This afternoon, Apple released their Q2 earnings for fiscal year 2016, which ended on March 26. The company saw revenues decline for the first time since Q1 2003, according to CNN. The results today did not meet expectations, but that was quite a run to go over 13 years without a year-over-year decline in revenue. Revenue for the quarter was $50.56 billion, which is 10% lower than the $58.01 billion announced a year ago. Gross margin was $19.9 billion, or 39.4%, which was down from the 40.8% gross margin in Q2 2015. Net income was down 22.5% as well, coming in at $10.5 billion for the quarter. This resulted in earnings per share of $1.90, down from $2.33 a year ago.

Apple Q2 2016 Financial Results (GAAP)
  Q2'2016 Q1'2015 Q2'2015
Revenue (in Billions USD) $50.557 $75.872 $58.010
Gross Margin (in Billions USD) $19.921 $30.423 $23.656
Operating Income (in Billions USD) $13.987 $24.171 $18.278
Net Income (in Billions USD) $10.516 $18.361 $13.569
Margins 39.4% 40.1% 40.8%
Earnings per Share (in USD) $1.90 $3.30 $2.33

iPhone sales have certainly slowed, but Apple was almost destined to falter after reporting such strong quarters a year ago. The launch of the larger iPhone 6 and 6 Plus triggered year-over-year growth in iPhone sales of 40% a year ago, and 46% growth the quarter before that. Strong growth in China helped fuel a lot of that gain, since it was practically an untapped market for Apple, but revenue from China fell 26% from a year ago. With Apple being a company that has struggled to expand it’s market outside of iPhone, when the one segment falters it can make a big impact on the results, which is exactly what happened here.

Pretty much every earnings report, sales of the iPhone dominate the discussion, and today is not really any different. Apple sold 51.2 million iPhones this quarter, which is a drop of 16% year-over-year. That brought in revenue of $32.86 billion for the quarter, which is a drop of 18% year-over-year. A larger revenue drop than unit sales means that of the iPhones it is selling, the average selling price is also down. Apple still gets 65% of its revenue from the iPhone, even on a down quarter, but the other segments are not pulling up the slack.

iPad sales continue their downward trajectory, with sales of 10.251 million units this quarter, which is down 19% from a year ago. Revenue for the iPad was $4.4 billion, also down 19%. This has been a common trend with the iPad over the last year or two, and what originally looked to be another strong growth segment for Apple has quickly become a market where sales keep declining. Eventually they will bottom, but even with the solid new entries in the iPad Pro, the smaller iPad Pro 9.7, and even the new iPad Mini, the Apple tablet market has quickly reached a point where people are not upgrading as quickly as the iPhone market does, and you have to start to wonder when sales of the iPad are going to bottom out.

The PC market is certainly declining, but the Mac has soldiered on, generally outperforming the PC market even in the down times. That trend also stopped this quarter, with Mac sales down 12% year-over-year, to 4.0 million devices. Revenue for the Mac was $5.1 billion, which is down 9% compared to last year, so the average selling price has increased a bit while sales have fallen. We’ve not seen Apple refresh the Mac for some time though, with only the MacBook getting Skylake, so sales may be affected by this as well.

Services, which include internet services, AppleCare, Apple Pay, and others, are now the second largest revenue source for Apple, with revenues up this quarter 20% over last year, for a total of just a hair under $6 billion for the quarter. Even compared to the holiday quarter, which was Q1, sales were pretty much flat, and all of the other segments dropped significantly (and expectedly) compared to last quarter. You likely don’t think of Apple as a services company, but iTunes sales, Apple Music, and their other services are now the number two product at Apple, and that’s pretty surprising. It may not be number two next quarter, but with Apple having over a billion people using their services now, sales here should stay strong.

The final segment from Apple is “Other Products” which includes Apple Watch, Apple TV, iPod, Beats, and accessories. This segment also grew significantly year-over-year, to $2.2 billion, which is up 30%. Although Apple doesn’t break down the products inside here, the addition of Apple Watch likely makes up a good portion of this, since it wasn’t part of the category a year ago.

