A Blog by Jonathan Low


Apr 26, 2016

Why Apple Is About To Report Its Worst Earnings In Over A Decade

The fact that Apple will report its worst earnings in 13 years may be shocking to some, but not to anyone who has followed the vagaries of tech behemoths considered impregnable to bad news - until they weren't.

The more interesting question is what, if anything, the company plans to do about it.

Aside from the mathematical probability dictated by the laws of big numbers and reversion to the mean (eg, whatever goes up must come down), the company has known for some time that smartphone market saturation and premium pricing were limiting its upside.

The strategic challenge is redefining that market in ways that do not adulterate the brand, catastrophically squeeze margins and encourage smaller, more nimble competitors to jump in. In this regard, it is almost certainly not a coincidence that on the eve of this earnings announcement, the Chinese government has chosen to shut down Apple's book and movie content services. The official reason is irrelevant: the Chinese can always invent a justification - and who's going to contest it: US courts, the Seventh Fleet?

The point is to pressure Apple to reveal source code to China and to provide more time for Chinese phone manufacturers to ramp up production while improving quality enough to offer a serious, low cost threat to the iphone. Welcome to global competition. It is not for the faint of heart. JL

David Goldman and colleagues report in CNN/Money:

More than two-thirds of Apple's revenue is made up of iPhone sales. Where the iPhone goes, so goes Apple -- and last quarter is expected to have been a miserable one. The last time Apple's sales fell year over year was the first quarter of 2003. At that time, the PowerMac was still the company's bestseller.
Apple is expected to say (this afternoon) that its sales and profit both fell last quarter -- a rarity for a company that has been growing at a rapid pace, even as it has become the largest technology company on the planet.
The last time Apple's sales fell year over year was the first quarter of 2003. At that time, the PowerMac was still the company's bestseller. Apple had sold a grand total of 611,000 iPods to that point. And Apple hadn't yet launched the iTunes Music Store.
But as rare an event as an Apple sales decline is, Wall Street analysts are expecting an even rarer occurrence last quarter -- a double-digit sales loss. Apple hasn't suffered that kind of ignominious fate since the fall of 2001. At that point, Windows 98 was the dominant computer operating system, and no one knew what an iPod was, because it hadn't been introduced yet.
Times have certainly changed. Now, more than two-thirds of Apple's revenue is made up of iPhone sales. So where the iPhone goes, so goes Apple -- and last quarter is expected to have been a miserable one for Apple's signature gadget.
Tim Cook predicted in January that iPhone sales would fall for the first time in history. Cook chalked it up to a really great quarter a year earlier, leading to a difficult comparison, on top of a "dramatically different" economic environment now versus 2015.
But ever-sinking iPad sales and flat-lining Mac demand isn't helping Apple's case either.
Apple (AAPL, Tech30) analysts have their collective fingers crossed that the iPhone 7 can reboot the Apple sales growth machine. in the meantime, the next few quarters are going to be stinkers.
First quarter of 2015: 61.2 million
First quarter of 2016 forecast: 50.4 million, down 18%

Barring a miracle, iPhone sales will fall for the first time since the smartphone debuted in 2007.
Demand for the latest iPhone isn't quite as strong as many had hoped. Cook said about 60% of iPhone customers haven't yet upgraded to the iPhone 6 or 6S (or the 6 Plus or 6S Plus).
First quarter of 2015: 12.6 million
First quarter of 2016 forecast: 10.1 million, down 20%

IPad sales are expected to fall for the ninth straight quarter.
First quarter of 2015: 4.6 million
First quarter of 2016 forecast: 4.6 million, flat

PC sales fell by 10% worldwide last quarter, according to Gartner. Apple has been outpacing the overall industry.
Wall Street analysts expect Mac sales to fall by the slightest of margins. If that happens, it would be the second straight quarter of falling Mac sales. Prior to the recent slump, Mac sales had risen for eight consecutive quarters.
First quarter of 2015: $13.6 billion
First quarter of 2016 forecast: $11.1 billion, down 18%

Last time Apple reported earnings, it posted the most profitable quarter in corporate history.
Apple's profit hasn't fallen since the last quarter of 2013.
First quarter of 2015: $58 billion
First quarter of 2016 forecast: $52 billion, down 10%

Sales are expected to fall. But for some perspective, Apple is expected to have produced more revenue in an off-quarter than the company posted in all of 2009.
Current quarter's sales
Second quarter of 2016 forecast: $47.4 billion
Get used to declining sales. Wall Street analysts expect Apple to post yet another quarter of falling revenue (the third quarter is expected to sink too).
Apple posted $49.6 billion in sales during the second quarter of 2015.
Meanwhile, in the company' most important market outside the US...Less than seven months after Apple launched iBooks and iTunes Movies, the services have been shut down in the world's most populous nation.
"We hope to make books and movies available again to our customers in China as soon as possible," Apple said in a statement. It did not say why they were offline.
Citing unidentified sources, the New York Times reported that the move was ordered by a Chinese regulator -- the State Administration of Press, Publication, Radio, Film and Television. The agency wasn't immediately available for comment Friday.
The regulator announced new rules in February restricting what content can be published online and who can produce it. The rules took effect in March, but it wasn't initially clear how much foreign companies would be affected.
China is Apple's second biggest market after the Americas, and its biggest market for app downloads. In the final quarter of 2015, the company generated revenue of $18.4 billion in the Greater China region, which includes Hong Kong and Taiwan.
Apple accelerated its move into China in 2013 by signing a deal to allow China Mobile to sell iPhones. China Mobile is the world's largest carrier with more than 800 million subscribers.
The move opened a lucrative new revenue stream for Apple, but it also underlined the need for good relations with Beijing. CEO Tim Cook, who says that China will one day be Apple's top market, has made frequent trips to the country.
Yet there have been setbacks. In 2013, Cook was forced to apologize publicly after state media criticized Apple's warranty standards and customer service.
And last year, Apple (AAPL, Tech30) paid China more than $80 million in back taxes and fines after severely understating its sales.

Monitoring digital content is a top priority for Beijing, which has invested heavily in a massive censorship apparatus dubbed the "Great Firewall." Thousands of websites including Facebook (FB, Tech30), Google (GOOG) and Twitter (TWTR, Tech30) are blocked, and even domestic social media platforms are heavily censored.
President Xi Jinping said earlier this week that "China must improve management of cyberspace" and ensure that content is a "positive culture that is a force for good," state media reported.
Apple, meanwhile, has faced questions in the U.S. over any potential cooperation with Beijing on encryption and censorship. Activists and security experts warn of severe consequences for political dissidents, for example, if Beijing were to gain access to information stored on Apple devices in China.
"We have not provided source code to the Chinese government," Apple general counsel Bruce Sewell said earlier this week.


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