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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  • boozed - Wednesday, April 27, 2016 - link

    I think the iPhone 6 exposed a huge latent demand that is now satisfied and we've returned to the mean. Reply
  • lilmoe - Wednesday, April 27, 2016 - link

    the signs were in the charts pretty early on, as far as shares are concerned. Reply
  • Kvaern2 - Wednesday, April 27, 2016 - link

    Nothing new. They always fret when Apple release earnings and it doen't seem to make much difference what the actual figures are. Reply
  • retrospooty - Wednesday, April 27, 2016 - link

    Who is "fretting" ? People are saying what most of us already knew. Apple has been milking it for years. The lack of compelling upgrades across all product lines is so evident now that even the "apple friendly press" is noticing. That is really all hat has changed in the past few years is that the press is noticing... and even Apple fans are complaining. Reply
  • toukale - Wednesday, April 27, 2016 - link

    Here is what Apple did in the year over year the past few years in billions.

    2012 - $39.2
    2013 - $43.6
    2014 - $45.6
    2015 - $58.0 (47.8)
    2016 - $50.1

    If you take the anomaly 2015 quarter out and replace it with their normal trajectory they are actually doing great. But that would be too logical for the market. Everyone knew there were just no way they were going to be able to leap over those record quarters. I am even surprise they were able to beat last quarter, even by 1%. This is like a baseball player hitting 4 homerun in a row and triple in their 5th at bat, but everyone is displease with that triple.
    Reply
  • retrospooty - Wednesday, April 27, 2016 - link

    Yup... I was just saying people aren't "fretting" The market is however starting to notice that Apple is milking it. The first ever decline in sales for iPhone isnt going to hurt them financially (in any meaningful way)... But it is telling about how the market and tech press is reacting to their current products and lack of compelling upgrades on them. Even Walt "Apple is the end all be all of the tech industry" Mossberg is occasionally badmouthing Apple these days. Even Apple fans on tech sites like this are complaining. Reply
  • dagnamit - Wednesday, April 27, 2016 - link

    In other words, buy Apple stock immediately. Reply
  • retrospooty - Wednesday, April 27, 2016 - link

    Based on their current trajectory and what the next gen of products looks like, I would not. They will level off at best. I am not saying that the company is in financial trouble, but the stock isnt likely to rise any time soon. Reply
  • dsumanik - Wednesday, April 27, 2016 - link

    agreed, buying apple stock at the moment at best will blue chip investment, but most likely lose and level off over the next 8 months. Time to sell and wait for the storm to blow over, or apple to start innovating again, Reply
  • Murloc - Wednesday, April 27, 2016 - link

    the problem is being able to tell that they're about to come out with the next big thing before the rumors start. Reply

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