Apple sold more iPhones than Wall Street expected in the third quarter and forecast revenue in the current period would top many analysts' targets, soothing fears that demand for the tech giant's most important product has hit a wall.
Apple's shares rose more than 7 per cent in US after-hours trading.
The world's most valuable publicly traded company said it sold 40.4 million iPhones in the third quarter, down 15 per cent from the year-ago quarter but slightly more than the average analyst forecast of 40.02 million, according to research firm FactSet StreetAccount.
IPhone sales dropped for the second straight quarter, pushing down Apple's total revenue 14.6 per cent in the fiscal third quarter which ended June 25.
Demand for Apple's phones has waned in China, partly because of economic uncertainty there, and has also slowed in more mature markets as people tend to hold on to their phones for longer.
"China was a major letdown and I'm anxious to get more details as to what drove the declines," said Patrick Moorhead, an analyst at Moor Insights & Strategy. "Samsung and Huawei are much more competitive now than a year ago and the Chinese economy is not doing well at all."
'Bright spot'
Moorhead said, however, that increased services revenue - which includes the App Store and iCloud - was a "very big bright spot for Apple."
Chief Financial Officer Luca Maestri said Apple's performance had topped his expectations in a quarter weighed down by tough foreign exchange rates and difficult comparisons with blockbuster iPhone 6 sales from the previous year.
Apple reduced its product inventory by $US3.6 billion, exceeding the $US2 billion expected reduction, meaning sales were better than they appeared, Maestri said.
Customer demand "was better than what is implied in our results and better than we had anticipated," he said in an interview.
Sales of the iPhone fell last quarter for the first time since the gadget's release in 2007, dropping 16.3 per cent. Maestri projected the gadget's average selling price to rise in the September quarter.
The iPhone drives about two-thirds of Apple's total sales. Apple Chief Executive Tim Cook said during a call with analysts that the iPhone SE, a cheaper, four-inch (10 cm) phone released this year, was extending the range of people able to buy Apple phones.
"It's opening the door to customers we weren't reaching before," he said.
Apple's quarterly net profit fell 27 per cent to $US7.8 billion, while revenue of $US42.36 billion beat analysts' average estimate of $US42.09 billion, according to Thomson Reuters I/B/E/S.
Sales in Greater China, once touted as Apple's next growth engine, decreased by a third, compared with a 112.4 per cent growth in the year earlier quarter and a near 26 per cent fall in the second quarter.
Investors are sensitive to any signs of trouble in China, one of the company's largest markets by revenue.
Maestri attributed the drop to inventory reduction in the nation, foreign exchange headwinds and a general downturn in the Chinese economy.
"It is very clear that there are some signs of economic slowdown in China, and we will have to work through them," he said. "We understand China well and we remain very, very optimistic about the future there."
Adding to Apple's woes in China, the company's stores for books and movies went dark earlier this year. Cook said Apple was working with regulators to restore the services but played down the financial impact of the outage, saying the stores yielded less than $1 million in revenue during the short time they were on the market.
"It's not a revenue-related issue," he said. "This is a service we want to provide our customers."
App store, iCloud bigger than iPad, Mac
Apple's services business, which includes the App Store, Apple Pay, iCloud and other services generated nearly $US6 billion in revenue, up 18.9 per cent from the previous year.
As iPhone sales level off, Apple is attempting to wring more revenue out of its existing base of users by emphasising services such as the App Store, Apple Music, storage centre iCloud and mobile wallet Apple Pay. Such services emerged as Apple's second-largest business after the iPhone for the first time in the company's second quarter, eclipsing gadgets such as the iPad and the Mac.
That shift in the business bodes well for Apple because gross margins on services are better than the average for the rest of the company, Maestri said.
"It's a great business because it is recurring in nature and more linked to our installed base," he said.
The company forecast fourth-quarter revenue of $US45.5 billion to $US47.5 billion, largely above Wall Street's average estimate of $US45.7 billion.
The forecast, covering the quarter ending September, will likely include at least the first weekend of sales of the iPhone 7 range, which Apple is expected to launch in September.
Up to Tuesday's close, Apple's shares had fallen about 8.2 per cent since the start of the year. Its shares rose 7.1 per cent to $103.57 in after-hours trade following publication of results.
Reuters
