Apple needs the 'iPhone 8' to succeed

With fewer than expected sales on the iPhone 7 and increased competition, Apple needs the iPhone 8 to succeed. Photo / AP

Apple faces more pressure than ever to deliver with its highly anticipated next-generation iPhone, as the company reported Tuesday that it sold fewer iPhones than analysts had expected in the company's second quarter.

Those looking forward to the new phone may have held off on buying a new device until the fall, analysts said. The softer-than-expected sales come as Apple faces increased competition for the device that makes up the majority of Apple's profits.

Apple sold 50 million iPhones in the past quarter, 1 million less than in the same period last year. Analysts had expected Apple to sell 52 million units.

On an earnings call, Apple chief executive Tim Cook said that Apple did not correctly estimate how popular the iPhone 7 Plus would be compared with the iPhone 7, which caused some supply problems.

The company did show strong profits thanks in part to its services unit, reporting earnings of US$2.10 (NZ$3.02) a share vs. an expected US$2.02. But the disappointing iPhone sales, combined with a weak outlook for the next quarter, sent the stock down more than 2 per cent in after-hours trading. US sales grew 11 per cent, but the company saw a 14 per cent sales drop in China. Cook played down concerns about sales in the world's largest phone market, saying that he thought those results were in line with previous years. He added that seven of the company's most popular stores are in China. But local competition from Chinese smartphone makers such as Huawei have been chipping away at Apple's market share.

Cook addressed analyst questions about the Apple Watch, saying the company is happy with sales and remains "very committed to it and believe . . . over time it will be even larger." Apple doesn't break out sales numbers for its wearable, but analysts expected to see more growth from that part of Apple's business as competitors leave the smartwatch market.

And analysts are upbeat about Apple's ability to bounce back, thanks to the company's reputation and customer loyalty.

"We're bullish on the iPhone 8 for three reasons: Apple's ecosystem stickiness, the expected upgradability of the device, and teenage fondness of Apple devices," said Clement Thibault, a senior investing analyst with Investing.com.

Meanwhile, Apple is also facing increased competition in its growing Mac business. Microsoft announced Tuesday morning a sleek new laptop aimed at students that is designed to compete directly with the MacBook Air.

Sales of the iPad continued to slide.

The company also increased the size of its share dividend and buyback programs to $300 billion through March 2019. Apple's stockpile of cash is nearly US$260 billion, which - as The Washington Post reported - is more than the gross domestic product of Jamaica and Finland combined.

The main bright spot for Apple continues to be in its services. The App Store, iTunes and other subscription products generated US$7b, up 18 per cent from the previous year.

Apple faces stiff competition from Samsung but is in a strong enough position to weather a weaker quarter - as long as it delivers on the promise of the iPhone 8, said Thomas Cooke, a professor at Georgetown University's McDonough School of Business.

"This is acceptable, considering the environment and that they have new products in the pipeline. That people are holding onto their phones a little longer than expected shouldn't be so alarming," he said.