Apple’s First Quarter of Negative Growth

Apple reported its first-ever quarter of negative corporate revenue as well as iPhone unit shipments growth decline after 35 quarters of straight positive growth as we warned last quarter. What does this means for Apple and the supply chain and competition? Let’s analyze and deep dive into Apple’s dip in performance. The margins have dipped again and too much dependent of the flagship refresh cycles vs incremental updates with maturing competition driving the overall demand down.


1. Apple fate is now 100% tightly linked to iPhone’s sales performance

  • As iPads, Macs has slowed down considerably, the onus is completely on iPhone to be Apple’s driving force
  • However, if iPhone registers a negative growth, it pulls down the overall corporate performance.
  • There is no doubt iPhone still generate more revenues and profits than the next five brands combined, however, history has provided enough evidence that fortune turns quickly in this cut-throat mobile devices market
  • The launch of a 4-inch iPhone SE was unnecessary from stimulating unit growth perspective though might make sense from Apple’s profit or operational mindset if it clicks and stimulates the upgrades which currently looks highly likely.

2.  China has been the bright spot for Apple but could also be a “problem child”


  • Greater China contributes to roughly a fourth of the revenues whereas USA+China+Japan contributes to combined 60% of Apple revenues.
  • Apple’s iPhone market share according to our preliminary Q1’16 (jan-Mar) estimates for China has plunged to 12% from 18% a year ago. iPhone shipments are down 32% YoY whereas its rival Huawei’s shipments are up 47% YoY. So China has begun to become a problem child for Apple as the Chinese consumer gets mature and is smart enough to pay the premium only for the major updated iPhone model than for an incremental updated model.
  • This shows overdependence on these three markets for Apple which is the reason Apple is betting on markets such as India to drive growth for the next five years
  • However, India market consumer is almost four times less richer than Chinese consumer and not a mature device user as Chinese or American consumer.
  • Secondly, since Apple plays mostly in segments above $500 retail in Indian market since iPhone 5S will be phased away, it wil have access to just 4% of the TAM in emerging markets such as India which will delay its growth prospects.
  • Playing in sub $300 segment is very important now for Apple to drive the ecosystem effect and as we highlighted iPhone SE is not the answer even though it is positioned that way.


3. Apple’s One Billion Device Base is Driving Software & Services Segment Growth

  • Apple’s total active device installed base has crossed a billion mark recently and is now seeing broader ecosystem level top-line benefits.
  • Apple’s Software & Services (S&S) revenues have now surpassed iPad as well as Macs revenues respectively which signals that the potential of next revenue growth will come from cashing on the ecosystem of S&S.
  • Majority of the one billion active user base is cash rich and upper middle class which warrants Apple to invest and focus more on S&S currently than on Apple’s ambition in automotive space.
  • However, declining Macs, iPads, iPhone and slower than expected Apple Watch sales are not helping the cause and feels if Apple has left it little too late to drive S&S revenues if it had focused on this segment 3 years ago
  • Apple Music which has reached 13 million paid subscribers is below expectations with attach rate of single digit of its total active user base.
  • Rollout and adoption of Apple Pay is still in nascent stages which needs to be accelerated to meaningfully impact the top and bottom lines


  •  In this highly competitive mobile industry, it takes years to build brand, channels, product and ecosystem but it takes just a few years for decline which could be rapid
  • In Apple case in spite of strong cash reserves, brand loyalty and a robust ecosystem we can see it is not immune to competitive headwinds, slower innovation and ecosystem, design aging effects
  • Apple will have to rethink about increasing the value proposition beyond incremental hardware updates and focus more on content, software, services innovation as its user base gets matured.
  • No one has yet cracked the cross device convergence of cloud, apps, UI and services even though Microsoft leads in this effort but Apple has a bigger opportunity here to solve this problem instead of four or five different app stores, UI and hardware form-factors which at some point will be a deal-breaker for developers.
  • Cloud, software and services is the area where Apple should focus its R&D on and roll out across globe rather than mostly US specific