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Apple’s string of 13 years of quarterly revenue reports without a decline, dating back to 2003, came to an end April 26 as the company reported second-quarter 2016 revenue of $50.6 billion, 13 percent lower than the $58 billion the company posted one year ago.
Net income was also down in Q2 to $10.5 billion from $13.6 billion a year ago as sales of the company’s flagship iPhone smartphones leveled off ending Apple’s enviable 13-year record of uninterrupted sales growth.
Apple also missed analysts’ revenue estimates as it reported $50.6 billion in sales, below the $51.97 billion average estimate of 34 financial analysts who were surveyed by Thomson Reuters in advance of the earnings report. The company also reported earnings per diluted share of $1.90, which is down from $2.33 per share one year ago. The $1.90 EPS was also below the average estimate of $2.16 EPS reported by analysts.
One year ago, Apple’s global revenue continued its then-usual climb in Q2 2015, reaching $58 billion, a 27 percent jump from $45.6 billion in the same period in 2014, while its net profit rose 33 percent to $13.6 billion from $10.2 billion in Q2 2014. Contributing to that success were the sales of 61.2 million iPhones globally, as well as 12.6 million iPads and 4.6 million Mac computers along with about $5 billion in sales from the iTunes Store, the App Store and other Apple services.
In January, the company reported Q1 2016 revenue of $75.9 billion, which was a new Apple record, but its sales of 74.7 million iPhones were flat from the 74.5 million that were sold in the same quarter a year earlier. The company’s Q1 net income was $18.4 billion, which set another quarterly record, up from $18 billion in January of 2015. Earnings rose to $3.28 per diluted share, up from $3.06 in the same quarter in January 2015.
But that was when it appeared Apple’s iPhone sales would never stop growing.
In Q2 of 2016, Apple reported sales of 51.2 million iPhones, which is down 18 percent from the 61.2 million iPhones sold in the same quarter one year ago. The Q2 2016 iPhone sales fell even more precipitously—by 32 percent—from the 74.78 million that were sold in the first quarter of 2016. Revenue from iPhone sales fell to $32.9 billion in Q2, down 18 percent from $40.3 billion one year ago.
Apple’s iPad sales were also down in Q2 to 10.3 million devices, a drop from the 12.6 million units that were sold one year ago. Mac sales were also down to 4 million, from 4.6 million one year ago.
However, Apple executives maintained a stoic public face despite the disappointing numbers.
“Our team executed extremely well in the face of strong macroeconomic headwinds,” Tim Cook, the CEO of the company, said in a statement. “We are very happy with the continued strong growth in revenue from Services, thanks to the incredible strength of the Apple ecosystem and our growing base of over one billion active devices.”
Several IT analysts told eWEEK that the disappointing Apple earnings report was a shocker on several fronts.
“This is not going to be pretty,” Rob Enderle, principal analyst at Enderle Group, wrote in an email reply to an inquiry. “This is the first quarterly sales drop since 2003 and it will be difficult for folks not to draw a line suggesting is the beginning of a trend. But we don’t get a trend from one data point,” he added.
“However, we’ve known for some time that Apple’s move back to dependency on one product was risky and that this one product, the iPhone, is the one they have the least control over due to both carriers and regulations that surround them,” wrote Enderle.
Apple Q2 Revenue Falls 13% Marking First Sales Decline Since 2003
“They’ve done a near heroic job trying to adjust to the loss of subsidies and increased viable lower cost competitors, but their inability to either extend the iPad’s run or create a replacement hit with the Apple Watch caught up with them this quarter.”
Chris Antlitz, a telecom analyst at Technology Business Research, Inc., agreed. “Apple’s venerable business has stalled and entered decline,” he told eWEEK. “The iPhone business (the underlying driver of the company’s success in past years) has tapped out.”
What the company is now trying to do, he argues, is to manage “its highly profitable stable of products and services and enticing shareholders to stick around with enhanced shareholder returns in the way of more share buybacks and higher dividends.”
That puts Apple in an envious financial position, wrote Antlitz, “but its biggest challenge is how to add multi-billion dollar businesses to its already huge franchise to continue revenue and earnings growth. The answer is it won’t be easy and the pressure is on more than ever to get it right in TV, connected car, and other new growth initiatives.”
Whatever else Apple does, he wrote, the company still has an iPhone problem. “Everyone in the world who likes and can afford an iPhone has an iPhone and Apple is also competing against the secondary market for refurbished products. These are both headwinds that will make it challenging for the company to continue to grow its iPhone business going forward.”
Charles King, principal analyst at Pund-IT, said Apple’s lower-than-expected Q2 results “likely disappointed many,” but the company did offset some of its iPhone sales drops with about $1 billion higher revenue for services compared to a year ago.
“Looking ahead, Tim Cook and other Apple executives need to clarify their vision for the company and how they will cope with saturated smartphone markets and faltering iPad sales,” wrote King.
“The Apple Watch isn’t going to take up the slack, and it seems unlikely that sales of existing products will return to their historical form. Add in projected lower margins for Q3, partly due to focusing on lower cost products like the iPhone SE and the pressure on Cook and company will likely continue into the second half of the year.”
However, this is still Apple, which has a long history of being a sales juggernaut, wrote King. “These issues aside, Apple remains a massively successful and profitable enterprise which is likely why investors’ reactions in after-hours trading have reflected muted disappointment rather than a scramble for the exits.”
Avi Greengart, an analyst with Current Analysis, shared this view. The company “still sold over 50 million iPhones this quarter and made $10 billion dollars. That’s Apple’s version of a really bad quarter,” he wrote.
“Apple has built a rich, sticky ecosystem around the iPhone, which bodes well for the future—whether [that means] more services, more iPhones, iPads, Apple Watches, Apple TVs or future products,” wrote Greengart. “Apple clearly believes in its future—and is hoping to blunt the impact of fairly negative quarterly numbers” through stock buybacks.
As part of its Q2 earnings report, Apple announced that it will buy back $175 billion of Apple stock, up from $140 billion in buybacks it announced last year. In addition, its board approved a 10 percent increase in Apple’s quarterly dividend and has declared a dividend of $.57 per share, payable on May 12.
The company provided guidance for its upcoming fiscal 2016 third quarter, estimating revenue between $41 billion and $43 billion and a gross margin between 37.5 percent and 38 percent.