Apple Fails to Deliver a Rosy Quarter

Earlier this year, the Apple Watch was released with much fanfare, but the customers are still to take to it the way they have taken to the prior iOS devices like iPhone or iPad. Apple (Nasdaq: AAPL) announced their quarterly results earlier this week which reflected the tepid response that the market had toward their Watch. Despite registering a record breaking quarter for iPhone revenues, Apple also fell short on market expectations on the number of units shipped.

Apple’s Financials

Apple’s third quarter revenues grew 33% over the year to $49.6 billion, ahead of the Street’s estimates of $49.36 billion. EPS of $1.85 was also ahead of the market’s forecast of $1.81 per share.

During the quarter, Apple sold 47.5 million iPhones, falling short of the market’s expectations of 48.8 million units. iPad sales were at par with expectations at 10.8 million units while Mac sales were marginally lower at 4.8 million units. This was a record breaking quarter for the iPhones which registered a 59% growth in revenues to $31.37 billion. Average selling price for the phones remained flat over the quarter at $660. iPad revenues were down 23% over the year to $4.5 billion and Mac sales grew 9% to $6 billion. Revenues from their Services segment which includes Apple’s App store increased 12% to $5 billion. Sales from Watches gets clubbed in the Other segment which reported revenues of $2.64 billion for the quarter.

For the current quarter, Apple forecast revenues of $49 billion-$51 billion, compared with the Street’s forecast of $50.92 billion.

Apple’s Disappointing Sales

According to a recent IDC report, the global Smartphone sales are projected to increase 11.3% over the year in 2015. The growth is expected to slow down from the 27.6% recorded in 2014. Apple’s recent results may not have represented this decline, but they surely aren’t expecting the stellar performance to continue. During the quarter, Apple pulled back phone inventory by 600,000 units. The current quarter for Apple will be all the more difficult considering that last fall they had released the iPhone 6 and 6 Plus.

Apple’s Watch is not faring any better. While Apple does not disclose detailed metrics, analysts expect that Apple probably sold no more than 2.5 million watches. They had earlier modeled sales of 4 million watches for the quarter. Some believe that the slow sales were due to limited point-of-sales and their app inventory. The Watch was available at only 680 points-of-sale compared with the over 220,000 for the iPhone and 120,000 for the iPad. During the quarter, Apple added 5,500 apps to the Watch’s store taking the list of Watch compatible apps to 8,500. But that is still very modest when compared with 1.5 million apps available for iPhones. Things should, however, improve when Apple releases watchOS2 later this year. The OS is expected to enable native apps for the Watch. Till then, most Apple loyalists may decide to wait on that decision of purchasing the Watch. My analysis is that the biggest issue with the iWatch is the lack of a killer use case.

Finally, Apple’s iPad sales continued to dwindle. This was the sixth consecutive quarter that Apple reported a decline in iPad sales. iPad sales have been on the decline as larger screen smartphones continue to eat into the tablet market. Apple is working on turning that around by focusing on the enterprise segment. Their earlier agreement with IBM is expected to improve the situation.

Apple does not disclose their product release schedule, but rumors suggest that the new iPhone 7 is on its way for release later this year. Apple will be hoping that the new phone and the upgraded watchOS will improve this recent slowdown. Meanwhile, their stock is trading at $125.16 with a market capitalization of $721 billion. It touched a high of $134.54 in April this year.