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In Q2 2016, Apple Sees First Revenue Decline in 13 Years

Reporting on its Q2 2016 financial results, Apple has announced net profits of $10.5 billion ($1.90 per diluted share) on revenues of $50.6 billion, disappointing financial observers who had expected gross revenues of $52 billion. The company’s revenues were down 12.8 percent compared to the year-ago quarter (see “Apple Makes Even More Money in Q2 2015,” 27 April 2015). Although Apple had predicted a revenue decline, this quarter represents the first in thirteen years.


Keep in mind, however, that the financial quarter ended 26 March 2016, so Apple’s announced results don’t reflect sales of the iPhone SE, which CEO Tim Cook claimed has had a “terrific customer response,” and the 9.7-inch iPad Pro, both released on 31 March 2016.

All three of Apple’s major product lines experienced a year-over-year decline. iPhone sales dropped 16 percent, and iPhone revenue dropped 18 percent. Although Apple sold 10 million fewer iPhones this quarter than it did a year ago, the company nonetheless sold 51.2 million iPhones in the quarter. Tim Cook expressed optimism about the iPhone’s future, noting the very large number of Android switchers, as well as what’s “in the product pipeline.”

iPad sales and revenue both dropped 19 percent year over year. Apple sold 10.3 million iPads as compared to 12.6 million a year ago. It appears that the 12.9-inch iPad Pro and iPad-specific features of iOS 9 have done little, if anything, to reverse the iPad’s decline. Apple expects to see a better June quarter for iPad revenues this year than in the previous two years.

Mac sales were also down by 12 percent, and Mac revenue was down by 9 percent, which is a bit surprising given Apple’s recent resistance to overall declines in the PC market. Overall, Apple sold over 4 million Macs in Q2 2016, compared to 4.6 million in Q2 2015. Apple CFO Luca Maestri, however, said that Mac sales increased significantly in a number of foreign markets, and that, despite the lower unit sales, he believes Macs gained market share last quarter.

The Services and Other Products categories remain bright spots in Apple’s lineup. Service revenue increased by 20 percent year-over-year, while Other Products revenue rose by 30 percent; Maestri said that the Apple Watch led the increase in the Other Products category. Combined, these two income categories bring in about $8 billion of revenue. In fact, the Services category is now larger than either the Mac ($5.1 billion) or iPad ($4.4 billion) revenue categories, having brought in about $6 billion in the quarter. Maestri remarked that the music business had reached “an inflection point” after several quarters of revenue declines, thanks to Apple Music, which now boasts 13 million subscribers.

Apple is having a tough time abroad as well, with year-over-year revenue declines of 26 percent in Greater China, 24 percent in Japan, 25 percent in the rest of Asia Pacific, and 5 percent in Europe. Luca Maestri pointed to the strong U.S. dollar as a cause of Apple’s lower foreign revenues, which may play a contributing role, even if it can’t completely explain the drops. One optimistic note: iPhone sales in India increased by 60 percent, and, as Cook pointed out during the analyst call, India is “the third largest smartphone market in the world”.

Despite Apple’s having had what Cook dubbed in his opening remarks as a “challenging quarter,” Apple is expanding its capital return program by $50 billion. Apple plans to spend a total of $250 billion on capital returns, up from $200 billion, by the end of March 2018. Apple’s board has authorized an increase in the share repurchase program from $140 billion to $175 billion, an increase of 10 percent to the quarterly dividend, and a dividend of $0.57 per share, payable on 12 May 2016, to shareholders of record at the close of business on 9 May 2016. Despite challenging times for Apple, the company is offering deep incentives for shareholders to stick around.

So where is Apple now? Though the news isn’t good, remember that this is merely a drop in revenues, not a loss of any sort. The company won’t be hoisting a “Going Out of Business” flag: Apple has $232.9 billion in cash and securities, and it’s still making money hand-over-fist; it’s just not growing at previous rates. Nor is Apple alone in disappointing analysts — Alphabet, Microsoft, and Twitter all missed their estimates recently.

Apple certainly faces challenges, such as improving services, making the Apple Watch and Apple TV more attractive, and convincing customers to upgrade their iPhones, iPads, and Macs, but there’s clearly something bigger at work here. It’s possible that we’re looking at the start of a slowdown, of either just the tech sector or of the entire global economy, but whether that slowdown is merely short-term economic bad weather or if it represents significant economic climate change remains to be seen.

