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Apple’s third-quarter revenue and net income fell for the second consecutive quarter as the iPhone maker reported $42.36 billion in revenue, down 15 percent from $49.6 billion a year earlier, and $7.8 billion in net income, a drop from $10.7 billion.
Apple’s year-over-year declines in revenue and net income for two straight quarters contrast with the company’s prior string of 13 years of quarterly revenue reports without a decline, dating back to 2003. Bringing that streak to a halt, the company reported revenue of $50.6 billion in the second quarter ended in April, 13 percent lower than the $58 billion the company posted a year prior.
The company’s third-quarter revenue of $42.36 billion did, however, beat the $42.1 billion estimates of an average of 36 analysts surveyed by Thomson Reuters.
Third-quarter earnings per basic share came in at $1.43, down from $1.86 per share in 2015.
Hitting the company’s revenue and net income hard were a 15 percent drop in global iPhone sales to 40.4 million units in the quarter, down from 47.5 million in the third quarter of 2015. Sales of iPads dropped 9 percent to 9.95 million from 10.9 million a year ago, while Mac sales fell by 11 percent to 4.3 million from 4.8 one year ago.
Apple’s revenue from U.S. sales fell 11 percent in the quarter to $18 billion from $20.2 billion one year ago, while its revenue in China dropped 33 percent to $8.8 billion from $13.2 billion in the third quarter of 2015.
Tim Cook, Apple’s CEO, didn’t let the lower revenue and net income figures get in the way of his optimism.
“We are pleased to report third-quarter results that reflect stronger customer demand and business performance than we anticipated at the start of the quarter,” he said in a statement. “We had a very successful launch of iPhone SE and we’re thrilled by customers’ and developers’ response to software and services we previewed at [Apple’s Worldwide Developers Conference] in June.”
In two bright spots, Luca Maestri, Apple’s chief financial officer, said in a statement that the company’s services business grew by 19 percent year-over-year in the quarter and that its App Store revenue “was the highest ever, as our installed base continued to grow and transacting customers hit an all-time record.”
The decline in iPhone sales that began in the second quarter had its roots in the first quarter of the year, when Apple sold 74.7 million iPhones, which was essentially flat from the 74.5 million sold in the same quarter a year earlier. In the fiscal first quarter, Apple’s revenue was riding high at $75.9 billion, a new Apple record at the time. The company’s first-quarter net income was $18.4 billion, which set another quarterly record, up from $18 billion in the same period a year earlier. Earnings rose to $3.28 per diluted share, up from $3.06 in the same quarter in January 2015.
But in this year’s fiscal second quarter, iPhone sales fell 18 percent to 51.2 million units from 61.2 million in the same quarter in 2015. The second-quarter iPhone sales were also down sharply—by 32 percent—from the 74.78 million in the first quarter of 2016. In dollars, iPhone sales dropped to $32.9 billion in the second quarter, down 18 percent from $40.3 billion a year prior.
Analysts Weigh In on Apple’s Performance
Jack E. Gold, principal analyst at J. Gold Associates, told eWEEK that part of the problem for Apple is that “iPhones continue to slide based on maturing markets not updating as soon as in previous years and a ‘saturation effect’ of fewer new customers.”
That has a large impact on Apple since the company brings in about two-thirds or more of its revenues from iPhone sales, said Gold, so “declines are particularly troubling there.”
The company did have some good news from the 19 percent revenue increase from services, “but given the relatively low percentage of the total revenues, this hardly makes up for the slump in phone sales,” he added. The company’s “overall margins were hurt by more sales of lower cost units [iPhone SE], reflecting a general trend in the markets, and a trouble spot for Apple trying to be a premium supplier with high margins.”
Apple Q3 Revenue Down 15% as iPhone Sales Drop Again
Charles King, principal analyst at Pund-IT, said the good news for Apple in its earnings report was that the company beat analyst’s estimates, “meaning things aren’t as glum as they might have been.”
Yet, at the same time, “weak iPhone sales contributed to overall revenues being substantially lower than they were a year ago,” King said. “That’s especially disturbing, given the company’s dependence on iPhone revenues and the general slowing of smartphone markets. It also underscores continuing problems at Apple unless the company can develop a wider variety of successful products.”
Another analyst, Rob Enderle of Enderle Group, told eWEEK that while the company did beat analyst’s expectations, “that is more about managing expectations than it is about actually executing.”
Most troubling for Apple is that smartphone sales for other vendors such as Huawei and Samsung “appear to be strongly up by 25 percent to 30 percent, which suggests these companies have started to cannibalize Apple users or, at least, there is revenue to be had but Apple is no longer getting their share of it.”
Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, said that a big problem for Apple in the third-quarter was that “China was a major letdown” in sales for the company. “I’m anxious to get more details as to what specifically drove the declines. Samsung and Huawei are much more competitive now versus a year ago and the Chinese economy is not doing well at all, all potentially contributing to the decline. Apple is clearly investing in India to diversify their emerging region performance.”
The tough third-quarter performance “puts an immense amount of pressure on the next-generation iPhone, iOS 10 and watchOS 3,” said Moorhead. “Samsung and Huawei are absolutely getting more competitive and are narrowing the hardware gap and in some areas eclipsing it through further segmentation and better marketing,” which Apple can fight due to its experience and brand.
“I believe if watchOS 3 truly delivers an experience, as it showed on stage at [the Worldwide Developers Conference], this will bring in a second wave of new buyers for Watch that could be 10 times the initial wave of early adopters,” he said. “This could be really big for Apple and I believe is being underestimated.”