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Apple shares jump as earnings clear lower bar

Apple warns investors on 1st quarter revenue
Apple warns investors, as CEO points to slumping sales in China 02:58

After warning that its fiscal first-quarter results would fall short, Apple followed through with today's earnings release, which showed both lower revenues and profits. Still, its shares jumped after the results cleared Apple's lowered bar for the three months ending in December.

Apple remains a money-making machine, but its uncharacteristic revenue drop indicates the company is "starting to run out of steam," Neil Saunders, managing director of GlobalData Retail, wrote in a client note. "The clear blue water that once existed between Apple and rivals is much diminished."

But Apple CEO Tim Cook put a positive spin on Apple's problems. "It's not in our DNA to sit around and wait for macroeconomic conditions to improve," Cook said on an investors call after the earnings release. The company has several initiatives in play to ensure it improves on its results, he added.

Cook touted Apple's services business, which expanded even as sales of iPhones decline. For instance, he said, nearly 16 years after the launch of the iTunes store, it now has 50 million paid subscribers.

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Still, Apple needs to step up its game in its services business to compete with the likes of Amazon Prime, according to Saunders, who believes Cook & Co. should consider a large acquisition like Netflix.

"Content is a big growth area and is becoming increasingly linked to devices," wrote the analyst. "Apple needs to play more heavily in this space both to generate new opportunities but also to defend its own device business."

The tech giant posted quarterly revenue of $84.3 billion, a decline of 5 percent from the year-ago quarter, with international sales accounting for 62 percent of revenue. Profits slipped to $19.87 billion. Earnings per share came to $4.18, a penny above the consensus forecast.

Apple reported iPhone sales fell 15 percent from the year-earlier period, while revenue from all other products and services increased 19 percent. Services revenue rose 19 percent during the year to $10.9 billion.

With iPhone weakness well-known, investors were focused on Apple's services, where the company reported gross margin for that business for the first time, UBS analyst Timothy Arcuri and Munjal Shal wrote in a client note.

Cooks says China is the culprit

In a Jan. 2 letter to investors, Cook said the company was lowering financial guidance for the fiscal first quarter ending Dec. 29, projecting revenue of about $84 billion. 

"We did not foresee the magnitude of the economic deceleration, particularly in Greater China," Cook wrote. "In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad."

China is especially significant for Apple, given it garners about a fifth of its sales from the world's second-largest economy, and its iPhones are assembled there.

Apple was among the large-cap tech stocks hit after chipmaker Nvidia on Monday cut its forecast for the fourth quarter, also citing slackening demand in China. Intel voiced a similar line last week in missing expectations for its fourth quarter.  

Apple is the latest multinational to point to an economic slowdown in China for weakened demand for its products.

"The stock has priced in a great deal of bad news and may well be able to weather the storm in tonight's earnings report, said Art Hogan, chief market strategist at National Holdings Corp. "I suspect that we get a 'sell-the-rumor, buy-the-news reaction.'"

That prediction is so far proving accurate, with Apple shares jumping in after-hours trade, lately up nearly 6 percent.

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