 

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Comments about In Q2 2016, Apple Sees First Revenue Decline in 13 Years
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David Morrison  An apple icon for a TidBITS Contributor 2016-04-27 03:23
I wonder whether the decline in Mac sales is a reflection of Apple's direction with OS X for the last few years. With ever-declining software quality, and the general dumbing down of everything, are people hanging on to their old Macs as long as possible? Some of us actually need functions that have been abandoned with no way to reactivate them.

One could also ask whether some of the new features are not that attractive to a large number of people? I know Steve Jobs's plan was to give people things they did not know they wanted. Perhaps current management is not so good at that as Steve was.
David, I think you raise a few excellent points.

I too worry that part of Apple's problem is that they've forgotten what got them so far: quality, attention to detail, usability/usefulness instead of feature bloat, and focus.
David you make excellent points. Actually since Steve Jobs untimely demise in 2011, I state that Tim Cook (personally a very nice guy) is not the right guy to lead this company. I knowing him since 2001 and give him many points to manage Steve Jobs with his thoroughness he help to create. Tim Cook loses the facts of detail. It begun to show with his first lapsing presentation.
For someone who cashes in Millions Dollars of salary needs also to be an example of leadership and not just words. What he inherited is to big for him to comprehend. What was Apple in 2011 truly represented is beyond his fully comprehension. Ego seems to be a big factor but not a perception of the real tasks. Quality lapsed and is in disarray. Tim Cook and Phil Schiller are so much full of themselves and do not see the future, trying to please Wall Street was the worst they ever have done and therewith-lost quality and perceptions of reality. Very sad, for the first time after over 30 years a loyal Apple user and Stockholder, I am looking for alternatives. If there come not soon drastically changes back to mature marks of quality Apple will keep declining and be sometimes a subdivision of Samsung.
B. Jefferson Le Blanc  2016-05-03 04:23
I hold only the faintest of hopes that this decline will stimulate some serious introspection by top management at Apple. Unfortunately, they are more likely to blame their problems on external economic factors rather than look inward to see if they may be doing some things less well than they should be. There is plenty of evidence that they've been slacking off, taking success for granted. But they've shown no inclination to acknowledge their faults, let alone do anything constructive about them. Thus is success more dangerous than failure. Failure forces one to examine one's weaknesses as well as one's strengths. Success tends to blind people to the downside—until it's too late. Sadly, Apple is no longer capable of thinking different. It's too soon to write Apple's obituary, but it's not too soon to recognize their decline. Quality and usability are no longer core values at Apple. Sooner or later this will tell in Apple's bottom line.
Shameer Mulji  2016-05-04 03:07
Apple's MO has always been to make technology more personal. If you want to know where the future of Apple lies, watch this video

http://www.apple.com/ca/ipad-pro/#watch-the-film

It makes it pretty clear where Apple's future lies, and it isn't OSX, at least not as you know it.
I also have to say I'm not entirely sure it's a bad thing Apple is starting to take a hit. In the past I think they've done some of their best work when they were under pressure. Maybe they were becoming too comfortable raking in massive margins and living off a reputation that had been built on hard work many years ago.

How about going back to fewer products/features/price points and instead focusing on delivering a high-quality reliable solution that caters to the bulk of consumers. Remember that things like the Mac or OS X, although maybe not quite as sexy as the iCar or the Apple Watch, are the backbone of the faithful Apple user base.

The iPhone SE seems to point in the right direction. Maybe we'll see more of that once Apple realizes they don't have a God-given right to printing money. Maybe they need to be reminded happy customers are what they should be after, not vulgar profit margins intended only to cater to never-satisifed stock traders and self-described "analysts".
Michael E. Cohen  An apple icon for a TidBITS Staffer 2016-04-27 12:14
Perhaps. But, as the results posted by Alphabet, Microsoft, Intel, and IBM suggest, Apple is not alone in having had a mediocre quarter financially, so factors beyond those that you cite may well be at play in the Apple results.
Michael, I'm sure you're right. My main point was that I believe Apple facing some headwind and being under pressure (even if that is entirely based on external factors) might in the end turn out to be a good thing.