What Apple's first down quarter in 13 years really means

All eyes are on Apple after the company suffered its first period of revenue decline since 2003. The next iPhone release will be a defining moment for the company, according to analysts.

Apple's 13-year revenue growth streak has come to an end. The company this week reported its first year-over-year decline in revenue since 2003, down 13 per cent in the first quarter of 2016 from the same period last year.

The downswing, which comes almost five years after former CEO and founder Steve Jobs passed away, is fueling some negative perceptions of Apple amidst the realisation that companies cannot continue to grow in perpetuity. The reason Apple's improbable period of growth ended is largely the same thing that fueled it for so long: the iPhone.

iPhone sales represent nearly two-thirds of Apple's business, and revenue associated with the company's flagship product declined 18 per cent year over year, with 51 million units sold. Apple CEO Tim Cook called the news a "pause in our growth," but he did not say when the company plans to reverse the negative trend. In fact, Apple forecasts that the current quarter, which ends in June, will be another down one.

[Related: Why Apple no longer needs an iPhone wow factor]

"There weren't any huge surprises this quarter," because Apple warned investors that revenue would decline going into 2016, and it fell within the company's range of guidance, according to Jan Dawson, chief analyst and founder of Jackdaw Research. "Anyone who reacted very differently to the actual results than they did to the guidance last quarter wasn't really paying attention."

Can Apple grow again in 2016?

Apple drives important new sources of revenue through services such as Apple Music and its Apple Watch smartwatch, but these businesses are relatively small compared to the iPhone, Dawson says. "iPhone growth is the single most important thing Apple needs to work on - everything else is so much smaller that it's hard to make a dent in overall growth if the iPhone is shrinking."

If Apple is to grow again this year, the yet-to-be-revealed iPhone 7 will have to be a smashing success, according to Dawson. Many analysts have tempered expectations, however, and some already believe it's more likely that Apple will start to sell more iPhones and increase revenue in late 2017.

"The big question longer term is whether [Apple] can return to growth later this year," says Dawson says, who believes it will, because iPhone growth is generally cyclical. "The massive growth Apple experienced over the last 18 months or so was entirely down to the introduction of larger phones, and demand is simply returning to its prior trajectory."

The iPhone also isn't the only culprit behind Apple's down quarter. "The biggest weakness is that it now has three major product lines in categories where there's little growth: smartphones, tablets and computers," Dawson says. "Apple has to take share in the major categories it competes in to return to strong revenue growth."

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Matt Kapko

CIO (US)
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