AAPL Apple Inc

By Daisuke Wakabayashi 

Apple Inc. posted its first quarterly decline in revenue in 13 years, ending a historically great run for the world's most valuable company and stoking questions about whether its best days are behind it.

The slowdown reflects the challenge facing Tim Cook, who took over as chief executive from Steve Jobs in 2011 with the iPhone a success, the iPad booming and the Apple Watch in development.

Now, iPhone sales are slowing, along with the rest of the smartphone market, the iPad has slumped for more than two years, and the Apple Watch is in its early days.

The company has struggled to maintain the sales surge that followed the introduction of its larger-screen smartphones in late 2014. The 2015 successors to those models haven't generated as much enthusiasm from consumers.

Apple's revenue and profit for the fiscal second quarter ended March 26 both missed analysts' expectations. The company also projected that revenue in the current quarter would fall far short of expectations.

But for all of the concerns about Apple's growth, the company still generated profits in the March quarter that are expected to exceed the combined earnings of technology peers Alphabet Inc., Facebook Inc. and Amazon.com Inc.

In an interview with The Wall Street Journal, Mr. Cook said it was "a challenging quarter," but he dismissed concerns that Apple was in decline. He attributed the slump to short-term factors such as the strong dollar, difficult economic conditions, and difficult comparisons for iPhone sales.

"It's a tough bar to hurdle, but it doesn't change the future. The future is very bright," he said.

The iPhone was the main culprit in the revenue decline. After an unbroken eight-year run of growth since the device's introduction in 2007, Apple reported the first-ever slide in iPhone sales. The company said it sold 51.19 million iPhones in the quarter, down from 61.17 million units a year earlier.

Mr. Cook said fewer iPhone users were upgrading because the iPhone 6 was so popular. But he said Apple continues to do well with new smartphone buyers as well as customers switching from phones running Alphabet's Android operating system.

Apple said more Android users switched to iPhones in the first six months of its fiscal year starting in October than any previous six-month period.

In many ways, Apple is a victim of its own success, particularly with the iPhone. During the 13 years since Apple last reported a quarterly revenue decline, it has popularized the iPod and introduced the iPhone and iPad. And its market value has grown to $579 billion, as of Tuesday's close, from $5 billion.

That leaves Apple confronting the challenge of extending or replicating the iPhone's success, much like the issues faced by Microsoft Corp. with its Windows operating system and Alphabet's Google search engine. The iPhone accounted for 65% of Apple's total revenue in the March quarter.

Apple reported profit of $10.52 billion, or $1.90 a share, for the quarter, compared with $13.57 billion, or $2.33 a share, a year earlier. Revenue declined 13% to $50.55 billion from $58 billion.

Analysts polled by Thomson Reuters had expected Apple to post earnings of $2 a share on revenue of $51.97 billion.

Apple's shares, down 20% over the past year, fell 8% to $96.12 in after-hours trading Tuesday. The decline erased more than $46 billion of the company's market capitalization, more than the total value of Caterpillar Inc. or Netflix Inc.

Smartphone sales are slowing globally, and Apple has fewer obvious moves left to sustain the iPhone's growth, which it did in the past by expanding its lineup with bigger displays and breaking into new markets like China.

These days, Apple's challenge is less about finding new smartphone customers and more about converting existing smartphone users to the iPhone.

Apple's iPhone sales topped analysts' estimates of 50.4 million units during the quarter, according to analysts polled by FactSet. But the average selling price fell to $641, below analysts' projections of $658.

These figures didn't include sales from Apple's latest iPhone SE, a phone with a smaller 4-inch display to replace the iPhone 5S. It began shipping on March 31. Starting at $400, it is the least expensive new iPhone that Apple has ever introduced. Mr. Cook said demand for the new phone is very strong.

"Can Apple grow again? That's the big question. We don't think it's proven that it can," said Abhey Lamba, analyst at Mizuho Securities. Still, Mr. Lamba said investors don't fully appreciate now much revenue Apple can generate from its users.

To find new areas of growth, Apple is pushing into new, but uncertain markets, including electric vehicles and augmented reality. Apple is also expanding its services business linked to the strength of the iPhone. Apple said services revenue, including its App Store and Apple Pay, rose 20% to $5.99 billion. It said its streaming music service now has 13 million subscribers, up from 11 million in January.

For the current quarter, Apple expects revenue of $41 billion to $43 billion. Analysts had been projecting revenue of $47.3 billion.

The company also projected gross margin, a closely watched measure of profitability reflecting the percentage of revenue that remains after manufacturing costs, of 37.5% to 38%, shy of analysts' projections of 39.3%.

Mr. Cook said the lower-than-expected revenue forecast for the current quarter reflects Apple's plan to reduce inventory by $2 billion, because of the difficult economy, the lower average selling price of the iPhone SE and overly optimistic forecasts for sales of Mac computers during the back-to-school shopping season.

Apple said it was still feeling the impact of the strong dollar in its global sales, noting that the revenue decline would have narrowed by 4 percentage points without the currency's impact. In addition, the price increases that the company implemented to deal with the dollar's appreciation hurt demand for its products.

Sales to Greater China, which includes Hong Kong and Taiwan, fell 26% to $12.49 billion. In the same quarter a year earlier, Apple's Greater China sales rose 71%.

As iPhone revenue slows, sales of Apple's other products haven't compensated for the shortfall. Apple said iPad sales fell for a ninth-straight quarter. Apple said it sold 10.25 million iPads during the quarter, down 19%. Its newest product, the Watch, generated $6 billion in sales in its first year, by some analysts' estimates. However, that barely registers on the company's annual revenue of $233 billion.

Apple also said it is expanding its capital-return program, which includes dividends and share repurchases. The company said it is now planning to return $250 billion in cash to shareholders by the end of March 2018, up from its prior plan to return $200 billion by March 2017.

Apple said it would raise its quarterly dividend by 10% to 57 cents and increase its stock-buyback plan to $175 billion from the $140 billion announced last year.

Since it started returning cash to shareholders in 2012, Apple has paid out $163 billion through March.

Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com

(END) Dow Jones Newswires

April 27, 2016 02:47 ET (06:47 GMT)

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