Apple's iPhone sales, weak forecast rock investor confidence

The tech giant continued to benefit from booming iPhone sales during the June period, but it didn't sell as many as analysts had expected.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
5 min read

The iPhone 6 has been in stores since September, but millions of consumers continue to buy it. James Martin/CNET

Apple sold a lot of iPhones in the June quarter, but it wasn't enough to please Wall Street.

The Cupertino, California, mobile giant on Tuesday reported fiscal third-quarter earnings that were better than analysts estimated, and its revenue was largely in line with expectations -- but it wasn't the blowout Wall Street has gotten used to.

The company also projected weaker fourth-quarter sales than anticipated. It expects revenue of $49 billion to $51 billion for the current period, below the $51.1 billion projected by analysts, according to a poll by Thomson Reuters.

Apple also said it sold 47.5 million iPhones during the June quarter, up 35 percent from a year ago but below the 49.4 million expected by analysts, according to a poll by Fortune. The iPhone accounted for 63 percent of Apple's total sales in the period, in line with the past couple quarters.

Apple shares tumbled 7.5 percent to $121 in after-hours trading on the lower-than-anticipated iPhone sales.

Tuesday's results show that even Apple may not be able to avoid the recent slowdown in the mobile market. The company's iPhone sales jumped, but they weren't as strong as analysts had expected. And Apple's weaker outlook for the September quarter raised worries things could get tougher as the year goes on. The iPhone 6S , expected in September, likely won't have as many drastic changes as last year's iPhone 6 -- and that means consumers may not be rushing to buy the new device.

Apple CEO Tim Cook, however, remained upbeat during a call with analysts.

"We did exceptionally well in any way you look at it," Cook said about iPhone sales."From our point of view, iPhone is doing outstanding."

"We had an amazing quarter, with iPhone revenue up 59 percent over last year, strong sales of Mac, all-time record revenue from services, driven by the App Store, and a great start for Apple Watch," he said.

Traditionally, iPhone made up closer to 50 percent of Apple's revenue, but the smartphone has become even more important to the company's financials since the iPhone 6 hit the market in September. iPad revenue has continued to drop, and so far, there's nothing to replace that shortfall. The Apple Watch, which Apple launched in April, may not be selling as well as hoped, and the company doesn't plan to break out sales for the smartwatch. Its new Apple Music service, which suffered from a three-hour outage earlier Tuesday, also likely won't move the needle anytime soon.

A big reason for the iPhone's recent strong sales is China. The country surpassed the US to become Apple's biggest iPhone market in the March quarter. But China could become less of a sure bet for Apple if the region's economy slows and demand starts to dry up. Earlier this month, Gartner revised its annual growth forecast for smartphones downward, in large part because of the cool-down in the region.

In the third quarter, though, Apple reported sales in Greater China more than doubled to $13.2 billion. Cook during a call with analysts on Tuesday called the results in the region "outstanding." He noted that while the recent problems in the stock market could cause some "speedbumps" for Apple, he still expects China to become Apple's biggest market.

"Generally, at least as we see it ... this worry is probably overstated," Cook said. "We're not changing anything."

Overall, Apple generated $49.6 billion in revenue, up 33 percent from a year ago. Analysts polled by Thomson Reuters had anticipated sales of $49.4 billion. Net income rose to $10.7 billion, or $1.85 a share, up from $37.4 billion, or $1.28 a share, a year earlier. Analysts had expected per-share earnings of $1.81.

Apple Watch keeps up with the times (pictures)

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Gross margin edged up to 39.7 percent from 39.4 percent a year earlier.

Apple sold 10.9 million iPads in the quarter, down 18 percent from the previous year. Analysts had expected it to sell 10.7 million tablets, according to a poll by Fortune. That marked the sixth consecutive decline for Apple's iPad line -- a concern for a company that's becoming more and more reliant on its smartphones.

Consumers have been holding on to their tablets for longer and opting to purchase bigger-screen iPhones instead. And so far, the expected boost from business users seeking out the tablets -- particularly with Apple's partnership with IBM -- hasn't materialized. What may turn things around for the iPad is a bigger-screen "iPad Pro" that could hit the market this fall.

At the same time, Mac sales have been strong. Apple sold 4.8 million computers in the third quarter, up from 4.4 million a year ago. Analysts polled by Fortune had expected Apple to sell 4.8 million Macs.

By comparison, Gartner earlier this month said worldwide PC shipments dropped 9.5 percent in the June quarter, the steepest decline since the third quarter of 2013. The firm expects PC sales to fall 4.4 percent this year.

Still mum on Apple Watch specifics

As expected, Apple didn't detail Apple Watch sales but said revenue from "other products" -- also including iPods -- grew 49 percent from the previous year to $2.64 billion. It also increased $952 million from the second quarter.

Cook said during a call with analysts that the Apple Watch's sales beat the company's own internal projections. He added that sales of the wearable to consumers exceeded the unit sales of the first iPhone and iPad in their comparable launch periods.

Apple Watch accounted for "well over" 100 percent of the sequential growth of "other products" and more than offset decline in iPods and accessories, Luca Maestri, Apple's chief financial officer, said during a call with analysts. He said Apple doesn't want to provide insight to competitors, so it's avoiding specifics.

In June research firm Slice Intelligence calculated, based on an analysis of email receipts, that Apple had sold 2.79 million Apple Watches since April, but Slice said in early July that daily sales had dropped 90 percent from the first week of sales to the beginning of July. Fellow research firm Strategy Analytics predicted in March that Apple would ship 15.4 million watch units in 2015, giving the company 54.8 percent of the global smartwatch market. KGI Securities analyst Ming-Chi Kuo echoed the 15 million figure in a May investors note, but a fellow Apple analyst, Morgan Stanley's Katy Huberty, believes Apple will sell 30 million watches during the first 12 months after launch.

PiperJaffray analyst Gene Munster on Tuesday initially believed Apple sold about 1.2 million Apple Watches, assuming the average selling price was $550. Munster later revised his forecast after Apple's earnings call to 2.5 million, which he called "in line with investor expectations." He said he made the change following Cook's comments. Still, even that level is below what Munster thought before the report -- 3 million -- and below what most analysts expected -- about 4 million, he said.

"We believe the number may fuel investor concerns about the near and long-term wearable opportunity," he said in his first note after the earnings report was released. "It's too early to write the Watch off," Munster added, but he noted that analysts' estimates for sales of the device would likely be lowered on Wednesday.

Update, 2:10 p.m. PT: With additional information, comment from conference call and analyst comment.

Update, 4:15 p.m. PT: With additional comments from conference call.

Update, 5:40 p.m. PT: With PiperJaffray's revised forecast.