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Apple's holiday forecast raises margin concern

Alistair Barr
USA TODAY

SAN FRANCISCO — Apple reported solid results from its most recent quarter, but gave a holiday period outlook that raised concern about the technology giant's profit margins.

Fiscal fourth-quarter net income was $8.2 billion, or $8.26 a share, compared to $8.2 billion, or $8.67 a share, a year earlier. Revenue came in at $37.5 billion, versus $36 billion in the same period last year.

Apple forecast fiscal first-quarter revenue of $55 billion to $58 billion and a gross profit margin of 36.5% to 37.5% for the period, which covers the important holiday shopping period through the end of December. Analysts were looking for a gross profit margin of 37.9% in the fiscal first quarter.

"People are a little concerned about the gross margin outlook for the December quarter," Brian Marshall, an analyst at ISI Group, said.

Apple shares slipped 0.2% to $528.30 in after-hours trading following the results.

Apple's iPhone sales could have been a little stronger during its fiscal fourth quarter, Marshall also noted. Apple launched two new iPhones that went on sale in September, before the quarter ended. Supplies of the high-end iPhone 5s may not have kept up with demand, crimping early sales.

Apple said Monday that it sold 33.8 million iPhones during the September quarter. Analysts were looking for iPhone sales of 34 million to 35 million units in the period.

Apple's main products, the iPhone and iPad, have been under increasing competitive pressure from rivals including Samsung and Amazon, which sell cheaper devices that run on versions of Google's Android operating system. That's has Wall Street scouring Apple's quarterly results for any sign the company is dropping prices at the expense of profit margins.

Apple's gross margin forecast for its fiscal first quarter was the first topic of conversation on the post-earnings conference call on Monday. Chief Financial Officer Peter Oppenheimer said the company is deferring more revenue, which pressured margin guidance. He also said new iPads and MacBook Pros have higher cost structures and lower pricing than previous models.

"There was some consternation about the margin guidance initially, but the company addressed the impact from changes in revenue recognition which alleviated some of those concerns," said Walter Piecyk, an analyst at BTIG.

Indeed, Apple shares were down about 5% before the CFO discussed the company's new revenue recognition approach and the impact of that on margins.

Apple shares have fallen more than 10 percent in the past year on concern the company has not come out with another blockbuster gadget to match the success of the iPhone and iPad. However, Apple is reportedly working on a smartwatch and possibly some type of TV product and a lot of investor hope is riding on these new products.

Apple CEO Tim Cook hinted at new products during Monday's conference call with analysts.

"We see significant opportunities ahead of us in both current product categories and new ones," Cook said.

The CEO was also optimistic about holiday sales of the new iPad Air and iPad mini.

"Both of these products are going to do really well," Cook said. "I think it's going to be in iPad Christmas, but we will see. We will report the numbers back to you in January how we did. But we're pretty confident."

Apple is also being hounded by activist investor Carl Icahn, who has been pushing the company to do a larger share buyback — in the range of $150 billion. The company generates massive amounts of cash — including $9.9 billion in its fiscal third quarter alone.

"We have solicited feedback on our capital return program from shareholders in the past. We've greatly appreciated their suggestions and we will actively seek their input again this year," Cook said on Monday. "We will announce any changes to our current program the first part of the new calendar year."

Apple returned $7.8 billion to investors, in the form of dividends and share repurchases, during its fiscal fourth quarter. That brought total payments to shareholders of $36 billion so far, the company noted.

Apple CEO Tim Cook introduces the new iPad Air on Tuesday in San Francisco.
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