Apple – Product Sales Dip, China Demand A Serious Question Mark

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Apple Inc (NASDAQ:AAPL)’s third quarter net sales rose 1.9% to $83.0bn, reflecting a small decline in Product sales to $63.4bn, but a 12.1% increase in Services to $19.6bn.

The Americas remain the group’s biggest region, where sales rose 4.5% to $37.5bn. In Europe sales rose from $18.9bn to $19.3bn. Sales were broadly flat in Greater China and declined around $1bn in Japan. Rest of Asia Pacific rose 14% to $6.2bn.

iPhone sales were the only product type to increase trading, rising to $40.7bn from $39.6bn.

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Operating expenses rose 15.1% to $12.8bn, with research and development spend rising over $1bn. Operating profit fell from $24.1bn to $23.1bn.

The group had net debt of $60.5bn as at the end of the quarter and generated free cash flow of $90.6bn.

Apple shares rose 2.8% in after-hours trading.

Apple's Earnings

Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown

“A dip in product sales is not a sustainable pattern for Apple, with hardware still the engine driver of the business. Services is mushrooming and it’s heartening to see this become a bigger part of the picture, but the services web can’t ensnare customers unless iPhones, Macs and Wearables are flying off the shelves. The question is how new iPhone models are going to land later this year. Apple is putting a lot of pressure on its brand to offset the very real pressures of inflation. With the US entering a technical recession and consumer confidence at significant lows, expectations could be overblown. Success in the coming months isn’t guaranteed, especially given the tech giant’s exposure to China. Not only is this a manufacturing lynch pin, but an increasingly important area for sales. The worsening economic backdrop in the region does give reason for caution.

That brings in the question of how Apple can stoke further revenue. The US regulator has issued a warning over Apple’s push into buy-now-pay-later lending. The group’s foray into this form of finance raises numerous questions, including how this new realm of data can, and should be used. Apple argues it wants to offer consumers further flexibility as incomes take a hit, but a cynic would say this is not the time to be encouraging people to risk getting into debt. At a time when data privacy and social responsibility are at the forefront of customer and investors’ minds, the potential monetary benefits of this venture are secondary to the rhetoric being displayed.

For all the challenges, Apple has shown remarkable resilience, with sales of $83bn leaving little room for critics, and the group’s position shouldn’t be underplayed.

Apple’s used to having loyal customers handed to it on a platter, and while the company silver is still looking polished, there is some graft required to keep it that way.”

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