January 26, 2016 at 9:48 PM
Apple said Tuesday sales of its iPhones increased at the slowest pace since the smartphone was introduced in 2007, a sign that the period of wild growth of the company's flagship device may be coming to an end.
The consumer electronics giant, whose stock is among the most widely held in America, reported it had sold 74.8 million iPhones in the last three months of last year. That's just above the 74.5 million it sold during the same period in 2014 and less than analyst estimates of between 75 million and 77 million units sold.
Any weakness in its iPhone business is bad news for Apple, which relies on the smartphone for at least 60 percent of its revenue. Overall, Apple reported $75.9 billion in revenue at the end of last year, less than the $76.7 billion that analysts had expected. But it broke records from a profit standpoint, reporting $18.4 billion in net income during the quarter.
The firm also forecast some rough waters ahead. During the current quarter which ends March 31, Apple said it would see between $50 billion to $53 billion in revenue. That would be a significant decline from the same period last year when Apple booked $58 billion in sales.
Hints of softer sales have dogged Apple for months, as several companies in the tech firm's massive supply chain have warned that the firm is ordering fewer parts for iPhones than ever.
Those reports have weighed on Apple's stock for months, which has fallen about 25 percent since July and was trading around $100 per share in regular trading on Tuesday. In after-hours trading, the stock dropped more than 2.5 percent.
The earnings were a marked departure for Apple, which has nearly always managed defy predictions that its remarkable growth was at an end. In quarter after quarter, the company has almost always beat back forecasts of gloom. Along the way, Apple's stock reached heights never before seen by an American corporation.
Now that there finally may be an end to that period of hyper growth, the pressure on the firm to create another groundbreaking product will be greater. Indeed, its other innovation, the iPad, saw a decrease in sales in the most recent quarter. Just over 16 million iPads were sold at the end of last year, down by 25 percent over the same period in 2014 and less than the 18 million units analysts had expected.
Its newest device, the Apple Watch, has yet to go mainstream. The company does not breakout sales figures for its smartwatches, but analysts have estimated that 5 million of them were sold over the holiday quarter.
The results appeared to confirm analysts concerns about a slowdown in growth at Apple. But the results could have been worse, some said.
“Overall given the ‘white knuckles fears’,” said Daniel Ives, senior technology analyst at FBR Capital Markets. “we would characterize the overall headline performance as better than feared.”
Apple remained upbeat about the earnings, focusing not only on the hardware sales but also on the strength of its software and services businesses. "The growth of our services business accelerated during the quarter to produce record results, and our installed base recently crossed a major milestone of one billion active devices," said chief executive Tim Cook in a statement.
Slower sales in China have been a particular cause for concern. According to Apple's latest earnings numbers, Chinese sales comprise 24 percent of the company's revenue, making it Apple's second-largest market.
On a conference call with investors, Cook said that the company "began to see some signs of economic softness in greater China earlier this month, most notably in Hong Kong." The company's profits were also hit because the dollar is so strong while other currencies have weakened, Cook said.
But he added, "Beyond the short-term volatility, we remain very confident about the long-term potential of the China market and the large opportunities ahead of us, and we are maintaining our investment plans. Despite the economic challenges all over the world, Apple remains incredibly strong."
Apple's slowing growth, in part, reflects the troubles of many other smartphone companies, said Ramon Llamas, a mobile analyst at IDC. As more people across the world buy smartphones, the market for new buyers inevitably shrinks.
But, he said, Apple is also facing fierce competition in the all-important Chinese market from local firms that are offering low-cost phones.
In fact, the rise of cheaper phones has driven the average price of a smartphone overall way down, according to the Consumer Technology Association. That price is forecast to dip below $300 for the first time in 2016, down seven percent from the previous year to $263.
"The classic innovator's dilemma is playing out in front of us," said Shawn Dubravac, an economist with the Consumer Technology Association. "Manufacturers who were garnering attention at the lower end continue to move up."
These devices can't match the performance of the iPhone, but are good enough for most consumers at a much lower price.
"Today's low-cost Android phones aren't like last year's," Llamas said. "The inexpensive ones are mid-range Android phones masquerading with low-end prices. Does Apple have a competitive answer to that? Not really."
To be clear, Llamas said, it's not as if Apple is withering in China. "Saying that Apple is falling behind or bowing out is an incredible misconception," he said, noting that Apple's consistently shown year-over-year sales growth in China.
Cook, on the conference call, sought to ease investor anxieties. Customers, he said, report being very satisfied with Apple products. And because they purchase apps, content and other services on their devices, they tend to buy tablets, laptops and other gadgets from the company or replace the one device that they own.
In fact, Apple reported that revenue from services such as the App Store, iTunes, Apple Music and Apple Pay was up 26 percent, to $6 billion in the quarter. Other products – a category that includes the Apple TV and the Apple Watch – generated $4.3 billion in revenue, up 62 percent.
"Our investors have been asking for a while about the recurring nature of our business," Cook said. "Especially during a period of economic uncertainty, we believe it is important to appreciate that a significant portion of Apple's revenue recurs over time. First and foremost, our customer satisfaction and retention rates are second to none and provide us with a long-lasting foundation.”