Apple’s glorious past casts pall on pedestrian present

epa05541887 Customers stand in front of an Apple store at the start of iPhone 7 sales in Hamburg, Germany, 16 September 2016.  EPA/BODE MARKS


Don’t get lulled into complacency. Everything is not fine in the Apple Inc. empire. On the heels of Apple’s first annual revenue decline in 15 years, the company on Tuesday posted a revenue gain of 3.3 percent in its fiscal first quarter ended Dec. 31. That was better than Wall Street’s recalibrated expectations, and Apple’s sizable profit margins expanded further. Shares rose in after-hours trading.
Still, part of Apple’s thrilling success in the last decade was its improbable rate of sales growth. Now, the growth is nowhere near Apple’s past performance.
Until last year, Apple’s annual sales had climbed by at least 7 percent — and often much more — for 14 consecutive years. The 3 percent sales growth in the December quarter wasn’t much better than that of an even larger and utterly conventional company — Wal-Mart Stores Inc., which analysts expect to report a 1.2 percent revenue gain for its holiday quarter. Do you think Steve Jobs would have wanted his company to be mentioned in the same breath as Wal-Mart?
One sign of Apple’s new reality is how little lift it got from a brand new iPhone. During the previous two holiday quarters after Apple released a radically new iPhone — in 2014 and 2012 — unit sales of the iPhone jumped 46 percent and 29 percent, respectively, from the same period a year earlier. The iPhone 7 models were billed as a significant redesign, but unit sales rose only 4.7 percent from a year earlier.
Apple might need another three to six months to show whether expectations are reasonable for a solid pickup in iPhone sales and a return to less Wal-Mart-ish rates of sales growth. The high end of Apple’s revenue guidance for the March quarter would mean a 6 percent revenue growth rate for the quarter. Apple tends to be conservative with its forecasts.
It’s good that Apple’s revenue should perk up compared with the awful fiscal 2016 declines. It’s not great, though, that the investment world is already looking ahead to how much the 10th anniversary iPhone model, expected later this year, might spur people to replace their old phones.
Bernstein Research estimates Apple’s iPhone revenue will jump 14 percent in fiscal 2018. On average, stock analysts expect Apple’s total fiscal 2018 revenue to increase by 7 percent, according to Bloomberg data. That is a lot of hope riding on a new iPhone that the public hasn’t seen yet.
For now, it’s best to get accustomed to a more boring stage of Apple’s financial life. The iPhone generates about two-thirds of Apple’s annual revenue, and it will be tough for the company to match earlier years’ pace of sales growth.
Other promising businesses, including internet products like apps and Apple Music subscriptions, are struggling to fill an iPhone-sized revenue hole. Apple’s internet services generated $24 billion in revenue in fiscal 2016; Apple’s iPhone revenue fell by more than $18 billion for the year.
Apple has experienced other slow patches before, most recently in 2013 and 2014 when it looked as if Apple’s incredible growth engine had run out of steam. It turned out that was merely a temporary lull before Apple re-ignited sales growth with the iPhone 6.
But the winds are not at Apple’s back as they were a few years ago. Sales of new smartphones globally have slowed to a crawl, and people are holding onto smartphones for longer as recent technology improvements have been nice rather than must-have.
Apple can no longer count on iPhone sales growth in China, where the company has stiff local competition. Apple’s revenue from the region comprising China, Hong Kong and Taiwan fell 12 percent in the three months ended in December. That was not as bad as the China declines in prior quarters, but it’s still not good. The next smartphone growth markets such as India are not ideally suited to Apple.
It may not be fair, but Apple is treated differently from most other public companies. Its performance is not measured against competitors, because no company is in the same league on profits, global scale and ability to charge higher prices for products while rivals are cutting theirs. No, Apple tends to be measured against its own remarkable track record. On that score, the current edition of Apple is found wanting.
— Bloomberg

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews.

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