Apple Sees iPhone Sales Shrinking This Quarter Amid Smartphone Market Slowdown, Says CEO Cook

While iPhone sales are “still very strong,” headwinds in the maturing smartphone market "are finally impacting Apple,” said Fogg. Growth in the smartphone market is shrinking and Apple is facing competition from its own products as well as Huawei, Samsung and Xiaomi, said Fogg. Apple’s strongest competitor “is itself because it must persuade existing iPhone owners to upgrade and buy the current model,” he said.

Apple sold 74.8 million iPhones in the holiday quarter, up 300,000 from the year-ago period, while upping the average selling price from $687 to $691, said Chief Financial Officer Luca Maestri on an earnings call Tuesday. But Apple is projecting $50 billion to $53 billion in sales this quarter, down from $58 billion in the March quarter of 2015, and iPhone sales in the current quarter are expected to fall year over year.

Responding to an analyst who projected a 15-20 percent unit decline in iPhone sales for the current quarter based on revenue guidance, CEO Tim Cook acknowledged there will be a falloff. He said the company believes the drop will be less than the analyst’s 15-20 percent estimate.

Asked whether Apple has reached a saturation point with iPhone, Cook cited market factors affecting sales this quarter: the “turbulent” macroeconomic environment and supply-demand issues in the March quarter from the iPhone 6 rollout last year that won’t repeat in 2016. Each $100 of non-U.S.-dollar Apple revenue in the holiday quarter translated to $85 on the balance sheet due to weakening currencies in international markets, Cook said. Two-thirds of Apple’s revenue is now generated outside of the U.S., he said.

Cook said metrics “strongly suggest otherwise” on whether the iPhone has reached a saturation point. He said that Apple’s view is that the iPhone experience should be able to “convince enough people to move over.” Nearly half of iPhones sold in China last quarter were to first-time iPhone buyers, said Cook. He added there are emerging markets outside of China with a low LTE penetration, and “we ought to be able to win over our fair share of those.”

Cook remained bullish on Apple’s opportunity in the China market, despite widespread reports of a slowing China economy. Cook pointed to the rising middle class that’s on track to grow from 50 million in 2010 to 500 million by 2020, “a great opportunity to win over some of those customers into the Apple ecosystem.” Sales of the iPhone grew 18 percent in mainland China during the quarter, while overall Apple revenue in China grew 14 percent year-over-year to a record $18.4 billion, said Maestri.

Mac sales were down 4 percent for the quarter to 5.3 million units, which Maestri spun into a positive statistic based on IDC estimates of an 11 percent global contraction in PCs. Sales of iPads fell to 16.1 million from 21.4 million, Maestri said. NPD gives Apple 85 percent tablet market share in the U.S. for tablets priced above $200, while IDC data shows Apple owned 67 percent of the commercial tablet market during the quarter, he said.

Apple’s Services business generated $6 billion revenue in the quarter, including $548 million from a patent infringement dispute, said Maestri. He credited growth in apps revenue for the 15 percent year-over-year increase. App Store revenue grew 27 percent in the quarter, while the number of customers purchasing apps grew 18 percent, he said.

“Apple knows it needs to diversify from its dependence on the iPhone,” said IHS’s Fogg, citing Apple Pay, Apple TV and Apple Watch as evidence of diversification. The nascent categories are “growing well, but not yet fast enough to off-set the headwinds affecting the iPad and iPhone,” Fogg said.