With quarterly revenue declining for the first time in more than a decade, Apple execs Tim Cook and Luca Maestri put on their game faces during today’s Apple earnings call to tell us why things aren’t really all that bad in Cupertino.
The sad truth is that slumping iPhone sales, which joined the iPad and Mac lineups in the down column, will likely take a toll on Apple’s image — and on its stock price.
Still, there were plenty of other intriguing and optimism-inspiring things we heard during Apple’s Q2 2016 earnings call. Here are the most important takeaways from this historic Apple moment.
Apple is a victim of its own success
It’s really hard to top Apple’s monstrous earnings from Q2 2015. The tech giant is fighting itself here, being forced to compare this year’s numbers to the killer iPhone 6 sales that drove 2015’s overwhelming revenue. Whether we’re talking about the overall success of the iPad, with a 78 percent market share, or the skyrocketing win in China in last year’s Q2, everything looks dimmer in comparison to it. iPad sales are down 40 percent, and the iPhone “only” sold 51.2 million units last quarter.
Because honestly, with quarterly revenue of $50.6 billion and quarterly net income of $10.5 billion, this “bad quarter” for Apple would be an amazing quarter for almost anybody else.
iPad is king of a shriveling tablet market
The iPad came up a lot during the earnings call, which makes sense because Apple recently launched a new, smaller iPad Pro, and tablet sales in general are slumping. Apple’s tablets are doing fine, really, selling 10.3 million units this quarter. But in general, tablets are stinking up the place.
Cook addressed the issue while fielding a query about the iPhone SE. The questioner asked if the iPhone SE’s slow start in some markets could be a repeat of the iPad mini, which seemed to start the tablet slide by offering a smaller, entry-level tablet alongside full-size standard ones.
“One of the challenges with the tablet market is that the replacement cycle is materially different than the smartphone market,” Cook said.
We’ve noticed that ourselves — Cult of Mac staffers who own iPads are in no rush to upgrade because we have lower demands on our tablets as “side devices” or haven’t seen any must-have features on the new ones. And with an iPad, you don’t have the “expiration date” of a two-year contract renewal that has historically inspired phone upgrades.
The world is a tough place
Emerging markets like China and India have been short-term wins for Apple, though this quarter shows some decreases. The iPhone, says Cook, is still attracting millions of first-time purchasers in emerging markets, but there is still only a 42 percent smartphone penetration. Cook still thinks this is a phase, however, and we’ll see more growth in the future.
Heck, the relative strength of the U.S. dollar makes it harder for Apple to make money in foreign markets, which is not something you’d even think about (unless you were a global, multibillion dollar tech company). In this regard, Apple is in the same boat as any other U.S. company.
… but Apple has a plan
Both Cook and Maestri are more than willing to explain that, while financials fell short of expectations this quarter, they were prepared for it and are strategically managing during the tough times. Over and over, they made reference to the “macroeconomic climate.”
Case in point, even Apple’s press release wording has changed, as you can see in the tweet below.
A word is missing from Apple's press release title today. pic.twitter.com/fv2Niabgd0
— Benjamin Mayo (@bzamayo) April 26, 2016
India is the new China
With sales in greater China falling, Apple is pushing into India for the kind of head-snapping growth that really boosts the bottom line.
But there are hurdles to overcome as Apple moves into the world’s third-largest smartphone market, according to Cook.
For one, the LTE rollout there is just beginning in earnest.
For another, sales channels are different in India. Carriers don’t sell smartphones there, so Apple is seeking to expand its retail footprint.
Still, Cook thinks India is key to Apple’s future growth. “I view India as where China was seven to nine years ago,” he said.
Services continue to shine
Online services like Apple Music and the App Store are Apple’s second-largest source of revenue, which has jumped 20 percent over last year.
The App Store alone has a 35 percent lead over last year, and Apple Music has a staggeringly large 13 million paying users. Apple CFO Luca Maestri called the combination of streaming (Apple Music) and downloading (iTunes) digital music an “inflection point” for Apple’s digital music revenue stream.
The purchase value of the install base of Apple services grew 27 percent during the quarter. It’s currently worth $10 billion and could be one of the biggest tech companies in the world on its own.
iPhone SE can’t keep up with demand
People who want the best tech in a smaller iPhone package have become a high source of demand for Apple’s diminutive handset, and Apple is looking forward to this model in helping bolster its bottom line in the June quarter.
It’s a key product to help Apple pull more people into the ecosystem from two of the three target markets identified by Cook: those switching to iOS from Android and those looking to buy their first-ever smartphone.
Tim Cook remains optimistic about Apple earnings
If there was one word that sums up Cook’s well-rehearsed talking points for this earnings call, it’s “optimistic.” He’s optimistic about future iPad sales, he’s optimistic about potential growth in India, he’s optimistic about comprehensive tax reform.
If anybody believes in the power of positive thinking — or at least positive spinning — it’s this guy.
Additional reporting by Evan Killham and Lewis Wallace.