Apple's Sales Rise in Pandemic, but Pressure Remains for Breakout Holiday Season -- 2nd Update

By Tim Higgins

Apple Inc. benefited from a significant uptick in sales of laptops and iPads due to the pandemic, even as quarterly iPhone sales fell from a year earlier after a delay in the launch of the company's flagship new smartphone.

Shares fell by more than 5% in after-hours trading after the Cupertino, Calif.-company reported Thursday that iPhone revenue fell 21% in the quarter that ended in September, worse than analysts had expected. Apple executives linked a 29% drop in China sales to the delay in bringing out the iPhone 12 to October. Apple usually begins selling its newest phones in September.

The tech giant this year has largely benefited from demand for digital services, computers and other devices as workers and students around the world have stayed home due to the spread of Covid-19. The fiscal fourth quarter continued that trend.

Sales of computers, iPads and smartwatches helped buoy the company in the three-month period, with total revenue rising 1%. Wall Street analysts surveyed by FactSet, on average, expected revenue to fall for the period. Revenue excluding iPhone sales rose 25% compared with a year ago, with Mac computers reaching a record of $9 billion.

Profit fell to $12.7 billion, or 73 cents a share, from $13.7 billion, or 76 cents a year earlier, the company said. The results beat analyst expectations for profit of 71 cents a share.

The lackluster iPhone sales through September are set to add pressure on Apple to deliver outsize revenue in this holiday quarter -- with fewer weeks than normal because some versions of the iPhone 12 aren't even available until next month. Investor expectations for significant growth in iPhone revenue have helped push the company's market value to over $2 trillion.

"We're really off to a great start," Chief Financial Officer Luca Maestri said in an interview Thursday. Earlier this month, the company unveiled four new iPhone 12 models, all of which have capabilities for 5G. "Everything that we've seen so far, particularly with the iPhone, but also all the other product categories is very, very positive."

The results helped Apple conclude its fiscal year with an increase in revenue and profits after both figures fell in the previous 12-month period. Apple finished its fiscal year with $274.5 billion in revenue, a 5.5% gain from 2019.

For a third consecutive quarter, Apple didn't provide detailed guidance for the months ahead, a tacit acknowledgment of the uncertainty it faces as the anniversary of the first known Covid-19 case approaches. The company said iPhone revenue is expected to rise in the current quarter, while other products should see double digit growth.

Wall Street expectations for the final three months of the fiscal year withered earlier this year as the coronavirus and its disruption began to spread around the world.

Because of the pandemic, Apple pushed back iPhone 12 production, resulting in a cascade of delays for the flagship product's unveiling earlier this month, weeks later than it would normally debut during a typical year.

Before the middle of September, Apple was seeing "double-digit" sales growth in iPhones, Mr. Maestri said in the interview. Then the company hit the period of the quarter when sales would be compared against last year's iPhone launch.

Investors are betting the new phone with 5G cellular connectivity will be the catalyst for a massive surge in sales, potentially reaching the previous record of 231 million units in fiscal 2015.

As unit sales have fallen from that peak, Chief Executive Tim Cook has shifted the company's emphasis to selling higher-priced phones and bolstering its services business, such as video and fitness apps, for use on the more than 900 million iPhones world-wide.

Before the pandemic, the bright spot of Apple's business had been its services unit, which had more than doubled in fiscal 2019 compared with five years earlier. It rose 16% in the most recent quarter to $14.5 billion.

That business is under pressure over claims that Apple uses its power over its digital ecosystem to hurt rivals and benefit itself -- claims Apple has strongly denied.

In recent weeks, a House subcommittee reviewing big tech companies accused Apple of using monopolistic power, and "Fortnite" video game-maker Epic Games Inc. has sued over the fees Apple collects through its App Store. A lawsuit by the Justice Department against Alphabet Inc.'s Google has put Apple's multibillion-dollar deal to favor the search engine under scrutiny.

Asked about the lawsuit, Mr. Cook told analysts there is a lot of potential for its service business. "I have no idea how the DOJ suit will go, but I think it's a long way from a conclusion on it," he said.

The pandemic has simply highlighted the depth of Apple's strength. Sales of iPad tablets and Mac computers have seen new life. Revenue for the product lines rose 46% and 29%, respectively, in the fourth quarter from a year earlier.

"We had a phenomenal back-to-school season," Mr. Maestri said. "But even today, we are supply constrained on both iPad and Mac."

Write to Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

October 29, 2020 19:21 ET (23:21 GMT)

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