Apple sales drop $4.1B after iPhone market share loss

The smartphone market seems to have recovered from its coma of nearly three years, but Apple has taken to the sickbed. The tech giant this week showed how dependent it is on the iPhone after a slump in shipments for the March-ending quarter led to a $4.1 bill drop in headline sales and a $500 million fall in net profit. It's just a blip after unusual events in the year-earlier quarter, insisted executives. But third-party data points to growth for the overall sector and a significant loss of market share for the iPhone.

Supplied by Omdia, a sister company to Light Reading, those figures show 300.4 million smartphones were shipped between January and March, an 11.6% increase on the year-earlier quarter. It comes after what analysts at the company describe as a "prolonged period of market stagnation and decline" that started around April 2021 and could still be observed late last year.

For Apple, though, it was a different story of decline. Shipments fell by 6.6 million units, to 50.7 million for the recent March-ending quarter, meaning Apple's market share slid four percentage points, to 17%, according to Omdia's data. And there is specific concern about the company's performance in China.

"China is an important market for Apple with the second largest shipment volume after the United States," said Jusy Hong, a senior research manager for Omdia, in a statement about the latest data. "However, Apple has been facing intense competition from Huawei in the premium segment of the Chinese local market since the second half of last year, which has contributed to disappointing iPhone shipments in the quarter. Performance in the Chinese market will be an important factor in determining Apple's overall shipments this year."

Unfortunately, Apple looked just as reliant on the iPhone last year as it did in 2021, generating about 52% of its total revenues from the gadget first launched under Steve Jobs, Apple's founder, way back in 2007. It contributed about 51% of the $90.8 billion in revenues that Apple reported for the March-ending quarter, with iPhone sales down a tenth year-over-year. An uptick in Mac computer sales of 4%, to $7.5 billion, was clearly insufficient to compensate after even sharper revenue declines across iPads and the wearables, home and accessories division. That top line was 4% lower, with net profit down 2%, to $23.6 billion.

Bullish in the China shop

CEO Tim Cook was quick to address the concern. "We faced a difficult compare over the previous year due to the $5 billion impact that I mentioned earlier," he told analysts on a call. That $5 billion is Cook's estimate of the pent-up demand that flowed from 2022 into early 2023, following disruption to supply chains caused by lockdowns. Subtract that and revenues would have grown.

It's a curious explanation. If Apple had been able to book the $5 billion in 2022, then 2023 would not have been as good, for one thing. And Apple was hardly the only company to experience disruption because of the measures taken during (and immediately after) the pandemic.

Cook also insisted that iPhone shipments grew in "mainland" China. But Omdia is not the only analyst company that seems to question this assessment of the recent performance. According to recent data published by Counterpoint Research, Apple's China sales were down 19.1% year-over-year for the March ending quarter "as Huawei's comeback directly impacted the premium segment."

The Chinese kit vendor currently looks resurgent after lifting the curtain on its Mate 60 Pro gadget in September last year. To the horror of Team America, teardowns showed the device was made with components from which Huawei was supposed to have been cut off by US sanctions. Revenues at Huawei's smartphone-making consumer business rose 17% last year on demand for the Mate 60 Pro.

Whatever one thinks of Huawei, the Chinese company has evidently worked to reinvent itself since it first came under sustained US attack, expanding into markets including the public cloud and the automotive sector. But there has been no such reinvention by Apple under Cook. Its Vision Pro headset, the mask you need to enter Apple's extended-reality universe, remains a commercial experiment for now. Nothing else has emerged as a potential iPhone successor.

Cook's main impact in his nearly 13 years in charge has probably been on supply-chain management. Through supreme cost control, Apple was able to generate a gross margin of 47% for the March-ending quarter, up from 41% immediately before Cook became CEO.

AI, of course

There was other positive news, though. Apple's services business has been on a roll and generated nearly $24 billion in sales for the March-ending quarter, up 14% year-over-year. That undoubtedly helped the gross margin and Apple is guiding for double-digit growth in services revenues in the current quarter. The forecast compares with guidance of low single-digit growth for total sales, with Apple silent about the outlook for iPhones.

If China consumed much of the analyst attention during the results call, generative artificial intelligence (AI) was the other big topic. Having previously been criticized for not having a generative AI story, Apple now seems unable to stop talking about it. Cook mentioned it no fewer than four times on the call, dropping in another two references to plain old AI (although in the context of the generative sort). "We continue to feel very bullish about our opportunity in generative AI," he told analysts, without sharing any real details whatsoever when quizzed on the approach.

Will investments in that area boost capital expenditure above historical levels of about $10 billion to $11 billion a year? That question, posed by Mike Ng of Goldman Sachs, went unanswered. The more interesting one, asked by Eric Woodring of Morgan Stanley, concerned the ability of a hardware company like Apple to make money from what is basically a software feature. As Woodring noted, "[software] upgrades haven't been a big factor in driving product cycles." If Cook thinks generative AI can change that paradigm, he wasn't sharing why.