Apple shares slump on weak forecast

SAN FRANCISCO — Apple shares slumped more than 7% on Monday after the technology giant gave a weak forecast that sparked concern about future revenue growth.

Apple executives tried to calm analyst concerns during a conference call by arguing that underlying growth is stronger than the top-line guidance suggested. CEO Tim Cook also confirmed that Apple will be entering new product categories in 2014, something Wall Street has been yearning for recently.

However, Apple shares added to losses as the conference call progressed. The stock ended the after-hours trading session down 7.9% at $507.

Apple's growth and profitability has declined in recent years as cheaper smartphones running Google's Android operating system have sold well, particularly in faster-growing developing regions such as Asia.

Apple is trying to tackle this by expanding in China and other developing countries. Apple recently struck a deal with China Mobile, the world's largest wireless network by customers, to offer iPhones in that country. Wall Street has been expecting the agreement to increase Apple's revenue growth.

However, Apple forecast fiscal second-quarter revenue of between $42 billion and $44 billion. Wall Street was calling for sales of $46 billion in the period, which is the first full quarter to include results from the China Mobile pact.

"Most investors will be disappointed with the forecast, given the recent China Mobile launch," Alex Gauna, an analyst at JMP Securities, said. "The problem is that it's not a robust second-quarter forecast, so we are back to no year-over-year growth, based on this guidance."

Apple generated $43.6 billion in revenue during its 2013 fiscal second quarter. If Apple sales hit the midpoint of its new forecast — $43 billion — the company would see revenue drop during that 12-month period.

The forecast puts the focus on new products that Apple is expected to release this year. Analysts are hoping for larger iPhones, a smart watch, possibly a new Apple TV product and a big mobile payments push by the company.

"The overriding theme from tonight's results will be an increased debate about iPhone unit growth going into the iPhone 6 product cycle (likely fall 2014)," Gene Munster, an analyst at Piper Jaffray, wrote in a note to investors.

Apple is walking a fine line between maintaining high selling prices and bigger profit margins for its products, while trying to keep sales growing, the analyst added.

So far, the company seems to be leaning towards higher margins. Apple's fiscal second-quarter forecast includes gross profit margins of 37% to 38%. Munster was calling for 36% to 37% margins, and analysts on average were looking for margins of 37.3% in the period.

Despite that, most analysts remained more concerned about slowing growth, with one asking Cook on the conference call whether Apple is a growth company anymore.

Cook said Apple generated double-digit growth during its most recent quarter — after excluding the impact of several trends, such as currency fluctuations, falling iPod sales and bigger revenue deferrals.

Apple's growth in North America was dented because the company did not expect such strong demand for its new iPhone 5s smartphone and took most of the holiday period to increase supply to satisfy that, the CEO explained.

Apple has been selling iPhones with China Mobile for about a week, and Cook reported that last week was the best week for activations that the company has ever had in China.

"It's been an incredible start," Cook said. "We are selling in just 16 cities with China Mobile. That will be over 300 cities by end of the year. We have quite the ramp in front of us."

Cook also hinted at new product categories and services coming later this year, saying that innovation has never been stronger at the company. The CEO described mobile payments as a big opportunity for Apple.

"We're working on things that you can't see today," Cook said. "We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is to focus on the few that deserve our full energy."