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Apple loses shine as iPhone sales tumble; analysts look to next release to improve

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Apple loses shine as iPhone sales tumble; analysts look to next release to improve

Apple Inc.shares seem to have lost some shine as investors, including one high-profile billionaireactivist, digest a quarterly earnings report that showed a historic revenue declineand weakness in iPhones sales.

Apple on April 26 reported $50.56 billion in net revenue forits fiscal second quarter,marking a 12.8% year-over-year decline and the company's first revenue decline in13 years. Sales of iPhones tumbled 18.4% year over year, further solidifying weaknessin demand for the iPhone 6s and iPhone 6s Plus, analysts said. Sales of iPads fellby a similar percentage, though that device's 18.7% decline in sales marked itssmallest year-over-year tumble since the quarter ended in September 2014. Salesdeclines of Macs accelerated; Apple did not break out sales results for its AppleWatch.

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The softness in sales was apparent across the company's geographicfootprint, with Greater China and the Asia Pacific regions accounting for the largestyear-over-year sales declines, down 25.8% and 25.0%, respectively. Operating incomefell by similar percentages in those regions, down 28.2% in Greater China and 31.6%in the rest of Asia Pacific. The declines followed a period of strong growth roughlya year earlier, with net sales in Greater China reporting 112.4% and 116.6% year-over-yeargains in the periods ending in June 2015 and September 2015. That growth soon tooka dive, however, gaining just 13.8% year over year in the December 2015 quarter.Sales and operating income also declined in the Americas and Europe during the just-endedquarter. Japan was the company's one geographic bright spot, reporting 23.8% growthin net sales and 13.6% growth in operating income.

Sales of the iPhone have long accounted for the majority of Apple'srevenue growth, fueled by strong consumer demand for the device. Sales of the smartphonegained more than 50% year over year in each of the first three quarters of Apple'sfiscal 2015, for instance. However, signs of a slowdown were apparent in the firstfull quarter after the release of the iPhone 6s: the device's sales grew just 1%year over year in the period ended in December 2015.

"The cyclical weakness of the iPhone 6s is well understoodby the investor base, although Apple themselves appears a late convert to that pointof view," wrote Nomura Holdings analyst Jeffrey Kvaal in a research note. "Thecompany has stopped arguing that the base has plenty of room to take an iPhone 6sand now believes the iPhone 6 pulled forward some replacement sales."

Well-known activist investor Carl Icahn CNBC on April 28 that he sold off hisstake in the iPhone maker largely due to concerns about China. Other investors alsofled the stock following the earnings report, sending Apple shares over 10% for the week ended April 29.The losses carried over when markets opened May 2, with shares falling almost 1%as of midday but then recovering somewhat to trade near flat as of late afternoonthat day.

On top of geographic concerns, including saturation issues insome markets, Apple faced a tough year-over-year comparison due to strong salesof the iPhone 6, said Greg Sterling, vice president of Local Search Association,in an interview.

"I think Apple has been on a remarkable multiyear run, andI think a number of variables have caught up with them this quarter," Sterlingsaid.

Apple executives gave a largely bleak forecast for the June quarter,with an expected year-over-year decline in revenue with a planned $2 billion reductionin channel inventory. However, Apple CEO Tim Cook told analysts the June quartershould see the best iPad revenue in more than two years following the release ofthe 9.7-inch iPad Pro at the end of March.

Pacific Crest Securities analyst Andy Hargreaves said in a researchnote that the company's June forecast reflected a correction after poor demand forecastsfor the iPhone 6s. He anticipates iPhone sales will grow again following the nextrelease, driving profits and improving investor sentiment in fiscal 2017.

"IPhone customers remain extremely loyal, and we believethe extraordinary utility of the smartphone provides room for a superior productto extract excess profits well into the future," Hargreaves wrote. "Thissuggests that Apple is likely to continue growing iPhone unit sales over severalyears, albeit modestly, with a relatively stable gross margin profile."

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