Apple this week reported a decline in both annual sales and profit for the first time in 15 years. The company banked $45.7 billion in profit on revenues of $215.6 billion during the last year, an annual profit decline of nearly 15 percent and an 8 percent drop in revenue compared to the company’s fiscal year 2015 results.
Apple saw its first year-over-year decline in revenue last April, and that downward trend continued despite new product releases and steady growth in its services business. With the important holiday quarter now underway, Apple faces heightened scrutiny as it projects record high revenues of between $76 and $78 billion, a number that would reverse its last six months of declines.
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“This looks like a temporary period of decline driven by the trough in the wake of the iPhone 6 launch (in late 2014), but it looks like Apple is coming out of that now,” says Jan Dawson, chief analyst and founder of Jackdaw Research. “I don’t think it’ll have a lasting impact.”
iPhone 7 demand outpaces supply
The iPhone is still Apple’s biggest revenue driver, and sales of the flagship device accounted for 60 percent of the company’s revenue during its 2016 fourth quarter. It released the iPhone 7 and iPhone 7 Plus just eight days before the end of the last quarter, so those phones’ impact should be much greater during the holiday shopping season.
On an earnings call with investors, Apple CEO Tim Cook said iPhone 7 and iPhone 7 Plus supply remains constrained. “It’s very hard to gauge demand, as you know, when you’re selling everything you’re making,” he said. “We’ll find out more through the quarter, but we’re confident enough to give you guys guidance that we’re returning to growth this quarter, which obviously feels very good for us.”
Apple forecast its largest quarter ever without introducing any new products outside of its existing portfolio, according to Dawson. “I suspect between new Macs and a strong iPhone cycle, together with stabilizing iPad revenues, Apple can drive growth in the interim without new products.”
Apple services reach new heights
Apple’s services business, which includes iTunes, the App Store, Apple Music, AppleCare and Apple Pay, is one of the company’s fastest-growing divisions. Cash flow associated with services helped Apple offset declines in other areas, but it only accounted for 13 percent of its total revenue during the last quarter. Revenue from services jumped 24 percent year-over-year, to $6.3 billion, during the fourth quarter, but Apple’s iPhone business was still nearly five times larger, based on revenue.
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Services represent a strong growth opportunity for the company, partly because the business tends to be more stable than hardware revenues, according to Dawson. “To the extent that the installed base continues to grow, it shouldn’t flatten out anytime soon, and if Apple keeps layering additional subscription services on top, that will help maintain growth too.” Video is one area in which Apple could introduce a subscription service and boost associated revenue, he says.
Cook said Apple is confident in its services business because it directly increases user engagement and loyalty. “We have almost doubled the size of our services revenue in the last four years, and as we’ve said before, we expect it to be the size of a Fortune 100 company in fiscal 2017.”