Apple sees sales slump continuing, shares drop 2%

Apple shares dropped about 2% after the company predicted what could be the fourth quarter in a row of declining sales. For the just-ended period, strength in services drove the profit beat, but weaker than expected sales of Apple's most famous device, the iPhone, underwhelmed investors. Executives said iPhone sales would improve in the fourth quarter, but did not say how much.

Apple is in a delicate position, with its entrenched iPhone battling for share against Android rivals in a mature market, while its next big product - the Vision Pro mixed-reality headset announced in June - is not yet in the hands of consumers.

Apple said sales for the fiscal third quarter ended July 1 fell 1.4% to $81.8 billion and earnings per share rose 5% to $1.26. That topped analyst expectations of $81.69 billion and $1.19 per share, according to IBES data from Refinitiv. Weaker iPhone sales were balanced by strong sales in the services segment that contains Apple TV+ and by sales in China that grew 8% year over year.

Apple Chief Financial Officer Luca Maestri said the company expects a year-over-year revenue performance in the company's fiscal fourth quarter ending in September similar to the drop the company reported on Thursday. That sales forecast is below analyst expectations of roughly flat fiscal fourth-quarter sales of $90.19 billion, according to Refinitiv data.

"There is a real concern about when volume picks up and what the horizon is for iPhone sales growth," said Daniel Newman, chief executive and principal analyst at research firm Futurum Group.

Apple pegged the gross profit margin in the September quarter at 44% to 45%, above analyst expectations of 43.4%, according to Refinitiv data. While Apple expects growth in its service segment that contains Apple TV+, iPad and Mac sales will fall by "double digits," Maestri said on the call.

Apple's research and development spending also hit $22.61 billion for the fiscal year so far, about $3.12 billion higher than at this point in the previous year.

Apple Chief Executive Officer Tim Cook told Reuters in an interview that the increased R&D spending was in part driven by work on generative artificial intelligence, the same field that is driving spending at other big technology companies.

"We've been doing research across a wide range of AI technologies, including generative AI, for years. We're going to continue investing and innovating and responsibly advancing our products with these technologies to help enrich people's lives," Cook said. "Obviously, we're investing a lot, and it is showing up in the R&D spending that you're looking at."