The entire mobile market is in a state of transition. Owning a smartphone is no longer the status symbol it once was. Smartphones are now largely commodities for folks. A phone might be a mission critical communication device, but consumers are starting to get burnt out on yearly upgrades. This puts Apple in a precarious position as a significant portion of Cupertino’s profit comes from iOS devices, 65% of the company’s sales coming directly from the iPhone.
We’ve already delved into the earnings report in-depth, but the bullet points are as follows:
- iPhone sales down 16%
- iPad sales down 19%
- Mac sales down 9%
- Revenue down 13%
- Services (Apple Care, Apple Pay, and Online services) up 20%
- “Other Products” (Apple TV, Apple Watch, Beats, accessories) up 30%
This quarter doesn’t reflect sales of products recently released like the iPhone SE. Apple finished this quarter sitting on $232 billion in cash, though a significant chunk of that money is in overseas accounts, and repatriating it would incur a substantial tax bill. While Apple sits on huge reserves, and can pay out larger dividends to investors, they’ll likely build some debt to pay out those dividends in the short term.
What’s not up for debate is the fact that Apple is still one of the most profitable and successful companies the world has ever seen, but where investors have been concerned is watching Apple find new avenues to drive growth. This is the first quarter earnings have fallen since 2003.
Does this sound some kind of death knell for the company? Probably not. What we witnessed this first quarter of 2016 was a perfect storm of conditions which hit Apple in several key areas.
“S” years are often slow…
Consumers like “new”, new form factors, new color options, fresh gadgets. Historically “S” years are slower sales years for Apple, and this year reinforced that trend. Though the iPhone 6S is tracking ahead of iPhone 5S sales over the same period. While that helps ease some of the sting of this announcement, apparently “Rose Gold” wasn’t quite enough to drive 6S sales near what Apple sold for the iPhone 6, and Apple will still be reducing phone component orders moving forward.
A mature market?
We know consumers are holding onto their phones longer. Payment plans actually remove some of the urgency in upgrading a device every two years, and this is an area which greatly affects Apple. Smartphones are necessary devices, but the decision to buy a new phone is often an emotional purchase. As the growth for high end devices cools, so will cooler heads prevail in evaluating expensive purchases.
Apple’s recent release of the iPhone SE is a direct shot at trying to heat up sales in China, which was down 26% over last year, and is the company’s second largest market behind the United States. Even with a proper mid-ranger targeted at China, and working deals in India as that country lights up more LTE, Apple top brass are expecting another weak quarter to follow.
What’s fascinating though, is watching Apple, a company that built its reputation on hardware, compete more aggressively as a software services company. Apple can’t escape the larger market trends where entry level and mid-range phones are putting more pressure on premium products, but they can draw more revenue from a variety of sources to build new markets.
The “Services” wing of Apple, which was up 20% over last year, generated $6 billion in revenue for the company and is now larger than the individual divisions for Macs or iPads. Apple Pay was a very small slice of that pie, but services like that, working in conjunction with content licensing, should prove to be a solid growth area for Apple over the next couple years.
Accessories also showed strong growth on the backs of premium offerings like Apple Watch, TV, and Beats. Apple might have difficulty in convincing high end consumers to buy a new phone every year, but there are plenty of opportunities to expand on Apple’s ecosystem of products. Apple has yet to put its full might behind home and automobile products as two examples. A handful of strategic company acquisitions could certainly help expand Apple’s portfolio.
The Magnificent 7
Though forecasts for next quarter look glum, this year will mark a new number phone for Apple. Folks holding out for something fresh, a better conversation starter than an “S” phone, have the iPhone 7 to look forward to. While one phone can’t correct for overall industry trends, it will likely bolster strong earnings for the end of 2016. If rumors hold true for the removal of the headphone jack, after the public’s gnashing of teeth, Apple might be able to drive additional accessory partnerships and licensing deals working with audio manufacturers on Lightning connector hardware.
The end of Apple?
When a stock price jumps or falls, it rarely has as much to do with a company’s actual performance in the market. It often has more to do with the perception of that company’s performance. Apple shares a problem with many other top tier technology manufacturers, in that continued growth for smartphones is ultimately unsustainable. Eventually the phone market will bottom out.
Apple is a juggernaut of a company, and a ship that large can be difficult to steer. The entire consumer electronics company faces some significant challenges in defining the next generation of products and services. Apple’s ecosystem of products is formidable, but bold moves will be required to reignite consumer excitement. Apple has played the last several years somewhat conservatively, more responding to market trends than driving the industry.
This company has the capital and the talent to create new product markets and new business opportunities. Apple is always most exciting when it delivers something truly new. What remains to be seen is if the top executives in Cupertino have the vision to deliver that next big thing.