Apple sales and profit slip as iPhone demand tumbles

Tumbling iPhone demand drove an uncharacteristic decline in Apple sales in the first quarter, trimming back its profit for the period.

Sales of its iPhone range slumped 15 per cent year on year, and although burgeoning revenue from services like digital media subscriptions – up 19 per cent to a new high of US$10.9 billion – and other products compensated, total sales were down 5 per cent to $84.3 billion.

Sales in China slumped 26.6 per cent during the period.

Net income fell by $100 million, from $20.065 billion in the December 2017 quarter to $19.965 billion in the latest quarter. While the company championed setting “an all-time earnings per share record” that was a consequence of a share buyback program reducing the share pool rather than an improved bottom line.

Commenting on the results, GlobalData Retail MD Neil Saunders said while Apple is still a money-making machine, the sales decline “symbolises a company that is starting to run out of steam”.

“In our view, this is something to be corrected, not least because Apple is a costly company to run and it relies on strong revenue growth to drive up the bottom line. As this quarter’s figures show, failure to achieve that results in profit erosion.”

Saunders said the slowdown in iPhone sales reflected Apple’s inability to come up with meaningful and valuable innovations that wow consumers.

“The latest iPhones might be works of art from an engineering perspective, but they are essentially incremental products that lack the excitement and newness of earlier models. With the higher price points of top-end models, consumers expect a lot more for their money. The blunt truth is, Apple’s latest line up of phones doesn’t do that much more than the generations that came before.”

He said the slowdown in China is a problem Apple shares with many other companies.

“The country is suffering from more sluggish consumer demand which has put the brakes on retail growth rates across many sectors. However, the issue for Apple is that this has coincided with a rise in competition from local phones and devices which has helped to eat into its own growth. In short, China is no longer the engine of growth for Apple that it once was and this makes Apple uncomfortably more reliant on mature markets to drive revenues. Some of those markets, like Europe, are also not delivering – thanks to very high price points and consumers that are hesitant to spend on big-ticket items.”

From must have to might buy

Saunders said Apple’s iPads and some of its Macs are good, quality items, however they are simply not impressing the market and Apple is losing its lustre in terms of producing compelling products.

“In our view, Apple has moved from a position of ‘must have this and must have it now’ to ‘might buy this at some point in the future’. Price increases may mitigate this but, ultimately, such a shift can only ever result in a softer sales performance.”

While services are performing well, Saunders said Apple must push much harder.

“Amazon is successfully creating an ecosystem of services through Prime. Apple needs to do something similar by building on its Apple Music subscription and its App Store offering. Movies and television content are also needed to propel sales.

“In our view, Apple should seriously consider a big acquisition such as Netflix. Content is a big growth area and is becoming increasingly linked to devices. Apple needs to play more heavily in this space both to generate new opportunities but also to defend its own device business.”

While Apple remains a solid and financially successful company, he said, a lack of serious and significant innovation means it runs the risk of diluting future earnings.

“Apple thrives off serving a mass market; at the moment its moves to provide more expensive items to fewer people will ultimately do further harm to the bottom line. The clear blue water that once existed between Apple and its rivals is much diminished. The company has time to reopen the gap, but to do so, it needs to pull something new and unique out of its hat sooner, rather than later.”

Cook’s positive spin

Apple CEO Tim Cook delivered a positive spin on the results: “While it was disappointing to miss our revenue guidance, we manage Apple for the long term, and this quarter’s results demonstrate that the underlying strength of our business runs deep and wide. Our active installed base of devices reached an all-time high of 1.4 billion in the first quarter, growing in each of our geographic segments. That’s a great testament to the satisfaction and loyalty of our customers, and it’s driving our services business to new records thanks to our large and fast-growing ecosystem.”

At the end of the quarter, Apple’s net cash balance was $130 billion.

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