Apple reported its first quarterly revenue drop since 2003 on Tuesday in what investors worry is the end of a remarkable period of growth that had catapulted the computer maker into the most valuable company in the world.
Shares were down sharply on Wednesday morning, as the Cupertino company said sales of its flagship iPhones dropped for the first time since their debut in 2007. That, more than any other statistic, drove the stock down 7 percent, wiping more than $40 billion from the companies market value. Apple's stock is one of the most widely held in America.
Based on Apple's guidance a few months ago, Wall Street analysts had been bracing for the firm to report a decline in revenues. But few expected the numbers to be this bad.
Sales of the company's latest smartphones, while still significant with 51.2 million models sold, could not keep pace with the 61.2 million sold over the same period last year. Because the iPhone accounts for nearly 70 percent of Apple's revenue, the slowdown has been a significant concern in the minds of analysts.
Overall, Apple reported $50.6 billion in revenue -- short of the $52 billion expected by Wall Street -- and $10.5 billion in profit. In the same quarter last year, the company reported $13.6 billion in profit on $58 billion in revenue.
What happened? One factor is that last year's spring quarter saw unusually high sales for Apple. Supply problems for the iPhone 6 and iPhone 6 Plus moved back sales that normally would have been counted in the company's traditionally strong holiday quarter.
But another, far more troubling reason is that Apple -- along with the rest of the smartphone industry -- is seeing a serious slowdown in the number of people buying new smartphones. For years, analysts have warned that the smartphone market is becoming saturated, meaning that most people who would want to buy a smartphone already have one.
Analysts do expect that iPhone sales will recover after the company introduces this year's expected model of the iPhone. The next version, if Apple keeps up with its traditional product cycle, should be the iPhone 7 and see major hardware makeover. Reports based on apparent weak links in Apple's supply chain indicate that the new phone could have a new kind of headphone port, be dust-proof and waterproof and may even sport a totally redesigned home button.
Sales of all other prominent Apple products also dropped from the previous year. The iPad continued a prolonged slide, down 19 percent from the same period last year. Mac sales were also down 12 percent.
Apple’s services sales, which include the App Store, iTunes Store and iCloud, were a bright spot, with a 20 percent increase to $2.1 billion. So too was the “Other Products” category, comprising products such as Apple Watch, Apple TV and iPod, which Apple does not break out individually. That area posted revenue of $6 billion -- a 30 percent increase.
“Our team executed extremely well in the face of strong macroeconomic headwinds,” said Tim Cook, Apple’s chief executive in a press release. “We are very happy with the continued strong growth in revenue from services, thanks to the incredible strength of the Apple ecosystem and our growing base of over one billion active devices.”
This quarter's earnings report, however, demonstrates that it's critically important for Apple to deliver new innovative products and find new ways to generate revenue as the smartphone becomes more of a commodity worldwide. The company's interests in media and entertainment, smart home devices and healthcare — as well as persistent rumors of an Apple-designed car — all show the company is hard at work to find and dominate the next revolution.
"The industry is in a lull between the mobile boom and what comes next in automotive, the connected home, health and industrial applications of the Internet of things," said Geoff Blaber, Vice President, Americas at CCS Insight, in a note ahead of the report. "Pressure is likely to mount on Apple to reveal the next big source of growth."
Apple also announced it will expand its capital return program, adding up to $50 billion to the cash it's set aside to return capital to shareholders; that means Apple is planning to spend a total of $250 billion in cash this way by the end of March 2018.