Apple sales plunge in China, but global profit rises

Apple sales and profit grew globally in the second quarter – despite iPhone sales being down $7 billion on the same quarter two years ago.

Total revenue grew by 4.5 per cent to $52.9 billion and net income by 4.9 per cent, leaving Apple sitting on cash reserves of a staggering $250 billion. International sales accounted for 65 per cent of revenue.

But in greater China, sales of $10.7 billion were down 34 per cent on the first quarter and 14 per cent year-on-year. Sales in Japan were $4.49 billion, up 4 per cent year-on-year, but down 22 per cent quarter-on-quarter. Global sales fell 22 per cent against the first quarter.

Neil Saunders, MD, of GlobalData Retail, cautions that while the quarterly results look reasonable, they are less impressive set against a very weak prior year performance.

“Over the same period in 2016, total revenue plunged by 12.8 per cent, and net income slumped by almost 23 per cent. In essence, this means that Apple is still a long way behind where it was two years ago – $5.1 billion behind in revenue and $2.5 billion behind in net income, to be precise.”

Saunders says Apple has only partially emerged from the slump that hit it over the last fiscal year.

“In our view, the company’s mature product lineup and an absence of any significant new devices mean it has struggled to regain all of the lost ground. Some devices, like iPads, are now firmly in decline and cannot be relied upon to drive future growth. Indeed, iPads were the only category this quarter to post a year-on-year revenue decline; while takings compared to two years ago are down by just over $1.5 billion.”

But while Apple has an absence of big-hitting devices to drive new sales, it does not mean that all parts of its business are in stasis. Sales of ‘other products’ which includes items like AirPods and Apple Watch posted a 31 per cent increase in revenue over the prior year.

“The service side of the business, which includes revenue from digital content and subscriptions, is a much more significant contributor – which is why the 18 per cent uplift in revenue is particularly pleasing. That service revenue is now nearly double that of iPad revenue – two years ago it was almost $500 million smaller – highlights that this is a genuine growth engine for the business,” says Saunders.

“We are particularly encouraged by the fact that service revenue is nowhere near as cyclical as product revenue. Moreover, there is a great deal more scope to grow this side of the business over the years ahead. While we do not see revenues from the division eclipsing product sales anytime soon, we do believe that it could become Apple’s largest sales contributor over the next 10 or so years.”

Maintaining popularity

Saunders believes the future success of services is, in large part, tied to the continued popularity of Apple products.

“To guarantee this popularity continues, we believe Apple needs to do two things. Firstly, the company needs to ensure that the next iPhone represents a significant step forward rather than an incremental upgrade. Among many consumers, there is a sense that Apple is falling behind rivals which, at worst, is encouraging some brand switching, and, at best, is making consumers delay upgrading. Apple needs to get back on the front foot if it is to grow its market share in phones.

“Secondly, Apple needs to look beyond its current lineup of devices. Phones will remain the backbone of the business for the foreseeable future; however, they are now an accepted part of the landscape and are no longer particularly new and innovative. In more cutting edge areas, like personal home assistants, Apple has seemingly little to offer and has allowed players like Google and Amazon to steal a march. Not only does this represent a lost revenue opportunity, but it also poses a danger of consumers becoming more embedded with rival ecosystems which could ultimately have a knock-on effect on service revenues.”

Saunders says while Apple should not blindly follow in the footsteps of its competitors, it needs to think much more widely about the technology needs of today’s consumers and come up with innovative solutions and devices to fulfill those demands.

“Ultimately, Apple remains in a very good position. The company’s uber-strong balance sheet, its technological and design expertise, and its extensive user base give it advantages that other firms can only dream of.

“However, it needs to start leveraging these much more effectively if it is to remain in pole position over the years ahead.”

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