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Is Apple now a devices and services company?

May 2, 2017

By Jeff Johnson, Developer of Underpass

Hi, I'm Jeff, your local neighborhood unpaid Apple analyst. Three months and one quarter ago I wrote A Record 14 Weeks, which showed that Apple's fiscal 2017 first quarter was not a return to growth, as widely and misleadingly reported by the media, but just another down quarter after the results are adjusted for the extra week in the once-in-a-blue-moon 14-week quarter. I also wrote two follow-up posts: Slow Week? and Follow-up on a Record 14 Weeks. Disappointingly, and despite the popularity achieved by my posts when they were written, the media are still to this day reporting 2017 Q1 as a growth quarter, completely ignoring the existence of the extra week. I did my best, but memories are short.

If your memory does happen to be long, you might recall that back in 2010, Steve Jobs called Apple a "mobile devices company". A few years later, Steve Ballmer called Microsoft a "devices and services company". Ballmer's replacement, Satya Nadella, has since dumped that phrase and rebranded Microsoft with a different mission statement, along the lines of "something something productivity". The question now, however, is whether Apple is still a mobile devices company, or has Apple become the new Microsoft? Perhaps more accurately, has Apple become the old Microsoft, a devices and services company?

Today Apple published its fiscal 2017 second quarter financial results. FY 2017 Q2 was back to the standard 13-week length, so we don't need to adjust the results to compare them with the previous year. What I'm interested in with this post is Apple's overall pattern of growth. Therefore, I'm going to put the current results in context alongside previous quarters, including 2017 Q1 and all of FY 2016. In the tables below, each value is a year-over-year comparison, with positive percentages representing growth, negative percentages representing contraction, and zero representing no change. For example, the numbers for FY 2017 Q2 represent growth or contraction when compared to the same quarter in the previous year, i.e., FY 2016 Q2. These percentages are all taken from Apple's published quarterly results, except FY 2017 Q1, which are based on the published quarterly results but adjusted by 13/14, exactly as I did in my original blog post on the subject.

Revenue 2017 Q2 2017 Q1 2016 Q4 2016 Q3 2016 Q2 2016 Q1
Overall +5 -4 -9 -15 -13 +2
Services +18 +10 +24 +19 +20 +26
iPhone +1 -2 -13 -23 -18 +1
iPad -12 -28 0 -7 -19 -21
Mac +14 0 -17 -13 -9 -3

Units 2017 Q2 2017 Q1 2016 Q4 2016 Q3 2016 Q2 2016 Q1
iPhone -1 -3 -5 -15 -16 0
iPad -13 -25 -6 -9 -19 -25
Mac +4 -6 -14 -11 -12 -4

It's worth extending the table for Services and iPad, because those categories have shown consistencies going back to at least 2014 Q2:

2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2
Services Revenue +10 +12 +9 +9 +8 +12 +11
iPad Revenue -20 -23 -29 -22 -14 -8 -13
iPad Units -20 -18 -23 -18 -13 -9 -16

Look at the unit sales. There are almost no positives. Indeed, there is only one positive number in the whole units table: Mac units in 2017 Q2. But one quarter of growth can't make up for the losses in previous quarters. Overall, Apple is selling less hardware now than in 2015, at least in terms of the "big three", the "tripod" of iPhone, iPad, and Mac.

Meanwhile, services are experiencing incredible, uninterrupted growth. The trajectory is higher and higher. In 2017 Q2, services revenue was significantly higher than either Mac or iPad. It's still far behind iPhone of course, but it's becoming the second most important revenue source for Apple. The tripod is now a table with four legs.

As for the future, the question is, does the hardware have any room for growth, or has Apple reached market saturation? It's clear that the iPad reached market saturation some time ago. And perhaps the iPhone finally has too. 6 straight quarters of no unit sales growth. Some analysts have claimed that the next iPhone update will be a kind of "super-cycle", because a large number of iPhone owners have gone a couple of years without upgrading. But it does appear that since cellular contracts have disappeared, and iPhones are no longer subsidized by the carriers, the iPhone upgrade cycle is getting longer. So it remains to be seen how many current iPhone owners will upgrade to the iPhone 8, or iPhone 7S, or whatever they end up calling it. And even proponents of the super-cycle theory haven't suggested that Apple will attract large numbers of new customers, for example, Android switchers. Even after Samsung's recent troubles, it doesn't appear that large number of customers are switching.

Thus, with iPad continuing its freefall, iPhone stagnating, and the Mac questionable — there are promised iMac updates sometime later this year and a Mac Pro update in some future unspecified year, while the Mac Mini "remains a product" — the only category of the 4 with significant room for growth is services.

Appendix

Q2 is typically the slowest quarter of the year for Macs, so the 4% unit sales growth in 2017 Q2 represents only 165,000 more Macs than 2016 Q2. Even with this growth, Apple still sold 364,000 fewer Macs in 2017 Q2 than 2015 Q2.

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