Apple Inc Q2 Earnings Tell a Story of a Changing Company

Apple Inc reported a net income of $US9.5 billion on $US43.6 billion in revenues. The results showed an 11% year-on-year increase in revenue accompanied by an 18% fall in profits. The company is selling more iPhones and iPads, but it’s making less money off of them. This implies lower post-sale revenue. Strong volume sales growth means that Apple Inc has strong replacement rates and continues to gain users. The core of the problem for the company is that these users are only interested in the hardware and have limited/no interest in spending money on Apple services and content. Much of this is because growth in smartphone and tablet sales is strongest in emerging markets where iPhones are often purchased as status symbols by consumers with limited access to and interest in services like iCloud.

Apple Inc’s ecosystem of hardware, software, services, and other content is its main advantage over rivals who, Samsung Corp aside, compete for razor-thin margins by trying to best each other’s hardware spec sheets. As Apple Inc’s user base expands to lower-income consumers some margin erosion is inevitable. A lower cost iPhone or iPad mini, Apple TV, iWatch or any other suggested or rumoured device will not be sufficient minimize losses in profitability on its own. Apple Inc needs to focus on developing services and products for its shifting user base, and generating post-sale revenue from consumers in emerging markets.