Apple Q2 2016 Device Sales (thousands)
  Q2'2016 Q1'2016 Q2'2015 Seq Change Year/Year Change
iPhone 51,193 74,779 61,170 -32% -16%
iPad 10,251 16,122 12,623 -36% -19%
Mac 4,034 5,312 4,563 -24% -12%

Apple announced they were going to be adding an additional $50 billion to their capital return program, bringing the program up to $250 billion in cash returned to shareholders by the end of March 2018. The dividend will be increased to $0.57 per share, and they will buy back $175 billion in shares, up from the original goal of $140 billion in shares.

They also announced guidance for the next quarter, where they expect revenue between $41 and $43 billion (Q3 2015 revenue was $49.6 billion) and gross margin is expected to drop again to between 37.5 and 38%. With this guidance, next quarter may be very similar to this one.

Apple Q2 2016 Revenue by Product (billions)
  Q2'2016 Q1'2016 Q2'2015 Revenue for current quarter
iPhone $32.857 $51.635 $40.282 65.0%
iPad $4.413 $7.084 $5.428 8.7%
Mac $5.107 $6.746 $5.615 10.1%
iTunes/Software/Services $5.991 $6.056 $4.996 11.8%
Other Products $2.189 $4.351 $1.689 4.3%

I don't think we have to worry about Apple going bankrupt just yet, but today’s earnings are a big change in what we’ve gotten used to in the last 13 years or so. All things must come to an end, and today it was Apple’s amazing track record over the last decade or more. They are certainly not alone in having their struggles this quarter, but the drop is pretty significant nonetheless.

Source: Apple Investor Relations

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  • KoolAidMan1 - Sunday, May 1, 2016 - link

    That's when the denial and spinning about how the product is bad and can never compare to whatever knockoff he's fellating this year.

    Google "retrospooty", this guy has spent the last six or seven years talking about doom and gloom for the company. People posting opinions is normal, but the sheer volume this guy does points to a pretty sad existence.

    I do remember him talking doom about the stock was when it was bottoming in 2012. He'll get it right someday, stopped clock and everything.
  • Murloc - Wednesday, April 27, 2016 - link

    only if you believe that they will have another iphone-like success with something else.

    How do you know if the apple car will just be a non-unique product like the watch, in direct competition with Tesla (which has the same brand strength), or if it will have something as revolutionary as good multitouch touchscreen was on phones.
  • jasonelmore - Wednesday, April 27, 2016 - link

    It means no growth which means the stock price will not go up. The lower it gets, the more shares apple will buy back. they are gonna keep throwing that money away to make their stock look like a good performer, when instead, they need to start hoarding their cash. Without a breakthrough new catagory product, it will continue to decline.

    Apple employee's over 100,000 people, plus the just spent billions on a new office. apple are pretty arrogant in that they sell bonds like they are risk free, to avoid paying taxes on money they'd like to use overseas, but can't without paying 30% tax on it.
  • antihelten - Wednesday, April 27, 2016 - link

    "Revenue for the Mac was $5.1 billion, which is down 12% compared to last year, meaning that Apple is also selling lower cost Macs than a year ago"

    Revenue is "only" down by 9% compared to last year ($5.1 versus $5.6 billion), so combined with a 12% drop in unit sales, Apple has actually increased their ASP, not lowered it.
  • dsumanik - Wednesday, April 27, 2016 - link

    Exactly. Which is why sales dropped they tried to overcharge for extremely minor upgrades, and even downgrades in some cases. They are running the same motherboard/cpu/chipset in the Macbook air, Mac Mini, and iMac... like really do you think people aren't going to notice its the same device in a different package? This is outright hubris and greed trying to exploit their existing customers...people aren't stupid they know apple stuff is expensive to begin with, but when they look at their 4 year old laptop, and it looks the same as the latest model, and offers no significant impact on their day to day usage.... i believe the phrase is "maybe next year" .
  • aliasfox - Wednesday, April 27, 2016 - link

    You bring up a couple of good points.

