APPLE drops revenue forecast below expectations.

AAPL drops to session lows in after-hours trading after issuing a rather tepid forecast during its earnings call, indicating that it now expects Q1 revenue to grow at a low to mid-single-digit percentage year-over-year (assume 4-6%). Analyst consensus is at 7%.

As Bloomberg notes, “low to mid-single-digit growth” means a slowdown for Apple, which just reported a 6% rise in sales. This helps explain why shares fell after the statement. Currently, they’re down about 2% in extended trading.

This dashed hopes that the artificial intelligence revolution would spark a new iPhone supercycle (which could have led to double-digit revenue growth).

$AAPL projects low to mid-single-digit revenue growth for FQ1, versus a consensus of 7%. This also doesn’t indicate the double-digit supercycle growth some had anticipated.

Before the earnings announcement, UBS’s sentiment toward Apple was at a relatively low 6/10. Despite the AI enthusiasm following Apple’s WWDC event this summer, UBS analyst David Vogt’s checks and anecdotal evidence indicated that iPhone sales during the September quarter were essentially flat year-over-year at about 46 million, against global sales growth of 2% year-over-year. Vogt predicted September quarter results would align with his forecast of $94 billion/$158 billion, with possible upside driven by iPad and stable iPhone sales of 46 million versus a 2% sales growth year-over-year. Including a 5 million channel fill for iPhones, David projected 51 million devices and iPhone revenue of $45.7 billion, expecting an increase of 4-5 million (after an IDC report suggested 56 million devices for Q3) with a balanced outlook for the December quarter. David foresees only a modest AI tailwind for the December quarter and forecasts 78 million iPhone devices, staying neutral with a target price of $236.

Moreover, despite numerous observations that artificial intelligence is not driving iPhone sales (see “Apple Intelligence Is Here. Early Adopters Disappointed”), investors continue to give Apple a chance for a successful iPhone 16 launch, though the checks/sales so far don’t strongly support it. Many appear to be awaiting further confirmation until the broader rollout of Apple Intelligence, but David anticipates a balanced comment on iPhone demand for the December quarter. Valuation frequently remains in question, but without significant iPhone underperformance, UBS does not expect Q3 results to be a major catalyst for the stock in any direction. In terms of flows, there’s mainly long-term demand and buyers.

Considering all of this, here’s what AAPL just reported for the quarter ending September 30:

• Adjusted EPS of $1.64 cents versus $1.46 year-over-year, beating forecasts of $1.58
• Revenue of $94.93 billion, +6.1% year-over-year, exceeding forecasts of $94.36 billion
• Product revenue of $69.96 billion, +4.1% year-over-year, surpassing forecasts of $69.15 billion
• iPhone revenue of $46.22 billion, +5.5% year-over-year, surpassing forecasts of $45.04 billion, setting a record for the company’s fiscal Q4
• Mac revenue of $7.74 billion, +1.7% year-over-year, in line with forecasts of $7.74 billion
• iPad revenue of $6.95 billion, +7.9% year-over-year, but below the projected $7.07 billion
• Wearables, Home, and Accessories revenue of $9.04 billion, -3% year-over-year, below the forecast of $9.17 billion
• Services revenue of $24.97 billion, +12% year-over-year, below the forecast of $25.27 billion
• The major – and highly significant – disappointment was the familiar culprit: China, where revenue unexpectedly fell again, down 0.3% year-over-year:
• China revenue of $15.03 billion, -0.3% year-over-year, below the forecast of $15.8 billion
• Continuing downward
• Total operating expenses of $14.29 billion, +6.2% year-over-year, below forecasts of $14.35 billion
• Sales expenses of $51.05 billion, +4% year-over-year, above forecasts of $50.81 billion
• Gross margin of $43.88 billion, +8.5% year-over-year, above forecast of $43.46 billion
• Cash and equivalents of $29.94 billion compared to $29.97 billion year-over-year, above forecast of $26.04 billion
• And so forth:

Analyzing the breakdown of sales by product categories, we find that iPhone revenue exceeded expectations, boosting total revenue. It reached $46.2 billion, surpassing forecasts of $45 billion, and increased by over $1 billion year-over-year. Although Apple’s marketing strategy for Apple Intelligence worked, the numbers fell slightly below the most optimistic forecasts.

