Why Is Apple in Danger?
Apple Inc. announced the results for its first quarter of fiscal year 2016 (quarter ended December 2015) on 26th of January 2016. The company started the fiscal year with record quarterly revenue of $ 75.9 billion and record quarterly net income of $ 18.4 billion, or $ 3.28 per diluted share. The revenue was 1.74 % higher than $ 74.6 billion of the year-ago quarter while the EPS was 7.2 % up from $ 3.06 per diluted share reported for the year-ago quarter.
Analysts were already of the belief that Apple is going to deliver a drop in revenue as indicated by its revenue guidance for the first three months of this year. And it indeed proved to be the first revenue decline as measured on a year-over-year basis in the modern history of the company. But the results were poorer than expected. Apple's first quarter revenue of $ 75.9 billion missed analyst expectations as well as the company's own guidance.
CEO Tim Cook attributed the company’s miss majorly to "the turbulent world around us," which is making it more expensive for Apple to sell its products overseas. He said in a conference call, "We're seeing extreme conditions unlike anything we have ever experienced before." The strong USD has made all other rates of foreign exchange so unfavourable, that it caused Tim Cook put it on top of all his reasons. International sales accounted for 66 % of the quarter’s revenue. Hence, foreign currency fluctuations have a very meaningful impact on Apple’s results.
Major markets, including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the Eurozone, have been impacted by slowing economic growth, falling commodity prices and weakening currencies. For example, the Brazilian real is down more than 40 %, the Turkish lira declined 20 % and the Russian ruble is down more than 50 %. Due to the weakening currencies $ 100 of Apple's non-U.S. dollar revenue in Q4 of 2014 translated to only $ 85 last quarter. The currency impact has been very large indeed.
The company earns most of its revenue in the three economically most important regions of the world: US, Europe and China. Last quarter, it reported revenue of $ 29.3 billion in the Americas, $ 17.9 billion in Europe and $ 18.4 billion in Greater China. That meant a growth of -4 %, +4 % and + 14 % respectively compared to the same quarter of fiscal 2015. Among the other markets, Apple reported 12 % less in Japan ($ 4.8 billion) while 4 % more in Rest of Asia Pacific ($ 5.4 billion) than the year-ago quarter. In constant currency terms, the Q1 2016 revenue would have been $ 5 billion higher at $ 80.8 billion, reflecting an 8 % Y/Y increase.
Apple was not able to achieve any significant year-over-year unit sales growth in any of its major product categories during 2015's crucial holiday sales quarter. The number of iPhones sold was basically flat (slightly down) compared to the year ago quarter while the Mac unit sales declined 4 % year-on-year. The iPad unit sales plunged 25 % and the sales for Apple Watch are not known as the company doesn't break out those numbers.
Despite the revenue miss, there are positives to take from these results. Apart from the record net income, the company’s performance in China has been laudable. While many companies have witnessed diminishing numbers from their Chinese operations in the December quarter, Apple maintained incredible momentum for iPhone, Mac and the App Store, in particular. Despite the turbulent environment, the company achieved its best results ever in Greater China, with revenue up 14 % over last year and up 47 % sequentially. The sales iPhone was also the best ever in China and so was the App Store performance.
Apple also crossed a major milestone of one billion active devices for the first time. Because of this large installed base, the growth of its services business has also been rapid. The aggregate purchase value of services tied to Apple’s installed base during fiscal 2015 is more than $ 31 billion i.e. an increase of 23 % over fiscal 2014. And in the December quarter, the value reached $ 8.9 billion, which is a growth rate of 24 % year-over-year.
The iPhone sales were flat. And the company has given a Q2 guidance that iPhone sales will decline and also the y-o-y revenue. And with Samsung ready to launch a battalion of new and improved phones in the June quarter, the competition is going to be tougher.
Apple thrives on innovation and it’s been years since it “invented” the iPhone. Now the Watch doesn’t look like the best candidate for becoming the new sales spearhead if iPhone starts declining. Still, it’s early days to count out the iPhone. But I think Apple’s audience now need another breakthrough innovation rather than a new iPhone every September to go crazy about.
So, it is apt to have a bearish view on Apple once the company CEO himself seems unable to give a clear idea of the road forward.