Apple holiday forecast disappoints given Samsung's troubles

Apple's new iPhone 7 Plus is displayed at the Apple Store at Tokyo's Omotesando shopping district, Japan on Sept 16, 2016.
Apple's new iPhone 7 Plus is displayed at the Apple Store at Tokyo's Omotesando shopping district, Japan on Sept 16, 2016. PHOTO: REUTERS

SAN FRANCISCO (BLOOMBERG) - Apple Inc investors expected the iPhone maker to take advantage of Samsung Electronics' weakness in the smartphone market and issue a robust holiday sales forecast. When the revenue projection was barely higher than analysts' estimates, shares fell as much as 3.1 per cent in extended trading.

"There was expectation for better guidance in the context that Samsung isn't doing so well and these guys should be winning market share," said Abhey Lamba, an analyst at Mizuho Securities in San Francisco.

Faith in Apple's growth prospects - already rattled by lower-priced competition and saturation in the smartphone market - was shaken further on Tuesday after the world's most valuable company reported its first annual sales decline since 2001. The company's revenue in China, the driving force behind stronger sales in 2015, declined 17 per cent in this fiscal year, prompting analysts on a conference call to raise questions about the source of further expansion.

Apple forecast sales of US$76 billion to US$78 billion for the last three months of 2016, compared with analysts' average estimate of US$75.4 billion. The numbers don't seem to account for Samsung's decision earlier this month to stop manufacturing the Galaxy Note7 after the phones and some replacement models overheated and caught fire. Samsung's most expensive handset was intended to compete with Apple's iPhone 7 for customers' holiday spending.

Apple chief financial officer Luca Maestri embarked on a vigorous defense of the earnings forecast after facing repeated questions on the topic in a conference call with analysts.

Efforts to outperform last year's US$75 billion in holiday quarter sales are rendered harder by a US$548 million patent infringement payment Apple received from Samsung a year ago as well as the dollar's gains, Mr Maestri said. Pent-up appetite for the larger screened iPhone 6 Plus and 6S Plus had also accounted for much of the demand from China, which has now been at least partially satisfied, he added. Those factors will make it more difficult for a year-to-year comparison, Mr Maestri said in a telephone interview.

International sales accounted for almost two-thirds of Apple's US$46.9 billion fiscal fourth-quarter revenue, the company reported.

Apple said its gross margin forecast, a closely watched measure of profitability, will be 38 per cent to 38.5 per cent in the three months through December. That compares with analysts' forecasts of 38.9 per cent.

The guidance implies that profit next quarter will also disappoint, said Toni Sacconaghi, an analyst at Sanford C. Bernstein. The "stock has had a good run, so perhaps some hope the guide would be stronger," he said.

Apple shares gained 22 per cent in the past three months, closing Tuesday at US$118.25, before the earnings were announced, the highest price since December.

The average sales price of the iPhone fell to U$619 in the fiscal fourth quarter from US$670 a year earlier as some customers opted for the cheaper, smaller iPhone SE over the higher specification 6S and 7, which was introduced Sept 16. The average price should recover by the end of the holiday quarter, Mr Maestri said.

Even as Apple sold 45.5 million iPhones in the quarter, more than analysts' projected, Mr Maestri and chief executive officer Tim Cook said that the company had been unable to manufacture enough of the new iPhone 7.

"Demand is outstripping supply in the vast majority of places, particularly in the iPhone 7 Plus," Cook said, referring to the larger screen version of the new handset. "We're working very hard to get them into customers' hands as quickly as possible."