What Else Went Wrong for Apple Besides Predicted iPhone Slump

Apple sales slumped 13 percent as many product categories fell.

By Aaron Pressman

Songquan Deng | Shutterstock

This story originally appeared on Fortune Magazine

Along with confirming a widely predicted decline in iPhones sales during the first three months of the year, Apple on Tuesday reported its first drop in quarterly revenue on an annual basis since 2003. But the whole point of quarterly earnings is to glean information we didn't already know.

So here are a few pieces of new information that are worth pondering as investors try to decide whether the most valuable U.S. public company is headed for a torturous decline or about to emerge triumphant again.

CEO Tim Cook didn't sound worried on the company's call with analysts. "The future of Apple is very bright," he said while alluding to exciting but unspecified new products.

The China collapse

In recent years, most of Apple's sales growth has come from China, but that engine too has greatly slowed. Apple said its China sales shrunk by more than a quarter to $12.5 billion. The rate of growth had already slipped to 14 percent last quarter's from jumps of 99 percent, 112 percent, and 71 percent in the three prior quarter. Further, the challenges are increasing after China forced Apple to shut down its iBooks store and iTunes movie service last week after just six months in operation, reducing the appeal of the iOS ecosystem there.

Last summer, CEO Tim Cook was disputing that the company had any issues in China, even emailing CNBC host Jim Cramer on August 24 to decry bearish comments.

"I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August," Cook wrote just eight months ago. "Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks."

But since then, the economic situation has not gotten better, and Apple's cheap phone competitors continue to nip at its heels. And with China already leading the world in smartphone sales, it has reached a saturation point with sales projected to increase less than 1 percent this year, according to market researcher Gartner.

Other problematic products

Apple's iPhone accounts for the lion share of its total revenue but other products that could have made up for some of the quarter's decline are also slowing.

Revenue from iPad was down 19 percent from a year ago to $4.4 billion while sales of Macintosh computers declined 9 percent to $5.1 billion. Only revenue from services, which include sales of apps and media on the iTunes store, iCloud storage and other items, was a significant bright spot, increasing 20 percent to $6 billion. Still the dollar amount of the increase of about $1 billion did not come close to offsetting the $7.4 billion of lost iPhone sales.

Investor payoff

As many declining tech companies have discovered, increasing a dividend and buying back stock can help lift share prices even when revenues are slipping. So Apple announced a $50 billion expansion to the company's program to "return capital." Under the bigger plan, Apple said it would spend a total of $250 billion by the end of March 2018. Of the total, $175 billion will go to buying back stock, up from $140 billion previously.

The announcement didn't help the stock price much after the disappointing results came out, however. Shares of Apple, which had already declined by 20 percent over the past year, lost another 8 percent in after hours trading. That's a loss of $44 billion from Apple's stock market capitalization.

Apple Watch

Tim Cook didn't reveal exact sales figures, but he said the sales met Apple's own expectations. But he did give a clue. Sales of watches in the first year on the market exceeded sales of the iPhone in its first year. Apple sold about 6 million of its original iPhone. Again though, with an estimated average selling price of about $500, sales at level would be worth only $3 billion over the year, a drop in the bucket for Apple.

Aaron Pressman

Senior writer

Aaron Pressman is a senior writer at Fortune, focusing on technology. He is based in Boston.

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