Apple puts weak faith in anniversary iPhone to return to growth

Apple has little to celebrate after another disappointing quarter. Total revenues came in around $120 million below expectations at $52.9 billion, largely due to a slip in iPhone sales to 50.76 million units for the quarter, down 1% year on year, and a 35% decline from the previous quarter.

The Apple share price suffered from disbelief and investors froze, leaving their money in Apple, unsure of where else to put it, leaving the market capitalization at $771 billion, massively overvalued. The only way is down once the market wakes up.

The company defended its results by claiming that consumers are waiting for the release of the tenth-anniversary edition of the iPhone, which is due out in September this year. Apple is pinning way too much hope on what is after all only a special edition handset and, at this rate, it cannot live up to the hype surrounding its release. Apple is setting itself up for more disappointment, just as iPhone 7 shipments failed to flourish in the previous quarter – if an anniversary iPhone is the most innovative product Apple can muster, it really does not bode well for future results.

While sales of the tenth-edition iPhone may go some way to improving Apple’s shipment numbers and revenues in the US for the fourth quarter of 2017, it is unlikely to rescue its flailing performance in China – where first quarter revenue declined again, down 14% from Q1 2016 to $10.7 billion.

China has long been a key target area for Apple, but it seems to be doing nothing to better its fortunes in a country where there are plentiful treasures for the taking – continuing to lose smartphone sales to Huawei, Oppo, Vivo and Xiaomi. We get the impression that being a fly on the wall amid strategic discussions on its Chinese operations would show a boardroom full of blank faces. We reserve a smidgen of sympathy for Apple though, with China being the ferocious market that it is.

Apple is notoriously secretive about its product developments, but it is expected to launch more aggressively into fields such as augmented reality, OLED displays, wireless charging, and further down the line machine learning and autonomous systems. R&D costs increased to $2.78 billion in the last quarter, up from $2.51 billion in the first quarter of last year – which Cook attributed largely to the company’s heavy investments in machine learning and autonomous technologies.

There were improvements in services, which covers the App Store, iTunes, Apple Music and Apple Pay, achieving an 18% revenue growth to just over $7 billion, but a slight 2% drop from the previous quarter.

The casualty of the quarter was once again the iPad, which has been having its shipments battered relentlessly for some time now, partly at the hands of Apple’s own large screen iPhone Plus handsets. It shipped 8.9 million iPads in the quarter, down 32% from the last quarter and 13% year on year.

Apple’s best performing segment was its Other product set, covering Apple TV, Apple Watch, Beats products and various accessories. Revenue for these products recorded an annual jump of 31% to $2.87 billion, but we are highly skeptical that sales of Apple Watch are responsible for this growth, as the high-end wearables market is pretty stagnant, so this is likely being held up by sales of Apple TV.

Samsung filed its quarterly results last week, reporting operating profit of $8.7 billion, up 48% compared with the first quarter of 2016. Total sales for the quarter were up 5%, to $48.5 billion.

Samsung’s mobile sales also suffered, declining 17% due to lower Galaxy shipments, as the company is still experiencing a knock on effect from the Galaxy Note 7 debacle, two quarters on, as well as mounting pressure from Apple and cheaper Chinese rivals. However, Samsung’s display unit was a strong growth area, with revenues rising 21% to $6.4 billion.

The Korean electronics giant also confirmed recently that the Galaxy Note 8 will be released later this year and, like Apple, it is forecasting that the launch will be popular enough to drive up overall shipments into positive growth.