What Will Help Apple Grow Again?

The saturation in the maturing smartphone industry coupled with currency fluctuations and macroeconomic challenges is finally weighing down on Apple’s results. For the first time since it launched the iPhone, Apple is expecting a decline in its revenue.

Apple’s Financials

For the first quarter of fiscal year 2016, Apple (NASDAQ: AAPL) reported quarterly revenue of $75.9 billion, up by $1.3 billion or 2% year over year. International sales accounted for 66% of the quarter’s revenue. Gross margin was 40.1%, up from 39.9% in the previous quarter. Operating margin was 31.9% and net income was $18.4 billion or $3.28 per share, up from $18 billion or $3.06 per share a year ago. Analysts expected revenue of $76.54 billion and $3.23 earnings per share.

It ended the quarter with $215.7 billion in cash plus marketable securities, up $10.1 billion sequentially. $200 billion of this cash or 93% of the total was outside the United States. It returned over $9 billion to investors during the quarter: $3 billion in dividends and $3 billion to repurchase 26 million Apple shares. Apple also launched its sixth accelerated share repurchase program, spending $3 billion for 20.4 million shares.

Consumer demand for smartphones is slowing worldwide as most people in developed nations already own a smartphone. That’s why emerging markets, especially China, is an important strategy for the iPhone. Emerging markets performance was strong overall, up 11% year-over-year and representing 34% of total company revenue for the quarter. Greater China revenue grew 14% y-o-y and 47% q-o-q to $18.4 billion.

Apple sold 74.8 million iPhones in the quarter, compared to analyst estimate of 75.5 million. Total iPhone sales grew 76% in India, more than 45% in Korea and Middle East and Africa, more than 20% in many western European countries, and 18% in Mainland China. iPhone ASP was $691 compared to $687 in the year ago quarter. According to IDC, although Apple has seen minimal growth in the quarter, its market share in 2015 has climbed to 16.2% from 14.8% in 2014. Samsung leads the market with 22.7% share, down from 22.7% in 2014.

As for its other products, it sold 5.3 million Macs and 16.1 million iPads versus 5.5 million Macs and 21.4 million iPads last year. Analysts estimates were for sale of 5.8 million Macs and 17.93 million iPads.

For the second quarter, it expects revenue to be down 5% to 10% between $50 billion and $53 billion, compared to analyst estimate of $55.6 billion. This is perhaps the first time in more than a decade that Apple is expecting a decline in revenues. Gross margin is expected to be between 39% and 39.5%.

What will help Apple tide over?

There are several factors in Apple’s favor. It has a strong base of loyal and satisfied customers who are very likely to buy other Apple products or upgrade. It has an active installed base of more than 1 billion Apple devices including iPhone, iPad, Mac, iPod Touch, Apple TV, and Apple Watch. This installed base drove over $31 billion in related purchases in 2015, up 23% and $8.9 billion in Q1’16, up 24%. Revenue from the App Store was over $20 billion in 2015.

What could further help Apple tide over the downward trend in its sales is an increasing focus on the enterprise market. Apple now has a total of 90 enterprise partners. IBM has released 48 new IBM MobileFirst for iOS apps in the December quarter and there are now over 100 apps in the IBM MobileFirst for iOS catalog for iPhone, iPad, and Apple Watch. In the two weeks ending January 3, customers spent over $1.1 billion on apps and in-app purchases but it is not clear how much IBM apps have contributed towards it. Services and apps have become an important revenue generator for Apple. It has started breaking out its Services revenue and we will have more visibility into revenue from the App store going forward.

CEO Tim Cook sees these tough times as an opportunity to invest in new markets.

“We’ve invested through economic uncertainty in the past and we’ve always come out stronger on the other side. In fact, some of the most important breakthrough products in Apple’s history were born as a result of investing through the downturn. We’ve also seen these times as opportunities to invest in new markets, just as we’re doing now in areas such as India and other emerging markets.”

Apple also seems interested in virtual reality (VR). It has recently hired leading VR researcher Doug Bowman. It has also acquired augmented reality startup Flyby Media. It is reportedly building prototypes of headsets that could one day compete with Facebook’s Oculus Rift or Microsoft’s Hololens, as it looks for new channels for growth, a la the iPhone.

The market was however alarmed at Apple’s recent performance. Its stock hit a 52-week low of $93.42 following its results. It is currently trading at $96.6 with a market cap is $535.61 billion. Its 52-week high was $134.54 in mid-July 2015.