Other products showed mixed results, with Mac revenue aligning with forecasts at $7.74 billion, while both iPad and wearables fell short of expectations ($6.95 billion versus the projected $7.07 billion, and $9.04 billion versus the projected $9.17 billion).

Mac showed a year-over-year revenue increase of around $100 million, meeting Wall Street forecasts at $7.7 billion. The new Mac models released this week are expected to bolster this product segment in the current quarter. The iPad fell unexpectedly short, coming in just below $7 billion, despite the release of new iPad Pro and iPad Air models earlier this year. The new iPad mini, released this month, is unlikely to make a significant impact. Wearables, Home, and Accessories also disappointed, with significant declines and falling short of Wall Street’s expectations. There is currently little excitement around Apple’s wearables segment – and the new AirPods are an early-adopter product that likely won’t generate much momentum in Q4.

Another worrying aspect of Wearables, Home, and Accessories is that revenue continues to decline despite Apple’s launch of a $3,500 device, its first new product category in a decade, within this segment this year. As Bloomberg notes, the iPad and wearables data are “quite concerning,” and it seems that Apple’s wearables segment is gradually winding down – but it’s worth noting that two of the main drivers there (Apple Watch Ultra and AirPods Pro) haven’t had significant updates in two years.

Still, not everything was bad news: the fact that iPhone sales – even though they appear unchanged for five years and include few if any meaningful upgrades over previous models – have grown is a testament to Apple’s marketing strength and brand power. There are no signs of a slowdown in the iconic product.

But at some point, Apple will need to introduce some innovative, rather than just iterative, changes to stand out from the crowd. Apple is extraordinarily fortunate that its competitors in the consumer electronics space are doing absolutely nothing to seize the opportunity to outperform Apple.

Another disappointment: contrary to expectations of modest recovery, sales in China fell for the fifth consecutive quarter, down 0.3% to $15.03 billion, below the forecast of $15.8 billion. The rest of the world saw growth, modest in America at 3.9%, and stronger in Europe and APAC, both with double-digit figures.

As Bloomberg notes, Greater China remains a weak point for Apple, and the company hasn’t done much to promote new products, pricing, or initiatives in this market – or in other developing regions – to offset challenges.

The weakness there, which Apple will attempt to explain in its conference call, is due to a combination of nationalism and interest in local products, whose designs are improving. Local players are also trying new things, like foldable devices, while Apple continues using the same design introduced five years ago.

Still, despite five quarters of declining revenue, the moderate uptick in annual sales growth is encouraging.

Once again, Apple reached a new record in terms of its installed device base globally. But with revenue growth from iPhone and a decline in China, the question arises: did iPhone sales grow in China?

While we await the answer, there was another disappointment for AAPL, as, following the underperformance in wearables and China, so did services revenue, which at $24.97 billion, up 12%, missed the forecast of $25.27 billion.

Although services revenue is at a record high, the slowdown could become more pronounced if governments continue to achieve their goals and force Apple to open its App Store to alternative distribution and payment methods.

Commenting on the quarter, CFO Luca Maestri stated, “Our record business performance in the September quarter generated nearly $27 billion in operating cash flow, enabling us to return over $29 billion to our shareholders. We are very pleased that our active installed device base reached a new all-time high across all products and all geographic segments, thanks to our customers’ high levels of satisfaction and loyalty.”

At least the company continues to buy back shares in huge quantities (it repurchased $25 billion this quarter) because shareholders are becoming increasingly cautious about doing so. And if we talk about drawbacks, it’s worth noting that the value of inventory this quarter was about $900 million higher than the same period a year ago. Suppliers are part of this: remember, Apple doesn’t manufacture its own phones!

In conclusion, these mixed results will solidify investors’ concerns that Apple is significantly losing ground in China, as it continues to saturate the market with products that consumers simply don’t find appealing, as well as devices that are merely iterative modifications of previous versions. So far, nothing Apple has shown in terms of its AI technology looks like the company will become a key player in this industry in the future.