Apple has been quick to point out the record-breaking revenue numbers for its first quarter.
The Cupertino-based company reported first-quarter sales of US$88.3 billion and a record quarterly profit for the final three months of last year of $20.1 billion.
As much as this is praiseworthy, it also masks some more worrying trends.
First is the 1 per cent fall in unit sales of the iPhone. Although revenue for phones increased by 13 per cent, this was a function of higher prices rather than increased volume. On the surface, this may not seem like a problem, but in our view, it indicates that Apple is, once again, struggling to persuade consumers to upgrade or switch to new devices. This slowing of the upgrade cycle will likely have an impact on phone revenue in future quarters.
Moreover, the slowdown in iPhone sales is emblematic of Apple’s inability to come up with meaningful and valuable innovations that wow consumers. Even the iPhone X is an incremental product that lacks the excitement and newness earlier models brought to market. Apple is fortunate in having a strong base of fans and many consumers who are bought into its ecosystem of services; but without device innovation, even this may prove insufficient to maintain market share in the face of rising competition.
Mac sales disappoint
The second area of disappointment comes from Mac sales where both volume and revenue slipped over the prior year. Admittedly, Apple is up against a comparative from last year when its new MacBooks Pros were gaining ground, but even so, this also underlines a dearth of serious innovation in the home and professional computing segments.
We also believe that lower volumes, and the fact that Apple’s products were not at the top of everyone’s Christmas lists, put a dampener on service growth. Last quarter this segment grew by 34 per cent and by 22 per cent in the quarter before that. Over this period, the increase was a much more modest 18 per cent. Arguably, the holiday period should be a bumper time for Apple subscriptions; that it wasn’t is concerning – not least because Apple needs income from services to make up for softness in product sales.
That Apple’s HomePod wasn’t available in time for the holidays was a misstep, not least because it could have helped boost service revenue. Our data show smart speakers and smart home devices were popular gifting and self-purchase items over November and December – with both Amazon and Google growing their market shares. Although Apple will point out its product is superior to rivals’ efforts, it is a latecomer to the party, and we believe its potential sales will be crimped as a result.
For all of these challenges, Apple remains a solid and financially successful company. Indeed, its profits increased over the period. However, a lack of serious and significant innovation means it runs the risk of diluting future earnings. Apple thrives off serving a mass market; a move to providing more expensive items to fewer people will ultimately prove harmful to the bottom line.
In essence, we believe that the clear blue water that once existed between Apple and rivals is much diminished. The company has time to reopen the gap, but to do so, it needs to pull something new and unique out of its hat sooner, rather than later.
-Neil Saunders-
