It goes without saying that nothing lasts forever. And that certainly applies to Apple which used to enjoy a mystique under Steve Jobs. To be sure, his successor Tim Cook has squeezed significant profit from the iPhone in the last five years. It's time for Apple to slash its costs and return cash to shareholders.
But Cook's efforts to spur growth from new products have not worked. Apple just reported a down year and forecast meager growth which in light of Samsung's woes were a big disappointment -- sinking Apple shares by 3.1%.
How so? Bloomberg reported Apple's "first annual sales decline since 2001. The company’s revenue in China, the driving force behind stronger sales in 2015, declined 17% in this fiscal year, prompting analysts on a conference call to raise questions about the source of further expansion."
As I pointed out over a year ago, Apple has narrowed itself into a supplier of iPhones for the Chinese market. But that market is maturing -- second quarter delivery data released in mid-August revealed that sales by Xiaomi and Apple declined 38% and 32%, respectively, even as total sales in China grew 5% according to Nikkei -- and the competition there is fierce. If that's not enough, the Apple mystique is not cutting it there as evidenced by that 32% revenue decline.
Apple's forecast of sales between $76 billion to $78 billion for the last three months of 2016 were just slightly above analysts’ average estimate of $75.4 billion. Bloomberg noted that analysts were expecting more because they think Apple should factor in the new customers it will take from Samsung which will stop making the Galaxy Note 7 "after the phones and some replacement models overheated and caught fire."
As Abhey Lamba told Bloomberg, an analyst at Mizuho Securities in San Francisco, “There was expectation for better guidance in the context that Samsung isn’t doing so well and these guys should be winning market share.”
Apple prices and margins are falling -- evidence of the loss of its mystique. The average sales price of the iPhone fell to $619 in the fiscal fourth quarter from $670 a year earlier. Why? Bloomberg says "some customers opted for the cheaper, smaller iPhone SE over the higher specification 6S and 7, which was introduced Sept. 16."
Apple expects the gap between the prices it charges and the cost to make each device to fall. Its gross margin will decline to between 38% and 38.5% -- below analysts’ forecasts of 38.9%. To put that in perspective its gross margin was 43.9% four years ago.
Apple Chief Financial Officer Luca Maestri says he thinks the average price should recover by the end of the holiday quarter.
The good news is that Apple sold 45.5 million iPhones in the quarter, more than analysts’ projected, Maestri and Cook said that Apple can't meet demand for the new iPhone 7. “Demand is outstripping supply in the vast majority of places, particularly in the iPhone 7 Plus. We’re working very hard to get them into customers’ hands as quickly as possible,” said Cook.
Where will Apple get new growth? Not the Watch nor a car.
Total smartwatch volumes fell 51.6% in the third quarter to 2.7 million units, according to IDC. And while that may have something to do with the timing of new product introductions, there is no doubt that these devices are in search of a reason for people to buy them.
Apple controls 41.3% of this market and suffered a 71.6% sales decline in the latest quarter, IDC notes.
As Jitesh Ubrani senior research analyst for IDC Mobile Device Trackers said, "It has also become evident that at present smartwatches are not for everyone. Having a clear purpose and use case is paramount, hence many vendors are focusing on fitness due to its simplicity. However, moving forward, differentiating the experience of a smartwatch from the smartphone will be key."
Meanwhile layoffs are growing fast in Apple's car division. Bloomberg reported that hundreds of members of its 1,000 person Project Titan team -- the one working on Apple car technology -- have either been reassigned or fired. And the remaining members of that team have until 2017 to prove the feasibility of a self-driving car system.
Cook could not be more thrilled about Apple's car prospects. He thinks technology could "revolutionize" the car experience.
Analysts are right to ask about where Apple will find growth in the future. But it's more likely that Apple will shrink and throw off lots of cash. To boost that cash flow, Apple should cut way back on its R&D and sell off its expensive real estate -- starting with its new headquarters.
After five years under Tim Cook, it is clear that Apple can't innovate anymore.
