One thing we can say for sure about Apple after it reported some of its worst earnings in years: Management did an epic job of managing expectations.
Yesterday, I wondered how investors and Apple watchers would react when the company reported a sharp slowdown in its business. Indeed, the company said revenues were down 15 percent from the same period a year ago, while sales of its most important product, the iPhone, plunged 23 percent.
And yet, this was slightly less terrible than Wall Street expected. Investors went wild and drove the stock up 6.8 percent in after-hours trading. Yes, Apple offered slightly lower guidance than expected for the fourth quarter that ends in September, but investors were willing to overlook that.
Now, imagine for a moment if Microsoft had reported a 15 percent drop in revenue and a 23 percent drop in its leading product. Think investors would be so forgiving? That’s what I mean about Apple management doing a masterful job of setting the bar low.
Still, beyond the decreased sales of all of Apple’s major products, there are still some worrisome numbers lurking underneath that top line bad news. But there are also some rainbows and unicorns in there.
First, the bad news:
1. “Other products” fell 16 percent from a year ago. This category is vague and includes stuff like iPods and Beats headphones. But it also includes the Apple Watch and Apple TV, two of the biggest product launches (or re-launches) under the tenure of CEO Tim Cook. The Apple Watch went on sale in late April 2015. On the one hand, sales were no doubt front-loaded, making for a tough comparison. On the other hand, the Watch hadn’t been on sale for the full quarter a year ago. There has been speculation that sales have been slowing as people wait for the next version, but, at the very least, we can conclude that the Watch doesn’t have a lot of momentum at this point.
And the same goes for the rebooted Apple TV that was launched last fall. This should have made for some good comparisons against the old version, which sold for under $100 and hadn’t been updated in years. Instead, it’s hard to detect that the new Apple TV is having much impact here.
One can’t call these two gadgets failures. Yet. But they have fallen well short of initial hype.
2. “Greater China” down 33 percent. As many people pointed out last night on Twitter, this was a tough comparison for Apple, because the company’s year-ago quarter saw a huge surge in sales (up 112 percent). At the same time, the China market is critical to Apple becoming a growth story again. While noting the “challenges” Apple faces in China due to the economy, Cook said he remains optimistic: “But to keep things in perspective, when we look back on our accomplishments in this segment over the last couple of years, they are truly remarkable. In the first three quarters of this fiscal year, our total revenue from Greater China was almost $40 billion, up 55 percent from the same time frame just two years ago, while iPhone units were up 47 percent.”
3. Services: Yes, I know most people would put this in the win column because it’s up 19 percent from a year ago. But I would be concerned that it’s been declining slightly for three straight quarters:
Q3 2016: $5.976 billion
Q2 2016: $5.991 billion
Q1 2016: $6.056 billion
Now, some folks are arguing that Q1 is a holiday quarter in much of the world and Q2 is a holiday quarter in China. But service revenue grew each consecutive quarter in fiscal year 2015. After making a 26 percent leap year-over-year in Q1 2016, it seems this category is actually losing a bit of steam.
Cook insists all guns are blazing: “In the last 12 months, our Services revenue is up almost $4 billion year on year to $23.1 billion, and we expect it to be the size of a Fortune 100 company next year.”
There have been some big changes made to the App Store, and Apple is still pushing on Apple Pay. But at the moment, it seems like last year’s holiday-quarter leap in Services is not a long-term trend.
Now, the good news:
1. iPad revenue up. Though the company still sold fewer iPads, revenue was up in this category for the first time in forever. That’s likely because the bigger iPad Pro is getting some traction. And, if so, it’s an indicator that Apple may be getting some momentum with enterprise users. “More broadly, we’re making great progress with our enterprise initiatives, and we see strong growth opportunities ahead of us,” Cook said. Making a big breakthrough with business customers with Apple’s IBM and SAP and Cisco Systems partnerships could be key to at least offsetting the continued decline with consumers.
2. R&D spending. Over the first nine months of the 2016 fiscal year, Apple has increased R&D spending to $7.475 billion, from $5.847 billion one year ago. The company is placing larger bets on its future and keeping its focus on the long-term opportunities. Fans may be impatient, but this is where Apple has always been very disciplined — in waiting for the right product at the right time.
3. Stock price. Apple simply isn’t going to be seeing the blockbuster growth it enjoyed for a long time. And it may never see that again. But the company is fine, pulling in tons of cash and very profitable. Of course, that was true of Microsoft a decade ago, when everyone was declaring it “dead.” The question is whether Apple investors are content to let things ride for a while or whether they’re going to grow impatient and start demanding cost controls, leadership changes, acquisitions, or other typical short-term fixes. But the fact that they drove stock up almost 7 percent after Apple slightly beat on a weak quarter shows that they may be willing to be patient until things come around again.
VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Learn more about membership.