Apple took a major hit in its earnings announcement yesterday afternoon. Revenue was $1.4 billion below expectations. Earnings per share were $1.90, not the $2 analysts had predicted. Gross margins were down a bit from the previous quarter. Most importantly for investors, the number of iPhones sold was down year over year for the first time and the average sales price slipped from the previous quarter's $690.50 to $641.82.
The company definitely lost ground.
When it comes to Apple, you have to be careful. In the January earnings announcement for the quarter that had ended in December, many predicted peak iPhone sales, assuming that the phenomenon of constantly advancing consumer demand was finally over.
That quarter was still the strongest the company had, although as Zach Epstein had noted at the time, Apple benefited from an extra week for presales and introduction of the iPhone 6s and 6s Plus into China at the same time it came out in the U.S. That effectively shifted some significant unit sales and revenue backward and out of the just reported quarter. Other factors affecting sales include the lack of an major upgrade to the iPhone and the important shift by the major carriers away from two-year contracts and subsidized phone purchasing for consumers.
In other words, of course sales were going to drop. The only reason they didn't in the previous quarter was some numbers nudging by Apple. And that's really fine. Assuming that sales of any product line should and will continue unabated forever is completely unrealistic. That Apple was able to do so for so long is impressive.
So, figure that the market has shifted and there's a new normal. Apple's problem, as has been true for years, is that everything hangs on the iPhone. Unit sales for the iPad and Mac continue to trend downward. CEO Tim Cook pointed to revenue from services and the growing strength in Apple's ecosystem.
Yes, services revenue was up a billion year over year, but that doesn't come close to replacing the drooping movement of the three main product lines: iPhone, iPad, and Mac. Nothing lasts forever, and that includes iPhone sales, whether due to falling public interest, fundamental market conditions, or something else.
The lesson for other businesses is to develop a useful sense of paranoia. Great success is only temporary. Sometimes the wave lasts longer and other times not. The more you depend on a single line of products or services, the greater the risk you face when things finally turn about. The necessary diversification has to be a commanding strategic demand in which there are enough potential candidates. When one, like Apple Watch, fails to take the world by storm, there are others in the wings ready to prove themselves.