iphones

Revenues at Apple hit a record $75.9bn in the December quarter while the company sold 74.8 million iPhones – an all time high. That is an average of 34,000 iPhones an hour, more than four times the volume it was selling five years ago.

Yet it is a sign of the high expectations for Apple’s financial performance that this is seen as disappointing. Total revenues were up by just 1.8% compared to growth of almost 30% in the same quarter a year ago.

Apple is now warning that revenues will come in at between $50bn and $53bn, below the $58bn it posted a year ago and its first decline since 2003.

There are a number of economic reasons for the slowdown. The strong dollar makes Apple’s products more expensive in international markets and there has been a material slowdown in the Chinese economy, one of Apple’s most important markets.

The market generally for electrical devices was also slow in the Christmas period. Argos saw its results dragged down by weaker sales, as did Best Buy in the US.

Yet there is also a sense that Apple is failing to persuade consumers to buy. Neil Saunders, CEO of retail consultancy Conlumino, says: “ While there is no doubting Apple’s technical and design prowess, some consumers simply overlooked its new iPhone, seeing too few benefits over and above their existing models to convince them to upgrade.

“The new iPad, which even by virtue of its name was aimed at a more professional audience, also received something of a lukewarm reception among consumers.”

A focus on services

Apple’s share price is hugely reliant on the perceived value of its hardware business. And that share price has fallen by £200bn since July last year from a high of £132.97 to around $99 today.

To allay those concerns, CEO Tim Cook, on a conference call last night, for the first time published data that reveals the size of its services business, which includes the App Store and Apple Music. The figure – which Apple refers to as its “install base-related purchases” – was up by 23% last year to $31.2bn. In the December quarter it increased by 24% to $8.9bn.

What Apple is trying to show is that even if iPhone sales plateau, the huge swathe of consumers that own its iPhones, iPads and iWatches mean that revenue will continue to rise. That “install base” has now crossed 1 billion devices for the first time, up 25% year on year.

Luca Maestri, Apple’s CFO, was quick to point out that it is these people that account for the “majority” of its services revenue, rather than current quarter sales.

“Apple is in a unique position of strength. We have world class scales in hardware, software and services all under one roof, which lets us innovate in ways that other companies can’t.”

Luca Maestri, CFO, Apple

“We have built a huge installed base around four platforms, iOS, Mac OS, watchOS and tvOS. We have tremendously satisfied and loyal customers who are engaged with our services at a fast growing rate. All of this provides us with an unparalleled foundation for the future of Apple business.”

However, that shift in focus is likely to take some time to filter through. Despite the impressive increase in service revenues iPhone sales still account for more than two-thirds of Apple’s revenues.

Analysts still believe Apple is reliant on the iPhone for future growth too. Saunders adds: “Apple is an immensely popular brand with desirable products, but it perhaps serves as an early warning that the company needs to work much harder at creating a step change in the new devices it launches.

“The fact remains that 2016 is year when Apple needs to come up with revolutionary rather than evolutionary product. If it fails to do so, its growth is likely to be diminished still further.”