The company expects a $900 million tariff hit in the June quarter.
Tariff concerns continue to weigh on Apple (NASDAQ:AAPL) as the stock fell about 4% Friday after the tech giant released its fiscal second quarter earnings Thursday after the closing bell.
The iPhone maker reported revenue of $95.4 billion in the quarter, which was 5% more than the same quarter a year ago. It was also better than the $94.2 billion that analysts expected.
Net income rose 5% year over year to $24.6 billion, while earnings increased 8% to $1.65 per share. Earnings exceeded estimates of $1.60 per share.
While tariff impacts were limited in the March quarter, they are expected to have a larger effect in the current quarter and beyond.
iPhone sales are up
Apple posted a solid quarter for its cash cow, the iPhone, despite weakness in China. iPhones generated $46.8 billion in revenue, roughly half of the total. iPhone sales were up 2% year-over-year and beat estimates of $45.8 billion.
However, sales in China were down 2% to about $6 billion. That was offset by an 8% gain in the Americas to $40.3 billion and a 16% jump in Japan to $7.3 billion. Sales in Europe were up about 1% to $24.4 billion.
Apple Services revenue, which includes Apple TV and Apple Music, jumped about 11% to $26.65 billion,. However, that slightly missed estimates of $26.7 billion. Wearable, home and accessories sales were off 5% to $7.5 billion, but Mac sales were up 7% to $7.9 billion and iPad sales jumped 14% to $6.4 billion.
“Today Apple is reporting strong quarterly results, including double-digit growth in Services,” Tim Cook, Apple’s CEO, said. “We were happy to welcome iPhone 16e to our lineup, and to introduce powerful new Macs and iPads that take advantage of the extraordinary capabilities of Apple silicon.”
$900 million tariff impact
Apple, like Amazon, has broad exposure to China, as some 80% of its iPhone were made in China. However, it is taking steps to mitigate that. Before the tariffs kicked in it shipped some 600 tons of iPhones to the U.S.
On the earnings call, Cook said Apple is moving the majority of its production for the U.S. to India and Vietnam, where tariffs are lower.
“For the June [quarter], we do expect the majority of iPhones sold in the U. S. will have India as their country of origin and Vietnam to be the country of origin for almost all iPad, Mac, Apple Watch, and AirPods products sold in the also sold in the US.,” Cook said on the earnings call.
China will remain the country of origin for the vast majority of products sales outside the U.S., he said.
Cook also noted that the iPhone and other electronics are not subject to the 145% reciprocal tariffs placed on China by the Trump administration, as electronics were exempted.
“For the June, most of our tariff exposure relates to the February IEEPA (International Emergency Economic Powers Act) related tariff at the rate of 20%, which applies to imports to the U. S. for products that have China as their country of origin,” Cook said.
Those tariffs will add about $900 million to Apple’s costs in the June quarter, Cook said, assuming no other changes in global tariff policies. But he told analysts that it should not be used to make projections for future quarters as there are certain “unique factors” that benefit the June quarter.
“For the March [quarter], we had a limited impact from tariffs as we were able to optimize our supply chain and inventory,” Cook said. “For the June, currently we are not able to precisely estimate the impact of tariffs as we are uncertain of potential future actions prior to the end of the quarter.”
Outlook for low-to-mid single digit revenue growth
For the June quarter, Apple anticipates revenue growth in the low to mid-single digits. It also projects the gross margin to fall between 45.5% and 46.5%. That assumes that tariff policy doesn’t change, and the economic picture doesn’t worsen.
Even still, the revenue estimate is below analysts’ expectations for fiscal Q3, or the June quarter, according to CNBC.
It also boosted its dividend by 4% to 26 cents per share, marking the 13th year of dividend increases.
Baird lowered Apple’s price target by $30 per share to $230 but maintained a buy rating. The consensus price target is $240 per share, which suggests a 17% return over the current price.
Apple stock is down 17% YTD and is trading at 33 times earnings. With a murky outlook and a still high P/E, investors should look for more visibility.