    Same motherboard/chipset in all of their mainstream consumer machines. Honestly, this is usually fine - it means you have one set of target thermals to engineer for, or set of chips to write for, and economies of scale in purchasing. It should make things cheaper for them and more bug-free for us. It's the same reason Toyota and Nissan each have one V6 for their entire (non-truck)lineup. The problem only shows up when this one platform becomes stale - Intel hasn't really been quick about releasing new chips/chipsets, so everyone downstream ends up suffering as well.

    "Four year old laptop, looks the same as the latest model" (Paraphrasing). Yep, here's where Apple's gotten really, really lazy. Apple used to update their chassis every few years to keep it fresh. The 15" model was redesigned in:
    - 2001 Titanium (from 14")
    - 2003 Aluminum
    - 2008 Unibody (with a sealed-battery refresh in 2010)
    - 2012 Retina

    It's been four years, Apple. If you can't make the internals better, at least make the externals different - slimmer bezels maybe? or easier internal access? how about more space between USB ports so you can actually use a flash drive and a mouse at the same time?

    The Air has looked the same since 2010, the 13" Pro is a zombie machine from 2008 when it was introduced as the aluminum MacBook. Three to five years is the typical upgrade cycle, and people like seeing something that's at least different when they go back to the store. Seeing a 2016 MacBook that looks exactly like your 2012 MacBook, which looks exactly like your 2008 MacBook, isn't going to get anybody excited.
  • Brett Howse - Wednesday, April 27, 2016 - link

    Sorry I fixed up the text - had too many numbers in my head when I wrote that I guess.
  • Ratman6161 - Wednesday, April 27, 2016 - link

    There is an important point here I think most of you are missing. That point is that smart phones are now where desktop PC's reached a few years ago i .e. they are "good enough" for most people. there is only so far you can go with constantly adding new features. Users eventually reach the point where the phone (like the PC) does everything they want it to do so unless something changes in their world where they suddenly want it to do something else, they don't need a new one. Faster processors, etc? Once again, once its fast enough to satisfy the need this is no longer a reason to buy a new one.

    Of course there will always be some who insist on having the latest and greatest, but as with all technology products, once they are fully mature, the incentive to go spend a bunch of money on a new one every year or two goes away. So this is no surprise at all, or at least shouldn't have been. Technology publications just tend to have no sense of history or they would have seen this comming, as many of us did.
  • Murloc - Wednesday, April 27, 2016 - link

    in PC gaming the software and hardware push each other indefinitely (better graphics and higher monitor resolution -> better GPU/CPU -> even more demanding graphics) and so the upgrades keep coming quickly.

    This appears to not be happening in the smartphone sectors, but they can still race to increase the display resolution and camera quality.
    I guess battery life is where technology is hitting a wall. It doens't get better as fast and so phones have to stay the same.
  • ElecDroid - Friday, April 29, 2016 - link

    I'm not an Apple expert. Certainly not an expert in Investment Relations. Apple is on a downward spiral because the man's ideas have all been used. I'm referring to Steve Jobs. I'm not an Apple fan but, the man was a genius. When he took the stage and introduced new tech. Everyone sat up in the tech industry,looked and copied. He saw things in a way not many people could. He had a knack for creating something in a simple,classy and quality way. I'm not really the type to stick to one brand. If it's a well made product I'll buy it. I like Android. I like iOS. I like Windows. Some things just work better on certain platforms. I do miss the innovation of Steve Jobs though. He pushed the smartphone market to where it is now. It's been kinda stagnant w/o him. I remember when the IPhone 4 launched and how much further along it seemed than any other phone! The best thing Apple could come up w/o him is 3D Touch. A huge Pro version of the IPad. An iMac w/ a 5k screen. Hold on still thinking.....Oh hold on the Apple Watch? The iPhone 6 is really the only radical new design they've had since his exit. They tried with the tried with the iPhone This industry needs another Steve Jobs and so do I!!!

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