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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  • osxandwindows - Tuesday, April 26, 2016 - link

    I don't care about the iPhone, I want new macs.
  • stephenbrooks - Tuesday, April 26, 2016 - link

    Tech companies these days want to sell you the "ideal device", which to them is a small shiny bauble that you pay a monthly subscription to own. The device itself does nothing of interest, although it has many buttons in its UI that pay the tech company additional money, if you're feeling generous.
  • dsumanik - Wednesday, April 27, 2016 - link

    This is what happens when you try and sell the same products for several years straight apple. The macbook line is in need of a massive refresh, still no next gen thunderbolt display and again with the single port macbook. Add to that the massive nerf the mac mini got, and the obscene price of the mac pro leaves you with a lot of professionals desperately wanting to upgrade, but having no technological reason to do so. In fact in some cases the new macs are downgrades from last gen, but more efficient. I would have purchases the ipad pro if there had been no camera bump and it included the stylus. Not gonna pay 130 bucks for a bluetooth pen, on top of a severly overpriced tablet. Good news is folks this means price cuts are coming, just watch... in 6 months they'll be hungry to move inventory.
  • Samus - Wednesday, April 27, 2016 - link

    Yeah the last time someone offered the ideal device it was the first gen Core i7's with X25-M's that many people still haven't upgraded from. Boy did Intel learn their lesson with those, offering mediocre improvements since. It only took 6 generations to compel many people to consider upgrading, and the prosumer skylake platform still isn't mainstream outside of Xeon's.
  • Flunk - Wednesday, April 27, 2016 - link

    Apple doesn't seem to care about Macs anymore.
  • KoolAidMan1 - Sunday, May 1, 2016 - link

    They're waiting on Kaby Lake. I told myself I'd wait for Skylake back in 2012, when it was supposed to be a 2014 release. That didn't happen, and now the technology that Apple would want like Thunderbolt 3 isn't integrated on the chipset until Kaby Lake, which means no new Macs until later this year at the soonest.

    It would be worse if CPU performance hasn't been at such a standstill over the last five years, but come on man...
  • auralcircuitry - Tuesday, April 26, 2016 - link

    Been sitting here with $2k for over a year now waiting on an updated macbook pro, the money is theirs whenever they get around to it. I do music production, couldn't give less of a shit about how thin or how many hardware ports they managed to remove from it. Put in a better processor, a bigger SSD, and take my money.
  • FreihEitner - Tuesday, April 26, 2016 - link

    Pretty much could not agree more. I run a Mac Pro tower, not because I need that much power but because I refuse to buy a disposable device which costs more than $1,800. When they announced they'd made the iMac thinner and lighter a few years ago, I knew there was no chance I would ever get another user-upgradable Mac desktop. I will run this Mac Pro into the ground and then be forced to jump ship to Windows. All Apple needs to do is admit the 2013 Mac Pro cylinder was a mistake (like the old Power Mac Cube) and go back to a real power-user design and I'll happily stay.
  • aliasfox - Wednesday, April 27, 2016 - link

    I have to agree with most of what you say. I have a Mac Pro tower from 2006 - updated and updated to the gills with 8 cores, SSD, and a boatload of RAM. I'm keeping it running because

    a) It benchmarks pretty close to a modern i5
    b) I can't get 24GB of RAM and four drives into any modern Mac
    c) It would take a lot more work to string together 4 displays like I have currently
    d) There's still room to upgrade - my boot drive is SSD, I could move my files to an SSD if I really want; I can upgrade from a Radeon 5870 to an R9 if I really want; I can bump myself to 32GB of RAM. Can't do that on a modern machine.

    21.5" iMacs are almost completely non-upgradeable, and the only things that can be upgraded on the 27" models is RAM and hard disk. I'm not about to drop $4k on a new Mac Pro that's not much better. MacBook Pros have caught up to my machine on processor performance, but I would only get to run two displays - three, if I want to go all Thunderbolt (I think).

    Honestly, my likeliest upgrade is to go from a 2006 Mac Pro to a 2010 model at some point.
  • Stuka87 - Wednesday, April 27, 2016 - link

    A current Mac Pro would blow yours out of the water in CPU and GPU performance. It literally scores twice as high in single and multi core performance. All while using about 1/3 the power.

    You do lose some expandability for sure, as the new ones is not a tower with a bunch of bays. But in terms of performance, its not even a comparison.

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