Can Apple look beyond the iPhone?
The question might seem outlandish given that the Cupertino, Ca.-based tech giant is projected to unveil it strongest ever holiday period on another iPhone sales record when it reports first quarter 2016 earnings late Tuesday.
Financial analysts expect Apple to announce income of $18.22 billion (U.S.) or $3.23 per share, up from $18 billion or $3.06 in the year-earlier period on $76.5 billion in revenue, with the sales representing less than 3 per cent growth year over year.
Some observers say Apple will report a first ever annual drop in iPhone sales on waning global demand particularly in mainland China — and thanks to a lack of innovation in the latest iteration of the world’s most successful consumer electronics device.
The Wall Street consensus, however, is for 76.5 million iPhone unit sales versus 74.5 million a year earlier, with analysts focused on Apple’s guidance for revenue and device shipments in the current second quarter.
Shares in Apple have fallen below $94 in 2016 amid reports the company is cutting production of the iPhone 6S and iPhone 6S Plus by 30 per cent in the January-to-March quarter due to slackening demand.
Piper Jaffray analyst Gene Munster said investors are “bracing” for iPhone sales as low as 50 million in the March period against Street projections for 58 million. Many analysts forecast introduction of an “iPhone 7” in the second half and Apple is also rumored to be preparing a smaller screen phone and new tablet devices for release this year.
The iPhone has accounted for an increasing percentage of Apple’ overall revenue, topping 65 per cent for 2015 compared to about 50 per cent three years ago while a soaring average selling price has bolstered profit margins.
But observers will be looking for signs that more consumers are trading down to cheaper models and watching to see if introduction of the iPad Pro can ease a prolonged drop in tablet sales and become a more viable secondary product able to help offset iPhone declines.
Apple Music which had 10 million subscribers in the last quarter could be another key component of growing iPhone related ecosystem that could help spur growth in the absence of another breakthrough hardware device.
CEO Tim Cook has said that Apple plans to push new products and services including Apple Watch and Apple Music with some analysts saying an evolution is needed to keep investors from looking elsewhere for stellar returns.
Otherwise, they say Apple is in danger of being labeled a defensive “value” stock able to generate predictable results and a reliable dividend but with less than spectacular appreciation.
“The big focus is around the growth outlook for the next few quarters and trying to understand how Cook and company are thinking about 2016 — not just in terms of ‘iPhone 7’ but in terms of other new product areas,” said Daniel Ives, managing director at FBR Capital Markets.
“A lot of [investor attention] is also focused on China. So much is tied to the China growth story.”
Apple is expected to put more focus on services linked to the iPhone including Apple Pay, the App Store and iTunes which have all shown dramatic growth over the past year but remain minor contributors to overall sales and operating profit.
As it is fears about Apple’s ability to maintain fast growth in a mature market and slowing economy have taken something of a bite out of the company’s status.
Defined by enterprise value, which includes debt and subtracts cash, Apple ceded the world richest company title to Alphabet in December, although Apple remains bigger based on share price or market value.
What to watch
iPhone - Given Apple’s increasing dependence on the device, reports of a sales slowdown have hit shares hard. Many analysts say any decline has largely been factored in to Apple’s stock price.
Services - Revenue from Internet services including AppleCare, Apple Pay and product licensing has been growing fast - but is still minor compared to iPhone sales.
Products - Apple TV, Apple Watch, Beats and Apple-branded and third-party accessories are another area with potential to offset declines in iPhone shipments.
App Store – Apple says the store set new sales records over Christmas and New Year’s, with customers spending more than $1.1 billion on apps and in-app purchases in the two weeks ended Jan. 3.