Apple Beats Earnings Expectations, But Misses On iPhone Sales

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It was a hugely important quarter for Apple, and it looks like it came about in line with what investors were expecting — including, potentially, the company’s first sales decline going into the second quarter.

Apple said it recorded $75.9 billion in revenue and earnings of $3.28 per share in the first quarter. That represents a record quarter for Apple on revenue, but slightly under what analysts were looking for. Analysts were expecting earnings of $3.23 per share on revenue of $76.6 billion.

Apple sold 74.8 million iPhones in the first quarter, compared to the 75 million that analysts were expecting. Last quarter, Apple shipped 74.5 million iPhones, which means its iPhone sales growth has potentially hit a wall. That could be due to a number of factors — like slowing growth in China, hitting a saturation point — but either way its main growth engine appears to be slowing.

That’s a small miss on iPhone sales, but a big number that people were watching closely was the company’s forecast for Q2. Analysts were looking for $55.7 billion, while Apple said it expected revenue to be in the range of $50 billion and $53 billion. In Q2 last year, the company recorded $58 billion in revenue — meaning Apple’s upcoming quarter could be the first negative growth quarter in recent memory. The stock is about flat in extended trading, which means that weak guidance was built into what analysts were expecting for the second quarter.

This is a huge deal for Apple. The iPhone has always been the main growth driver of the company, with iPad sales stalling, and if that engine starts to slow down it does not bode well for its future performance. To be fair, growth engines inevitably hit a saturation point, but this is something that Apple has been able to maintain since it launched the iPhone in 2007.

Apple also sold 16.1 million iPads, another miss from what was expected. Mac sales came in at 5.3  million, which was also a miss on what analysts were expecting. Both of those also represented declines from the first quarter last year. We still haven’t seen what the iPad Pro will do to iPad sales just yet, which have also already stalled.

There was one interesting note on the call relative to some buzz building around Apple’s potential involvement in VR: Cook said he didn’t think VR is a “niche.” “It’s really cool and has some interesting applications,” he said.

Apple is still printing money off its iPhone sales, but it puts the company’s efforts to diversify its products with new pieces of hardware like the Apple Watch and the iPad Pro in context. Apple recorded $4.35 billion for its “other” category, which includes products like the Apple Watch and Apple TV. A year ago, Apple recorded $2.7 billion, meaning a 62% jump in revenue year-over-year.

Apple has $216 billion in cash as of the end of Q1. “We have the mother of all balance sheets,” Cook said on the call.

Foreign exchange rates continued to be a huge headwind for the company, so much so that Apple specifically called it out in its earnings presentation. The difference would have been around $5 billion in revenue, the company said. In fact, Cook mentioned it within the first 2 sentences of the earnings call — along with the major challenges the global economy is facing. Two-thirds of the company’s revenue comes from outside the United States, making foreign exchange rates a major headwind for Apple, Cook said.

“We’re seeing extreme conditions just about everywhere we look, major markets including Brazil, Russia, Japan… have been impacted by slowing economic growth, falling commodity prices and weakening currency,” Cook said. “We saw softness in China, noticeably in Hong Kong.”

This was expected to be a hugely important quarter for the company given how its stock has performed this year. In short, 2015 was not a great year for Apple’s stock.

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