Apple cabled that issues are getting higher after a troublesome quarter

Apple on Thursday reported a difficult December quarter, including the company’s biggest quarterly sales decline since 2016, along with declines in sales at its iPhone, Mac and wearables businesses.

Initially, investors didn’t like the result, as Apple shares fell as much as 4% in extended trading.

But the stock staged a brief rally after Chief Financial Officer Luca Maestri began providing data points during a call with analysts, suggesting Apple’s performance in the current quarter will improve even if overall revenue is still down year-on-year becomes.

The tech giant has not provided guidance since the pandemic began. But its data points — or “directional insights,” as management calls it — allow analysts covering the stock to get a feel for how the company is doing and update their models.

Here’s how Apple’s forward-looking statements from Thursday break down.

“For iPhone, we expect our March quarter year-on-year revenue performance to accelerate compared to the December quarter year-on-year revenue performance,” said Maestri. “This represents a year-over-year acceleration in our underlying business performance as the December quarter benefited from an additional week.”

The iPhone is by far Apple’s largest product segment, accounting for 56% of its revenue last quarter. Apple said Thursday that iPhone sales were down more than 8% year over year. But Maestri’s comment suggests they won’t continue to fall any faster in the March quarter.

Management said part of the reason for the decline in November and December was that it couldn’t make enough high-end iPhones at Chinese factories due to Covid restrictions and production has recovered.

Still, there’s a risk that customers who couldn’t find a new phone over the holiday season will simply give up rather than buy one in the current quarter. Apple CEO Tim Cook said it was “very difficult to gauge” as analysts asked about it on the earnings call.

Prior to Thursday, analysts had expected Apple to post revenue of about $98 billion in the fiscal second quarter.

On Thursday, Apple announced that sales fell 5.49%. Last year, in the March quarter, Apple reported revenue of $97.28 billion. A similar decline in the March quarter of this year would take sales to around $92 billion.

So on the surface, that should have been a disappointment.

But as Apple explained, a 5.49% decline would actually be an improvement from the December quarter, as Apple’s results for the quarter were artificially inflated by the fact that there was an extra week. In other words, year-over-year revenue performance in December 2022 was even worse than it looked.

Additionally, the Covid lockdowns at factories in China were a big factor in the deficit, but Apple said on Thursday its production was back to levels it was happy with, suggesting supply was not so strong in the March quarter will be heavily burdened like in December.

“For services, we expect year-over-year revenue growth while we continue to face macroeconomic headwinds in areas like digital advertising and mobile gaming,” said Maestri.

Services revenue was one of Apple’s few pleasant surprises on Thursday, as sales of $20.77 billion beat Wall Street consensus expectations. The segment includes App Store, Warranties, iCloud and Apple Music, among others.

Last year, Apple reported $19.82 billion in services revenue in the March quarter, so the company suggests an increase from there, though executives said it’s still a tough environment with declining games and advertising sales.

“For Mac and iPad, we expect revenue for both product categories to decline at double-digit rates year-over-year due to difficult comparisons and macroeconomic headwinds,” Maestri said.

This represents a significant shift for the iPad, which was Apple’s fastest-growing hardware business in the December quarter, growing nearly 30% year over year to $9.4 billion in revenue. Now Apple is suggesting the business will surge from a 30% growth to a more than 10% decline.

In contrast, Mac business fell nearly 29% in the December quarter, but Cook told analysts that this was partly due to the company releasing new laptops and Apple announcing new Mac desktops and laptops in January. Based on these comments, Mac sales will be down at least 10% in the March quarter, but are likely to improve.

“We expect a gross margin between 43.5% and 44.5%. We expect operating expenses to be between $13.7 billion and $14.9 billion,” Maestri said.

Apple’s margins remain significantly higher than before the pandemic. For example, Apple reported gross margin of 38.4% for the quarter ended December 2019, the last full quarter before the Covid pandemic was declared.

“We’re working a lot on the cost structure and it’s paying off,” said Maestri.

Cook told CNBC’s Steve Kovach Thursday that Apple actually fell short of its target for operating expenses for the December quarter.

“We are careful and thoughtful. If you look at our OpEx guidance, which we announced for this quarter, we’re down a half billion dollars,” Cook said. “So we express the costs.”

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