Apple's China Slump Deepens Even as Total Sales Grow Again

(Bloomberg) -- Apple Inc. reported a deepening slump in China during the holiday quarter, even as total iPhone sales were stronger than expected and the company returned to revenue growth. 

Sales in China dropped 13% to $20.8 billion in the fiscal first quarter, which ended Dec. 30, the company said in a statement Thursday. That fell far short of the $23.5 billion predicted by analysts and was Apple’s weakest December quarter in the Asian nation since the first period of 2020.

“We are not happy with the decline, but we know China is the most competitive market in the world,” Chief Financial Officer Luca Maestri said in an interview with Bloomberg Television’s Emily Chang.

The shares dropped more than 3% in extended trading after the report was released. They had closed at $186.86 in New York on Thursday, down 2.9% this year.

Maestri also warned that Apple’s sales growth may not last. The current quarter will have a tough comparison with the year-earlier period, when pent-up demand for the iPhone added close to $5 billion to sales, he said. At the time, Apple was recovering from supply-chain constraints triggered by Covid lockdowns in China, and consumers were clamoring for iPhones. 

“When we remove this impact from last year’s revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago,” he said on a conference call. Analysts had been expecting a 1% sales gain in the period. 

Apple is contending with cooling consumer spending in China, rising competition and widening government bans of foreign technology. Huawei Technologies Co. introduced a new line of smartphones last year powered by China-made chips after a US blacklisting had largely driven it out of the market. Huawei’s return sparked a wave of nationalistic buying in the country, with a 36% jump in shipments in the fourth quarter, according to IDC.

Apple’s China struggles overshadowed an overall revenue gain of 2.1% to $119.6 billion. Analysts had predicted an increase of 1% to $118 billion on average.

With the growth, Apple avoided posting a fifth straight quarter of declines — a streak that would have been its worst since a tailspin in the 1990s. The iPhone was a bright spot during the period, generating a 6% revenue gain and exceeding analysts’ estimates.

The earnings report also comes on the eve of Apple launching the Vision Pro headset. The device vaults the company into its first major new category since 2015 while steering Apple into unfamiliar terrain: virtual and augmented reality. The $3,499 headset lets people watch 3D videos, play games and conduct more immersive meetings.

Chief Executive Officer Tim Cook also said that Apple will make an announcement this year on artificial intelligence features, confirming earlier reports by Bloomberg. With Apple’s tech peers pouring money into AI right now, investors have been eagerly awaiting an update from the company on this topic. 

Read More: Vision Pro Is Latest Bid to Prove Consumers Can Embrace Headsets

First-quarter profit climbed 16% to $2.18 a share, topping estimates of $2.11. The iPhone, Apple’s biggest moneymaker, brought in revenue of $69.7 billion, compared with an average projection of $68.6 billion.

The latest model, the iPhone 15, was a more significant upgrade than some previous iterations — with its higher-end versions adding new materials and camera features. The company also had an easier time getting the product to consumers than during the holidays of 2022, when Covid lockdowns in China trigged supply-chain snags. There were no such hiccups this time around.

Apple’s services segment, which includes the App Store and streaming platforms, continued to outpace other divisions. It brought in $23.1 billion during the holiday period, up 11% from a year earlier. Still, that was just shy of the $23.4 billion estimated by Wall Street.

As Apple forewarned in November, the iPad was a weak seller during the holidays. Its revenue declined 25% to $7.02 billion. Analysts had predicted $7.06 billion on average.

It didn’t help that Apple didn’t release any new models in the last calendar year — the first time that’s happened since the iPad debuted in 2010. But the company is preparing to unveil a bunch of new iPads as early as next month, Bloomberg News has reported.

Apple refreshed its computer lineup in October with three new MacBook Pro models and a new iMac — powered by speedier M3 chips. That helped sales grow slightly to $7.78 billion, but they still came up short of the $7.9 billion estimate. 

Revenue from the company’s Wearables, Home and Accessories segment — which includes the Apple Watch, AirPods and its TV set-top box — fell 11% to $11.95 billion. Those products didn’t get significant upgrades this year, which may have hampered sales. Apple also was hit with a US ban on sales of its latest smartwatches over a patent dispute, but that played out after the Christmas shopping season. The company ultimately had to pull a blood-oxygen feature from the devices. 

Read More: Why Apple Had to Disable Oxygen Sensor in Its Watches

More broadly, Apple is facing one of the most tumultuous periods since Cook became CEO more than a decade ago. It’s under more regulatory pressure than ever, with new European Union laws forcing it to change its App Store policies. And even with the sales growth last quarter, many of its biggest markets are maturing. Though the Vision Pro could open up a new opportunity, the first version of the product is probably too costly and cumbersome for most consumers.

China was the biggest question mark heading into the earnings. Apple’s iPhone won market share in the region last year, but sales have continued to slide. The country also is home to the company’s main manufacturing hub, adding to its importance for Apple.

“We continue to see significant opportunity for us in China in the long term,” Maestri said in the interview.

--With assistance from Emily Chang.

(Updates with Huawei’s new phone in seventh paragraph)

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