Apple Post Third Straight Quarter of Declining iPhone Sales

Apple’s revenue fell 9% to $46.9 billion versus $51.5 billion in the year-ago period

a1Iconic technology major Apple Inc. (NASDAQ: AAPL) announced its Q4 FY16 financial results on October 25th, 2016.

Headquartered in Cupertino, California, Apple engages in the design, manufacture, and marketing of mobile communication, media devices, personal computers, and portable digital music players. The Company also sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. Apple’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessories, services, and support offerings.

It operates through the following geographical segments: Americas, Europe, Greater China, Japan, and Rest of Asia/Pacific. The Americas segment includes both North and South America. The Europe segment consists of European countries, as well as India, the Middle East, and Africa. The Greater China segment comprises of China, Hong Kong, and Taiwan. The Rest of Asia/Pacific segment includes Australia and Asian countries not included in the reportable operating segments of the company. Read more about Apple’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Apple’s revenue fell 9% to $46.9 billion versus $51.5 billion in the year-ago period. Gross margin declined to 38% compared to 39.9% in the year-ago quarter. International sales accounted for 62% of Q4 FY16 revenue. Despite good customer response for the iPhone 7, iPhone 7 Plus, and Apple Watch Series 2, Apple posted its third successive quarter of declining iPhone sales, reflecting concerns that Apple may have lost its tech superiority, even with the newly released iPhone 7. On a brighter note, Services’ revenue jumped 24% to record high of $6.3 billion during the reporting quarter.

Source: Company's Data
Source: Company’s Data

The biggest source of concern for Apple is its major dependency on its blockbuster product iPhone, which accounted for 66% of its FY15 revenue. In January 2016, Apple forecasted its first decline in sales in more than a decade, underpinning concerns that Apple is reaching the limits of iPhone growth and emphasizing the importance of new sources of revenue.

During the reporting quarter, Apple surpassed estimates, selling 45.5 million units of iPhone versus projections of 45 million units. However, iPhone shipments fell 5% compared to 48.04 million units sold in the year-ago period. The new iPhone has been promoted aggressively by wireless carriers, amid a massive recall of rival high-end phone, the Samsung Galaxy Note 7, over safety concerns.

Source: Apple
Source: Apple

Chief Executive Tim Cook said that India was poised to boom in smartphone sales as a more powerful 4G cellular network was put in place this year and next. He also hinted at potential future areas of business, commenting that media content creation and ownership was a great opportunity.

Overall, Apple’s net income fell to $9.01 billion, or $1.67 per share, during Q4 FY16, from $11.12 billion, or $1.96 per share, a year earlier. During Q4 FY16, Apple generated $16.1 billion in operating cash flow, a new record for the September quarter.

Regional highlights

During Q4 FY16, Apple’s revenue from the Americas fell 7% to $20.22 billion versus $21.77 billion in the year-ago period, pointing to concerns that the Company has reached market saturation for its products. On the other hand, Apple’s revenue from Europe grew 3% to $10.84 billion versus $10.57 billion in the year-ago period.

More worrying is the fact that revenues from Greater China fell a whopping 30% to $8.78 billion from $12.51 billion. This is mainly because Apple faced major headwinds in China during the reporting quarter, where it lost market share to homegrown rivals. However, Apple is looking to make inroads in China’s transportation market when it struck a $1-billion deal with Chinese ride-hailing company Didi, a rival of Uber Technologies Inc. in China in May 2016. For Apple, Didi is seen as a lucrative investment since it could provide access to big-ticket companies in the Chinese market.

Apple’s revenue from Japan grew 10% to $4.32 billion versus $3.92 billion in the year-ago period, while revenue from Rest of Asia declined 1% to $2.67 billion versus $2.70 billion in the prior year period.

Other highlights

Returns to shareholders: Apple returned $9.3 billion to investors through dividends and share repurchases during Q4 FY16 and has now completed over $186 billion of its capital return program. Apple’s board of directors declared a cash dividend of $0.57 per share of the Company’s common stock. The dividend is payable on November 10th, 2016, to shareholders of record as of the close of business on November 7th, 2016.

a4Building AI capabilities: Apple is seeking to expand its expertise in artificial intelligence (AI) with its acquisition of Hyderabad, India-based machine-learning startup Tuplejump Software Pvt. Ltd on September 23rd, 2016. Tuplejump’s software specializes in processing and analyzing big sets of data quickly.

The Tuplejump deal is Apple’s third acquisition in 2016, after it purchased Seattle-based Turi Inc. for about $200 million in August 2016, aimed at expanding its computing capabilities for its products and services. Turi helps developers create and manage software and services that use a form of AI called machine learning. It also has systems that let companies to build recommendation engines, detect fraud, analyze customer usage patterns, and better target potential users, which Apple could potentially integrate with its future products.

Apple’s acquisition is aimed at gaining an edge in AI, particularly in the field known as pervasive computing, where software tries to automatically infer what people want. Turi’s technology could feed into Apple’s Siri digital assistant and help define new ways computers interact with people.

On January 7th, 2016, Apple purchased Emotient, a company that uses AI to recognize and act upon facial expressions. The San Diego, California-based Emotient announced in May 2015, that it had been granted a patent for a method of collecting and labeling as many as 100,000 facial images a day so computers can better recognize different expressions.

Apple developing smart-home device: On September 23rd, 2016, Bloomberg reported that Apple is developing an a5Echo-like smart-home device based on the Siri voice assistant. Started more than two years ago, the project has completed R&D and is now in prototype testing. Like Amazon.com Inc.’s (NASDAQ: AMZN) Echo, the device is designed to control appliances, locks, lights, and curtains through voice activation. If the product reaches the market, it would be Apple’s most significant product since the launch of the Apple Watch in 2014.

Apple Watch Nike+ launch on October 28th, 2016: Apple announced on October 24th, 2016, that it has teamed up with Nike Inc. (NYSE: NKE) to launch Apple Watch Nike+, which combines all of the unique features of Apple Watch Series 2 with the new Nike+ Run Club app for health-conscious runners. Apple Watch Nike+ also features exclusive Nike Sport Bands and unique watch faces inspired by Nike’s iconic style that can be easily personalized with apps like Activity Rings, Heart Rate, Stopwatch and Weather.

Apple Watch Nike+ features built-in GPS to track pace, distance, and route and is water resistant for up to 50 meters. It also features training data, including pace, distance and heart rate through the app interface. Priced at $369 for 38 mm and $399 for 42 mm, the product will be available at Apple.com, Nike.com, Apple Stores, select Nike retail stores, select Apple Authorized Resellers, including Best Buy, and select specialty stores and department stores.

Outlook for Q4 FY16 and full year FY16

For its all-important holiday season, or Q1 FY17, Apple forecast revenue of $76 billion to $78 billion, ahead of estimates of $75.08 billion, prompted by high demand for its newest iPhone 7. If it hits that estimate, this quarter would be Apple’s biggest on record by sales, ahead of the $75.9 billion revenue it posted in the year-ago period. However, Apple offered a conservative outlook on profit margins, 38% to 38.5% versus expectations of nearly 39%, leading to a fall in its stock prices.

Stock Performance

a6Apple’s stock stood at $115.59, falling 2.25%, at the close on Wednesday, October 26th, 2016, having vacillated between an intraday high of $115.70 and a low of $113.31 during the session. The stock’s trading volume was at 65,834,089 for the day. The Company’s market cap was at $625.31 billion as of Wednesday’s close.

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