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Are Apple’s Best Days Over?

Posted on Thursday, Apr 28th 2016

The second quarter of the year does not appear to be very bright for several tech giants. After a disappointing performance reported by Alphabet and Microsoft last week, Apple (Nasdaq: AAPL) does not seem to be faring any better. During the quarter, Apple announced its first ever revenue drop since 2003.

Apple’s Financials

Apple’s second quarter revenues fell 13% over the year to $50.6 billion, falling significantly short of the Street’s forecast of $52.02 billion. EPS of $1.90 was also short of the market’s projected earnings of $2 per share.

The disappointing revenues were driven by weak iPhone sales. During the quarter, iPhone sales fell 16% over the year to 51.2 million. This was the first time ever that iPhone sales ever reported a decline since they were launched back in 2007.

By segment, Apple’s iPhone revenues fell 18% over the year to $32.86 billion. iPad sales fell 19% over the year to $4.4 billion and Mac sales fell 9% to $5.1 billion. Services revenues grew 20% to $6 billion and revenues from other products, which include sales from Apple Watch and AppleTV, grew 30% to $2.2 billion.

By region, Apple’s revenues from the Americas fell 10% over the year $19.1 billion and sales from Europe fell 5% to $11.5 billion. But worrying reports came in from China as well where revenues fell 26% to $12.5 billion. Japan was the only market that reported growth as revenues improved 24% to $4.3 billion. Revenues from the Rest of Asia Pacific fell 25% to $3.2 billion.

For the third quarter of the year, Apple forecast revenues of $41 billion-$43 billion with a gross profit of 37.5%-38%. The market was looking for revenues of $47.4 billion.

iPhone’s Future

Disappointing sales for iPhones were partly attributed to strong comparisons a year ago. iPhone 6 was a sought after phone when it was released last year and the iPhone’s next upgrade is expected only later this year. But there were other worrying factors as well. Newer iPhone models aren’t bringing any massive innovation or new technology to the market. They are mostly improving performance of existing features. Add to that mature markets, weaker macro-economic conditions and a strong dollar, the conditions aren’t favorable to drive sales of the expensive iPhone in newer emerging markets.

But Apple remains hopeful. Last month, they released iPhone SE, a four inch smart phone targeted to compete with the smaller Android phones in the market. With prices starting at $399, iPhone SE has the lowest-ever starting price point for an iPhone. The phone features the A9 chip used in iPhone 6s, a 12 megapixel camera that captures 4K videos and touch ID based security. Apple hopes the phone will keep users interested in the iPhone.

Apple is also counting on infrastructure improvements in emerging markets. Earlier this year, the LTE rollout began in India and Apple is optimistic that the advancement will help users better realize the potential of the iPhone.

Analysts were particularly concerned about declining sales in China where sales have fallen 26% over the year. According to Apple, the decline was due to the weakening of Hong Kong Dollar over the past year. Mainland China revenues have also fallen, but at a comparatively lower rate of 11% over the year and 7% on a constant currency basis. During the quarter, Apple opened seven stores in the region and is looking to open another five to end the current quarter with 40 stores. As LTE adoption in China rises, iPhone sales should improve.

Within developed markets, Apple is also attracting buyers by extending its Upgrade program. Last year, Apple unveiled the Upgrade program that allowed consumers with acceptable credit checks to purchase an iPhone through a monthly installment program with the option of upgrading it when a new phone was released. While last year, the option was available only through carriers, now the option is available on Apple’s own website as well. Consumers can now choose to purchase the phone directly through Apple on monthly installments and continue to operate with a carrier of their choice. Consumers will now have the ability to upgrade their phone within a year, whereas through a carrier, they would have been tied to a two year contract.

Overall Apple may be fighting the slump through multiple channels, but Apple really needs to kick off its innovation engine. As RBC Capital Markets’ Amit Daryanani said, “As you get to the 7, all the stuff you’ve seen so far, all the discussions, again indicate it’s a bit more of an evolutionary product rather than revolutionary”

Apple needs more than that. And Apple is trying to do that with other products such as the Apple Watch. The Watch celebrates its first birthday this week and despite its failings, the product has delivered well for Apple. Apple does not divulge sales of the device, but analysts estimate that Apple has sold as many as 12 million Watches in a year, translating to $6 billion in revenues. According to IDC, Apple Watch accounted for 61% of the global smartwatch shipments last year. Despite the big numbers, the users aren’t particularly impressed with the Watch. Slower processing and response times coupled with frequent battery charging requirements don’t make it the favorite wearable available. But Apple Watch is the only device completely compatible with the iPhone – making it a big selling feature. This was the first version of a new product by Apple. Hopefully, like its other products, this one will evolve into something better as well. IDC estimates the wearable technology market to grow 28% annually over the next five years driven by a 43% annual growth in smartwatches sales.

Analysts believe that Apple is also exploring other opportunities in the form of a Virtual Reality segment. But Apple remains secretive of any developments on the front. Recent hires to the team and earlier acquisitions suggest that something may be under development.

Their push into the enterprise segment through the tie-up with IBM is faring well. IBM now has engagements for more than 200 deployments of native iOS apps for enterprise customers to drive mobile transformation. Apple is seeing a higher adoption of native iOS apps to drive efficiency within the workplace and to deliver better customer satisfaction. For instance, retail bankers are leveraging the iOS apps on iPads to deliver improved customer experience by reducing queue times and improving the customer onboarding process.

Apple’s stock is trading at $97.82 with a market capitalization of $542.37 billion. It touched a high of $132.97 in July last year and had fallen to a 52-week low of $92.00 in August. The stock fell 8% after result announcement, eroding nearly $40 billion in market capitalization.

 

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