Revenue rises slightly even as China factories shut down and sales fall

By Tripp Mickle 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 1, 2020).

Apple Inc. reported a slight uptick in revenue for its latest quarter even as the coronavirus shut down factories and dented sales in China, as the tech giant's growing services business offset declining iPhone sales.

The company said revenue rose 1% in its fiscal second quarter to $58.3 billion, with iPhone sales momentum stalling after Apple closed stores, first in China and then world-wide. Profit fell about 3% to $11.25 billion, or $2.55 a share. Apple's stock fell slightly in after-hours trading Thursday.

The results exceeded analysts' revised expectations for nearly $55 billion in revenue but fell short of the company's pre-pandemic projections for more than $63 billion for the three months ended March 28.

In the face of historic economic uncertainty, Apple declined to project sales for its current quarter for the first time since it began providing concrete revenue guidance in late 2003. The omission means Apple can avoid having to revise its sales projections in the coming months -- something it did twice in the past two years because of unexpected economic downturns in China.

"Apple is one of very few companies that can survive Armageddon because their balance sheet is in better shape than Uncle Sam," said Mike Frazier, president of Bedell Frazier Investment Counselling, a Walnut Creek, Calif.-based firm with about $500 million under management.

The results highlight the strengths of big technology companies even during an economic crisis that has rocked markets around the world and severely tested businesses. Facebook Inc. and Microsoft Corp. on Wednesday reported higher revenue and signaled more gains in the current period as homebound social-media usage swells and cloud-computing grows. Google parent Alphabet Inc. last week posted revenue gains but provided a sober outlook, saying it experienced a sudden slowdown in ad sales in late March.

Apple's services and wearables business proved to be the difference maker for the company in the March period, underscoring the value of its strategic shift from selling more devices to selling more services and accessories across those devices. Those businesses, which include App Store sales and AirPods wireless earbuds, surged 18% to $19.63 billion. Meanwhile, sales of the company's legacy products -- the iPhone, iPad and Mac -- fell nearly 7% to $38.68 billion.

"Amid our most challenging global environment in which we've ever operated our business, we're proud to say that Apple grew," Chief Executive Tim Cook said Thursday. He said the results speak to Apple's "durability as a business and the enduring importance of our products in our customers' lives."

Apple said it would add $50 billion to its share-buyback program, a decrease from last year's addition of $75 billion but still a sign of its commitment to return capital even as buybacks have become controversial in the U.S. Its board also approved a 6% increase in its quarterly dividend to 82 cents a share, building on last year's 5% increase.

Executives suggested the April-to-June quarter would present more of a mixed picture, an indication of the uncertainty that even the strongest companies are facing. Customers appear to be spending more on some Apple devices so far this month compared with a year ago, Mr. Cook said. But wearables and iPhone revenue are set to slow from the previous quarter, according to Chief Financial Officer Luca Maestri.

For companies with significant operations in China, Apple's results indicate the impact from the economic downturn there may not be as bad as feared. The company's sales fell 7.5% to $9.46 billion across its Greater China region, which includes Hong Kong and Taiwan. Apple, which relies on China for nearly a fifth of total revenue and for almost all of its manufacturing production, was highly exposed to the pandemic's effect on the country, the first to lock down its economy to curtail the outbreak.

Still, Apple's dependency on China to make almost all of the iPhones it sells world-wide proved a challenge as February factory closures disrupted production. The stoppage delayed the release of the iPhone SE by a month, according to analysts, pushing sales of the smartphone out of the March quarter when it was expected to lift revenue. A two- to three-week shutdown of factories also slowed shipments and sales of iPhones outside China, according to analysts.

The Wall Street Journal reported Monday that Apple is pushing production of this year's flagship iPhones back by a month, which could delay sales of those devices from September until October or later. It also is cutting production volume for the four new models by about 20% as the coronavirus weakens consumer demand.

The company this month added the $399 iPhone SE to its lineup, its lowest-priced model since 2018 when it discontinued a previous low-end model bearing the same name. The phone, which had been in development long before the pandemic, now offers iPhone owners a more affordable upgrade option at a time when many are being pinched by economic troubles.

Mr. Cook said that Apple's operations team and suppliers have returned to work and production reached traditional levels by the end of March.

"This may not have been the quarter it could have been absent this pandemic, but I don't think I can recall a quarter when I've been prouder of what we do or how we did it," Mr. Cook said. He said that overall demand for Apple products remained strong in February as China shut down, but then deteriorated as European countries and the U.S. locked down their markets.

"Over the long term, though, we have a high degree of confidence in our enduring business," Mr. Cook said. In April, he said there was an uptick in demand as Apple released new products, governments made stimulus payments and customers bought new devices to support remote work.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

 

(END) Dow Jones Newswires

May 01, 2020 02:47 ET (06:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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