The news out of Cupertino yesterday was different: rather than announcing another record quarter of revenues and profits, Apple CEO Tim Cook and CFO Luca Maestri had a different story. For the first time since 2003, the company reported a year-over-year decline in revenues and profits. The result? After-hours trading in AAPL skimmed about $43 billion in market valuation from the company, and share prices — which had been floating around the $105 – $110 level, dropped to $96 as the markets opened today. Looking between the lines, there is some good news about Apple’s fortunes, and that’s what Cook and Maestri tried to spin during Tuesday’s earnings call.
For example, after several years of declining iPad sales, Cook noted that the next quarter — the first full quarter in which the 9.7-inch iPad Pro will have been available for sale — should see “our best iPad revenue comparison in over two years.” That doesn’t necessarily mean that iPad sales will increase; it just means that the decrease should be stemmed by the popular new iPad.
China has been the shining hope of Apple and one of its more stellar performers for years, but sales were down 26 percent over last year’s quarter. The numbers looked bad, but Cook was able to “shine the Apple” and point out several important things. First, most of the decline in sales was in Hong Kong, which still uses the Hong Kong dollar as currency. The HK$ was very strong during the past quarter compared to the US$, which has slowed trade, shopping, and even tourism. Apple’s focus is still on mainland China, where sales were down about 11 percent, and when currency exchange rate fluctuations were taken into account, that number appeared to be actually about 7 percent.
There’s one other factor that could help Apple’s fortunes in the short term: the iPhone SE. It wasn’t available in time to help out iPhone sales in the second fiscal quarter of 2016 (ending March 31), but indications are that the phone is selling well and should help Apple in bringing over switchers — those people who are abandoning Android and coming over to iOS.
Those who might be concerned that Apple is doomed should take a look at the numbers. Even in a “bad” quarter, the company had revenues of $50.6 billion and a profit of $10.5 billion — figures that a lot of companies would love to have. Apple also announced an increase in its capital return program aimed at sweetening the pot for shareholders through share buybacks and increased dividends.
Finally, the proverbial silver lining on the dark storm cloud was provided by Apple’s “services and other products” category. Revenue from services were up 20 percent over last year and other products — including Apple TV, Apple Watch, Beats products, iPod and accessories — were up 30 percent from Q2 2015. If Apple can continue to grow its services business for iCloud, iTunes, Apple Music, and so on, that base of over one billion active devices can provide a strong and long-lived revenue stream.
Tim Cook has to show optimism to investors and analysts in the face of adversity, and he did a good job at that during yesterday’s earnings call. But the company must come through on new and innovative products — even completely new product categories — in order to return to the heady days of intense and continued growth. The smartphone market that Apple created is beginning to show signs of saturation, and the replacement cycle for those phones won’t fuel big growth. Whether it’s a product or service we’re totally unaware of, or if a cellular-connected Apple Watch really takes off and replaces the iPhone, something new out of Apple is going to be the only way for the company to avoid less-than-stellar financial results.