Apple (AAPL) earnings Q1 2023

Apple missed expectations for revenue, earnings and revenue for many of its businesses on Thursday, sending the stock lower in extended trading. Apple’s overall revenue for the holiday quarter was about 5% lower year-over-year, its first year-over-year sales decline since 2019.

Apple CEO Tim Cook said three factors weighed on results: a strong dollar, manufacturing issues in China affecting the iPhone 14 Pro and iPhone 14 Pro Max, and the overall macro environment.

“The third factor, I would say, was just the challenging macro environment, and you hear that from, I think, everyone,” Cook told CNBC’s Steve Kovach.

Apple shares fell more than 4% at one point during Thursday’s extended trading session before rebounding after the tech giant released data on its current-quarter outlook. The company’s data points indicated that iPhone sales will not decline as quickly as they did in the holiday quarter.

Here’s how Apple compared to Refinitiv’s consensus expectations:

  • ENV: $1.88 versus an estimated $1.94, down 10.9% year-on-year
  • revenue: $117.15 billion vs an estimated $121.10 billion, down 5.49% year-on-year
  • iPhone Earnings: $65.78 billion vs an estimated $68.29 billion, down 8.17% year-on-year
  • Mac earnings: $7.74 billion vs an estimated $9.63 billion, down 28.66% year-on-year
  • iPad earnings: $9.4 billion vs an estimated $7.76 billion, up 29.66% year-on-year
  • Revenue from other products: $13.48 billion vs an estimated $15.23 billion, down 8.3% year-on-year
  • Revenue from services: $20.77 billion vs an estimated $20.67 billion, up 6.4% year-on-year
  • gross margin: 42.96% vs. 42.95% estimated

Apple hasn’t provided guidance for the current quarter, which ends in March. There has been no guidance since 2020, initially citing the uncertainty created by the pandemic. Analysts expected the company to post revenue of about $98 billion in the fiscal second quarter.

However, Apple has offered some data points on performance expectations. Chief Financial Officer Luca Maestri said revenue in the March quarter would follow a similar downward trend as in the December quarter. Services are expected to grow, Maestri said, but Mac and iPad sales are expected to fall by double digits from the same period last year. iPhone sales will decline less in the March quarter than in the December quarter, Apple added.

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The quarter was a stunning failure by Apple, and its first earnings fall from consensus expectations in nearly seven years. In fact, it was only the second drop in sales since August 2017, with sales falling more than 3% below consensus expectations.

It also represented a decline in Apple’s success over the past two years, driven by the need for new computers to work from home and go to school. It was Apple’s first quarterly year-over-year sales decline since 2019 and its largest annual quarterly sales decline since September 2016.

Cook told CNBC that the failure was partly due to a strong dollar. He said Apple grew in most markets when controlling 800 basis points of foreign currency headwinds. One basis point corresponds to 0.01 percentage points.

Cook added that the supply of iPhone 14 Pro and iPhone 14 Max was significantly reduced during the quarter, meaning fewer phones had to be sold to customers. The primary iPhone assembly plant in China was hit by Covid lockdowns during the quarter, a warning issued to investors in November.

“We posted an update on this on November 6th and it lasted through most of December,” Cook said. “So we had a big hole there.”

The Apple CEO said production is now back to levels Apple is happy with.

Cook said the difficult macro environment has impacted sales of iPhones, Macs and wearables like the Apple Watch. iPhone and Mac sales fell year over year. Apple’s other products category, which includes headphones like AirPods and wearables like the Apple Watch, declined over 8%.

According to Cook, Mac sales declined because it was difficult to compare the quarter to the year-ago period, when the company launched new high-end MacBook Pro laptops. There were no similar product launches in the December quarter of this year, he noted.

The report offered some bright spots for investors. First, Apple announced that it has 2 billion active devices, including iPhones, Macs, Apple Watches and other products, up from the 1.8 billion active devices it revealed in January last year.

The number is important to investors because it summarizes the company’s global reach and suggests upside potential if the company can better monetize those customers through services or other additional products.

“We attribute that to the fact that in the case of the Apple Watch, we have a lot of switchers and a lot of first-time buyers,” Cook said. “And so obviously you need to include people who aren’t currently active on a device to grow.”

iPad sales rose nearly 30% year over year after the quarter released both a low-end budget model and a high-end new model. It’s a redeeming area in Apple’s hardware business and a reversal of the last December quarter, when Mac revenue soared and iPad revenue fell.

Another bright spot for investors: Apple reported 6% growth in its services business, beating analysts’ expectations.

Management said cloud services, payments including Apple Pay and Apple Card, and music are strong components of the services. Cook added that Apple employees are beta testing a “buy now, pay later” feature that will be part of the Services. “It will start soon,” he added.

Cook said Apple is cutting costs and slowing hiring. However, unlike many competing tech companies, it hasn’t announced any layoffs.

“We are also aware that the environment in which we find ourselves is difficult. That’s why we’re cutting costs. We’re cutting back on hiring, we’re being very thoughtful and careful with the people we hire,” Cook said.

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