. Adjusted earnings per share came in at $1.46, beating the consensus by 7 cents.
The product's revenue fell more than 5% to $67.18 billion, also falling below analyst expectations. The bulk of the product's revenue comes from iPhone sales, which amounted to $43.81 billion in FQ4, up 2.8% annually and in line with expectations.
The company generated $7.61 billion in Mac sales, down as much as 34% YoY. Apple blamed the weak Macs performance on “challenging market conditions.” Analysts were looking for $8.76 billion. iPad revenue fell 10% from the last year to $6.44 billion, although better than the Street at $6.12 billion.
“We now have our strongest lineup of products ever heading into the holiday season, including the iPhone 15 lineup and our first carbon-neutral Apple Watch models, a major milestone in our efforts to make all Apple products carbon neutral by 2030,” said Tim Cook, Apple’s CEO.
Apple generated a further $9.32 billion in sales of wearables, although this number was also a bit lower than what analysts were looking for. Finally, Services revenue rose 16% to $22.31 billion, topping the consensus by nearly $1 billion.
“We're happy to see growth coming from all categories and every geographic segment, which is a direct result of the strength of our ecosystem. Our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem,” CFO Luca Maestri said on the earnings call.
A big negative from the report was underperformance in China, where sales fell 2.5% YoY to $15.08 billion while analysts were looking for an increase in revenue to $17.01 billion.
Apple stock recently fell after reports emerged that China's government reportedly expanded its ban of iPhones to local government workers and state-owned companies. Moreover, Huawei launched a high-end smartphone that is directly challenging Apple’s iPhone 15.
Speaking on the call, CEO Cook played down China concerns and said that revenue rose in constant currency while the iPhone actually set a September quarter record in mainland China.
“Over the long term, I view China as an incredibly important market and I'm very optimistic about it,” he said in the earnings call.
Apple said it returned almost $25 billion to shareholders, while it still managed to continue “to invest in our long-term growth plans,” Maestri noted.
Gross margin increased 70 basis points sequentially to 45.2%, while Product gross margin stood at 36.6%.
The Board of Directors declared a cash dividend of $0.24 per share. Apple ended the quarter with over $162 billion in cash and marketable securities.
All-in-all, Apple closed its fiscal year with revenue of $383 billion, down 3% YoY.
Guidance Spooks Investors
While Apple shares were nearly unchanged in the aftermath of the release of the FQ4 report, the stock retreated more than 3% after the CFO offered a cautious outlook for the current quarter on the earnings call.
Maestri said he expects revenue in this quarter, which covers the busy holiday period, should be “similar” to last year. For its December quarter last year, Apple generated $117.2 billion in FQ1 revenue. Analysts were hoping for revenue acceleration to $122.8 billion, according to data compiled by Bloomberg.
“We expect iPhone revenue to grow year-over-year on an absolute basis. We also expect to grow after normalizing for both last year's supply disruptions and the one extra week. We expect Mac year-over-year performance to significantly accelerate from the September quarter,” Maestri added.
Apple’s outlook for the holiday quarter is likely to spook investors and hurt the risk sentiment, despite the rally in risky assets observed this week after the Fed decided not to raise interest rates.
With these financial forecasts, some investors might view the tempered expectations as an indication to consider shorting the stock, anticipating that share prices could potentially decline.
Investors are closely watching data related to demand for Apple’s products as it serves as a reliable indicator of the strength of the U.S. consumer. The cautious guidance comes just a few days after mining and construction equipment maker Caterpillar (NYSE:CAT) said it is observing weakening demand.
Caterpillar shares fell last week after the company reported a decline in the order backlog, which was viewed as an ominous sign for the global economy, especially in the United States, its largest market. This marked the first annual decline since the third quarter of 2020.
Caterpillar is considered an economic bellwether due to its widespread use of machines in construction, mining, and energy projects globally. As a result, investors closely monitor the company's order backlogs, as they tend to reflect future customer demand. Historical data shows that when Caterpillar's order backlogs declined in the past, it often preceded a slowdown in the U.S. economy.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.