Apple’s Financials: The Run-up to Doom?

April 26th, 2016

Challenges, challenges. It appears that the tech industry isn’t getting the love this quarter when it comes to revenue. So we know that Alphabet, Google’s holding company, and Microsoft had somewhat disappointing earnings. Once again, Twitter had disappointing earnings because advertisers aren’t buying enough space, but the social network has long had problems figuring out the best ways to monetize.

In this climate of lowered expectations, Apple reported its March quarterly earnings. It didn’t help that they missed the pessimistic expectations of industry analysts. But those projections aren’t real things. They are guesses that may or may not reflect the real world.

The big headline is that iPhone sales declined year-over-year. This is the first time that happened since the product debuted in 2007. But the final numbers, 51.2 million units sold, were above the consensus of 50.3 million. Last year, Apple managed to move 61.17 million iPhones, so the sales falloff is pretty significant as such things go, though it’s not as if the company didn’t predict it would happen.

Still, the sales drop is a headline story at the major news outlets — huge.

In all, second quarter revenue totaled $50.56 billion, with earnings of $1.90 per share. This compares with sales of $58.01 billion and earnings of $2.33 per share in the year-ago quarter. According to published reports, Wall Street freaked at the revenue miss, and the stock price dropped more than 6% as a result in after-hours trading. One expects that unfortunate trend will continue for a while until reality sets in.

And this is one I didn’t expect. Mac sales also disappointed, with sales of four million units compared to analyst expectations of 4.53 million. iPad sales came in at 10.2 million, compared to industry predictions of 9.95 million. Mac sales last year were 4.56 million, and iPad sales totaled 12.62 million. At least iPad sales aren’t decreasing as fast as some expected.

But the Mac! Is there a reason other than the general slowdown in the PC industry? Well, there were no new or refreshed models during the March quarter. The first update came last week with the launch of a refreshed MacBook. More new Macs are expected to arrive between now and June’s Worldwide Developer’s Conference. Will there be a major change to the MacBook Air and MacBook Pro?

While Mac sales didn’t do as well as expected, Apple is once again boasting that over half of Mac buyers are, again, new to the platform. So clearly PC users are still switching in decent quantities. Indeed, if I were saddled with Windows 10 — and wasn’t already a long-time Mac user — I’d join them.

As one would expect when a corporate executive has to respond to bad news, Apple CEO Tim Cook put his best foot forward on the situation, saying, “Our team executed extremely well in the face of strong macroeconomic headwinds. We are very happy with the continued strong growth in revenue from Services, thanks to the incredible strength of the Apple ecosystem and our growing base of over one billion active devices.”

In case you’re wondering, this is Apple’s first revenue decline since 2003. The company’s guidance for the current quarter is also somewhat disappointing, with revenues expected to land between $41 billion and $43 billion.

During the quarterly conference call with financial analysts, Cook and crew attempted to highlight the most favorable aspects of a situation that would normally be regarded as bad news. So, he said that a “very high percentage” of iPhone customers are switching from Android and other platforms. Unit sales of the Apple Watch also met Apple’s expectations for the quarter, but Cook also said it was following seasonal trends, which means it was less than the previous quarter. As usual, Apple doesn’t break out Apple Watch sales.

But services were a high spot, growing 20% year-over-year to $5.99 billion. Highlights included Apple Music, which grew two million over the quarter and now has 13 million subscribers. But the subscription music service has a long way to go to match the industry leader, Spotify, which claims 30 million paid subscribers. In addition, revenue from the App Store increased 35% to hit an all-time high.

The iPhone SE also shows promise. Although initial sales didn’t register in the March quarter, supplies are constrained because demand is higher than Apple expected. So skepticism that it wouldn’t do well may have been unfounded. Then again, Apple’s expectations might have been modest, and it’s not as if they’ll tell us what they really were.

It was also announced that 78% of the businesses who plan to buy smartphones during the current quarter will choose iPhones.

One promising note: Apple claims that it’ll present the best iPad revenue compares in over two years during the current quarter. The 9.7-inch iPad Pro appears to be having some impact. It was also revealed that the iPad has a 78% share of the tablet market for products over $200. Of course, lots of cheapie tablets are being sold, but one wonders what sort of use they get.

Despite trying to make good of a bad situation, it’s clear that Apple’s detractors will have a field day in the weeks ahead saying that doom and gloom is now upon us. It has already begun, with the next iPhone, presumably the iPhone 7, is being characterized as disappointing months before it is expected to be announced. Little has changed.

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2 Responses to “Apple’s Financials: The Run-up to Doom?”

  1. DaveD says:

    It may have not been good news, at least it wasn’t too bad. Apple is still a profitable company. While the long run of iPhone fever comes to an end, it is time for Apple to refocus knowing the smartphone market is saturated.

    I think it is time for Apple to get off annual software upgrades. It is too problematic. Need to address the lack of thinking out and taking time to make new features a pleasurable user experience. Apple needs to seriously listen to the users who have been saying for too long… What happened to “It just works.”?

    Time to reflect.

  2. dfs says:

    I agree about Apple needlessly imposing time constraints on itself, which may put pressure on them to release half-baked, reputation-damaging software just to meet an arbitrary self-imposed deadline, so things don’t always “just work.”

    A particularly disturbing example of the same kind of thinking is their annual iPhone replacement program, since it more or less contractually obliges them to bring out a new model annually in order to fend off class-action suits. This may be their prime motivation for putting out iPhone 7, since, based on what I’ve read about it, it doesn’t seem to contain enough innovation to merit a release for any other reason.

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