Apple’s Financials: The Tea Leaves Report

April 28th, 2016

So we know that Apple’s numbers for the March quarter were, in large part, worse than so-called financial analysts predict. Apple’s stock price was down more than 6% as I wrote this column, and that’s to be expected. It’s an unfortunate fact that, even though Apple remains a highly profitable company, only a single quarter’s revenue is generally compared in relation to year-ago quarters, along with recent quarters if there’s a significant change. Long-term trends are often overlooked.

This means that it’s almost certain that the stock price will continue to fall, since Apple’s guidance reveals another revenue drop this quarter.

To be sure, Tim Cook and crew are doing their best to set make excuses for lower sales of iPhones and Macs — few expected much out of the iPad — and point to products and services that are doing well. So Apple Watch sales are supposedly exceeding the company’s expectations. But who knows what those expectations are anyway?

The biggest concern for the future is the iPhone. After steadily growing sales for nine years, it plateaued, more or less, in the December quarter with just a slight increase, and fell in the March quarter. That trend is expected to continue in the current quarter despite reports of higher-than-expected demand for the iPhone SE.

Some suggest the main reason is that the iPhone 6s upgrade wasn’t compelling enough. But that doesn’t quite pass the logic test. Most people aren’t upgrading from an iPhone 6. They might have an iPhone 5s, something older, or an Android smartphone. Compared to these, the latest iPhone is a compelling product. Regardless, would doing some fancy stuff with the iPhone 7 — which is what it is expected to be called — be sufficient to boost sales?

Honestly, I have no idea. True, sales of Samsung’s Galaxy S7 are, so far, higher than its predecessor. But that may have been due to the fact that the Galaxy S6 wasn’t a very good product. You can’t say the iPhone 6s is a poor product. Besides, Apple is still selling far more high-end smartphones than Samsung.

It could be that, as some suggest, the smartphone market is saturated and there will no longer be double-digit gains, even though it’ll remain a profitable business. Remember, Apple is still earning higher profits than anyone else in the mobile handset business.

So where does that leave the Mac? Well, suffering from a double-digit sales drop, with results far below what analysts expected, wasn’t so encouraging. Even though the entire PC market is contracting, March was a rare quarter where Apple’s decline was more than the average for the industry. So is this a fluke, did customers opt for iPads or PCs instead? I suppose Apple has the marketing information, but they still claim that more than 50% of new Mac purchases are to customers new to the platform. It’s a claim that’s been repeated for years, and I’ll take it as true simply because there has been no evidence to dispute it.

What is certain is that Apple’s critics are wondering what the next great thing might be? Will services revenue continue to soar? That will help, but what about the Apple Watch? Can it eventually achieve sales in the iPad or iPhone range? That doesn’t quite seem possible, but time will tell. Certainly if the Apple Watch develops cellular connectivity — perhaps as an alternate version — it might boost sales substantially.

But what else is there on the horizon that might replace the iPhone as a fast-growing money-making machine?

There is ongoing speculation about the Apple Car, and the rumors do present a credible case that something’s afoot. But that doesn’t mean Apple will actually sell a car. It could be a test bed to evaluate technologies for future versions of CarPlay. But even if Apple were to go whole hog on such a project, would profits appear out of the starting gate, as with other products, or would it take years? Bear in mind that the industry average is 8%.

So if Apple can deliver margins above 8% with a car, it would be pretty good, but how long would it take to get there?

Another possibility is for Apple to buy a large company to provide a product or service to add to its portfolio. So far, most acquisitions have been relatively small, mainly to add technology to existing product lines. A notable example is Siri. But with the $3 billion purchase of Beats Electronics, Apple acquired a major manufacturer of premium headphones.

While Apple never tells us anything in advance about an acquisition, and even after it’s done, they aren’t apt to admit it except in a general way. Well, except for Beats. But during the quarterly conference call with financial analysts earlier this week, Cook was a tad more informative about Apple’s plans: “We’re always looking in the market about things that could complement things that we do today, become features in something we do, or allow us to accelerate entry into a category that we’re excited about.”

Later on, he dropped a broad hint: “We could definitely buy something larger than we bought thus far.”

Of course, that statement has fueled speculation about what Apple might have in mind, and some companies are already being mentioned. So would Apple jump into the car business in a big way and acquire Tesla — or is that a bridge too far? Besides, at twice the current market cap, roughly $66 billion, it would be a huge stretch for Apple. Would it be worth jump starting its entry into the car business? Would Elon Musk even consider such an acquisition?

Wouldn’t it be far cheaper for Apple to do it their way?

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3 Responses to “Apple’s Financials: The Tea Leaves Report”

  1. Dana Sutton says:

    Not sure I’d call Beats “premium headphones.” Measured against Sennheiser, etc. etc. they don’t stack up very well and they’re very overpriced.

    There are all sorts of things Apple could get involved in. The Watch, for ex., would be revolutionized if it could be transformed into a monitoring device for serious medical purposes (the most obvious thing it could measure would of course be cardiac behavior, but possibly this is not the only thing itg could be made to do). Another medical area Apple could move into, believe it or not, hearing aids. Siemens makes a couple of models with Bluetooth capacity so they double as hearing aids and in-the-ear headphones. I have a pair myself. The audio quality is surprisingly good, and the thing’s terrific when it works properly. Unfortunately, the Bluetooth connectivity is a bit iffy, it is too difficult to establish and maintain and the associated iPhone app. is a piece of crapware. Apple could design a similar product which would beat the socks off this one.

    Looking at things more broadly, Apple is not really an electronics company so much as it is an industrial design shop. It has a demonstrated capacity to convert a piece of equipment that’s complicated, awkward to use and has a steep learning curve into something that’s simple, elegant, and a pleasure to use. This talent could be applied to a wide panorama of devices. One of a thousand such is the Smart Home, where you can control everything from your thermostat and lights to the stations on your lawn sprinkling system (those of you who live in the Southwest will understand this immediately). Apple could offer a comprehensive modular system of such controls all managed from your Apple mobile devices.

    It’s difficult to imagine Apple will run out of new fields to conquer. And it will have to do this because, like Woody Allen’s famous shark, it will die if it doesn’t keep moving forward. What will otherwise kill it is the success of its existing products. Ones such as the iPhone have been polished and refined to the point where the prospect of replacing them with newer models loses its appeal, so it is only natural that customer interest tails off. And the iMac is at least approaching that point (give mine a HDMI port and give me the ability to replace the SSD with a one with larger capacity once these become available and I could happily live with it for the rest of my life).

  2. Peter says:

    If Apple bought Tesla, the interesting question would be what they would get.

    Tesla is renowned for their cars. But, in some ways, Tesla is actually becoming a battery company. With newer products like Powerwall and Powerpack and Tesla’s planned construction of their Gigafactory, they’re getting into batteries in a big way.

    So Apple could conceivably buy their car division and let Tesla concentrate on supplying huge numbers of batteries.

  3. Dana Sutton says:

    Maybe vice versa would make better sense, since so many Apple products are battery-operated.

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