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The end of iPhone’s glory days?

The Financial Times logo The Financial Times 28-04-2016 Richard Waters in San Francisco
iPhone SE© Bloomberg iPhone SE

Investors in Apple had already been braced this year for a sharp, one-quarter decline that would bring the first fall in sales for the iPhone.

Now, though, they will have to get used to the idea that the severe slump will go on for at least two quarters. And the longer Apple struggles to revive the fortunes of its dominant product, the greater the concerns that the iPhone’s glorious days of growth are behind it.

The depths of the trough in Apple’s core smartphone business became clear on Tuesday, as the company reported weaker results than expected for the first quarter of this year and issued a downbeat forecast for the second.

Rather than a steady recovery starting in the current quarter, iPhone unit sales could now be on track to see an even bigger decline than they did in the first three months, when they fell 16 per cent year-on-year.

It did not matter that Apple executives insisted that the weakness in the forecast was partly the result of a $2bn inventory adjustment that will mask the likely strength of consumer demand. At only $41bn-$43bn, Apple’s revenue forecast for the quarter ending in June was far enough below Wall Street’s expectations of $47bn to send a chill through the market, slicing 8 per cent from the company’s stock price in after-market trading.

The figures underlined what had already been apparent: Apple is living in the shadow of its own past success. The surge in sales following the launch of the iPhone 6, which began in September 2014, has left an acute hangover. And the longer it goes on, the more the pressure will grow on Apple to prove that it can still whip up fresh excitement for its ageing smartphone product line when the time comes to reveal the iPhone 7 later this year.

“We’ve hit an innovation plateau,” said Geoff Blaber, an analyst at CCS Insight. “The iPhone can’t grow indefinitely.” Apple’s greatest challenge, he added, is living up to the outsized expectations generated by its own past success.

According to Apple executives, however, there is nothing new in the iPhone’s current product cycle, even if the pullback has looked greater.

The pause is very similar to the one seen two years ago, said Tim Cook, chief executive officer. Then, as now, Apple followed a significant overhaul of the iPhone with a year in which it produced fewer changes. If anything, the upgrade rate by iPhone customers is better than it was then and the underlying picture remains healthy, he insisted on an analyst call following the earnings announcement.

Mr Cook also brushed off suggestions that Apple was passing from being a growth company to a mature one. Asked if the slowdown meant it was time to rethink the company’s position in the tech world, he retorted: “This too shall pass.”

(FILES) This file photo taken on February 25, 2016 shows a man as he walks up the stairs at the Apple Store in Grand Central Station in New York. The US Supreme Court on March 7, 2016 upheld a ruling that Apple was part of a price-fixing conspiracy for electronic books, clearing the way for a $450 million settlement to be paid.The top court declined without comment to hear an appeal from Apple, which lets stand a 2013 ruling by a New York federal judge. / AFP / Timothy A. CLARY© AFP (FILES) This file photo taken on February 25, 2016 shows a man as he walks up the stairs at the Apple Store in Grand Central Station in New York. The US Supreme Court on March 7, 2016 upheld a ruling that Apple was part of a price-fixing conspiracy for electronic books, clearing the way for a $450 million settlement to be paid.The top court declined without comment to hear an appeal from Apple, which lets stand a 2013 ruling by a New York federal judge. / AFP / Timothy A. CLARY

But there were enough signs in the latest earnings to make investors think twice.

One was a slide in Apple’s Greater China segment, until recently its strongest source of growth. Though accounting for only 25 per cent of total sales, the region was responsible for 60 per cent of the revenue decline in the first quarter. According to Mr Cook, however, mainland China was more robust than those figures suggested, with end demand only sliding by 5 per cent after an inventory adjustment. The bigger regional decline, he added, was caused by lower sales in Hong Kong — a result, he said, of tumbling purchases by tourists.

A hefty decline in overall iPhone prices also added to Wall Street’s unease. With customers showing a preference for cheaper, older models rather than the latest flagship phone, the average selling price fell by $49 from three months before, to $642.

Pricing is expected to come under more pressure in the current quarter, following the launch of the iPhone SE, a cheaper device with a smaller, four-inch screen designed to expand Apple’s reach into more parts of the smartphone market.

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If iPhone sales have been flagging this year, then there has been little to make up the difference. Apple’s other hardware products also turned in weak results in the latest period. The iPad continued its decline, with unit sales down 19 per cent from a year before, while a halving of revenues from the company’s “other products” segment from the preceding three months hinted at a big decline in sales of the Watch.

In apparent confirmation, Mr Cook said that sales of the Watch were shaping up to be as seasonal as they once were for the iPod, which produced 40 per cent of its annual sales in the final quarter of the year. And even sales of the Mac, which had held up during a broader slump in PC demand, registered a decline, with unit sales down 12 per cent.

Amid the broader pullback, it was left to Apple’s services segment to produce the one bright spot. Three months ago, most analysts paid little attention when Apple sought to shine a light on the potential for its services division, choosing instead to see it as a sign that the company was trying to shift attention away from the iPhone’s slide.

Given that it still accounts for two-thirds of overall sales and has seen such violent swings, however, the fate of the iPhone is likely to dominate Wall Street’s attention for years to come.

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