AAPL Apple Inc

Profit, revenue decline, but shares climb in after-hours trading on brighter sales outlook

By Tripp Mickle 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 1, 2019).

Apple Inc. posted its first back-to-back drop in quarterly sales and profit in more than two years, but the tech titan reported strength beyond its struggling iPhone business and said a sharp downturn in China showed signs of easing.

Profit dropped 16% to $11.56 billion for the three months through March 30, while revenue slid 5% to $58.02 billion, Apple said Tuesday.

Sales of the iPhone, long the biggest driver of its business, fell 17% to about $31 billion -- an accelerated decline for a product that has been hobbled by smartphone owners holding on to devices longer and by competition from rivals in China offering lower-price, feature-rich handsets.

The company's results exceeded analysts' expectations, which had ebbed following a surprising slump in the previous quarter. Chief Executive Tim Cook highlighted glimmers of hope in problem areas including China, where he said customers have reacted positively to Apple's move to lower iPhone prices and offer financing programs.

"Looking back at the past five months, November and December were the most challenging, so this is an encouraging trend," Mr. Cook said. "We like the direction we're headed with the iPhone, and our goal now is to pick up the pace."

Apple said it expects revenue in the current quarter of between $52.5 billion and $54.5 billion, above consensus expectations.

Apple also blunted the damage from its iPhone business by extending the robust growth of services like app sales and streaming-music subscriptions, which collectively jumped 16%. It also said it would add $75 billion to its continuing share-buyback program.

Shares of Apple surged about 5% after-hours, after falling in regular trading. Through Tuesday's close, Apple's stock was up about 27% this year, recouping most of the losses it racked up in the final two months of last year. Its market value is on course to once again top $1 trillion.

Tuesday's report followed a mixed bag of quarterly results from tech giants, including a major stumble by Google's parent company Alphabet Inc. that caused its stock to plunge nearly 8% on Tuesday, its worst decline in more than six years.

Both the digital-advertising giant and e-commerce giant Amazon.com Inc. over the past week reported their slowest revenue growth in four years as their core businesses showed signs of maturity. Microsoft Corp., meanwhile, topped $1 trillion in market value at Tuesday's close for the first time after reporting strong earnings last week.

The iPhone's woes have threatened to define one of the weakest years in Mr. Cook's tenure. In January, Apple reported its first decline in revenue and profit for the holiday quarter. It last experienced consecutive quarterly declines in 2016 amid weak demand for the iPhone 6s, which offered limited improvements over preceding models -- much like this year's iPhone XS and XR.

Mr. Cook has combated the adversity with a new strategy: expanding Apple's services business and increasing the price of its gadgets. In March, it announced new subscription services for original TV shows, videogames and magazines, as well as a credit card. It raised prices late last year on iPads, helping it increase sales 22% in the latest quarter even as analysts estimate shipments remained flat.

Mr. Cook also highlighted success -- especially in China -- of trade-in programs added to revive iPhone sales. The company is offering customers with older iPhone models above-average prices for those devices if they exchange them for new iPhones, he said.

Investors have largely shrugged off the iPhone troubles and focused on Apple's potential to generate billions of dollars in revenue by selling subscriptions across the more than 900 million iPhones world-wide. They also were encouraged that the company struck a multiyear agreement in April with Qualcomm Inc. for smartphone modem chips that should allow Apple to deliver an iPhone in 2020 with speedier, 5G wireless technology.

"They have reset expectations," said Mike Bailey, research director at FBB Capital Partners LLC, which has $1.1 billion under management and counts Apple among its top-10 holdings. "The next catalyst Apple needs to get sales growing are features like 5G. That factor went from negative to positive in the quarter because of the resolution with Qualcomm."

Apple's share-repurchase plan is down slightly from last year's $100 billion commitment, which was the largest ever announced by a U.S. company, according to data from research firm Birinyi Associates. Apple has bought back $71.6 billion since announcing that prior commitment, bringing total repurchases since 2012 to nearly $275 billion. Apple didn't give a timetable for when it will fulfill the new commitment.

The company's board also approved a 5% increase in its quarterly dividend to 77 cents a share, building on last year's 16% increase.

Apple continues to struggle with broader economic challenges in China, where slower growth has hurt companies including 3M Co. and Intel Corp. The iPhone maker's sales from Greater China, which includes Hong Kong and Taiwan, fell 22% in the just-ended fiscal second quarter, an improvement from the prior quarter.

Apple recently reduced iPhone prices in China to be more competitive with lower-price handsets from rivals like Huawei Technologies Co. and Xiaomi Corp. That bolstered sales in China during the quarter, analysts said, but iPhone shipments still fell 30% to an estimated 6.5 million units, according to Canalys, a market research firm.

Mr. Cook said Apple has been helped by the Chinese government's move to stimulate the economy by reducing value-added taxes, and by a boost to consumer confidence from signs of progress in U.S.-China trade talks.

Apple also delivered 30% sales growth from its wearables division that includes its smartwatch, AirPods wireless headphones and HomePod smart speaker. Analysts project that will be a $21.76 billion business this fiscal year.

The combination of wearables and services accounted for 29% of total revenue in the fiscal second quarter, while the iPhone fell to 54% of sales from its typical level of two-thirds.

"Thank goodness for the services side of the business because if they didn't have that Apple would be a super-cyclical hardware-only company," said David Rolfe, chief investment officer of Wedgwood Partners Inc., a St. Louis-based firm with $3.1 billion that counts Apple as its third largest holding. "It's grown its ecosystem and given people more reasons to stick around."

Dow Jones & Co., publisher of The Wall Street Journal, has a commercial agreement to supply news through Apple services.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

Corrections & Amplifications Apple last experienced consecutive quarterly declines in 2016 amid weak demand for the iPhone 6s. An earlier version of this article incorrectly stated it was the iPhone 6.

(END) Dow Jones Newswires

May 01, 2019 02:47 ET (06:47 GMT)

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