<div id="readability-page-1"><div><figure><figcaption>WASHINGTON, DC - DECEMBER 01: Apple CEO Tim Cook arrives for the White House state dinner for ... [+] French President Emmanuel Macron at the White House on December 1, 2022 in Washington, DC. The official state visit is the first of the Biden administration. (Photo by Nathan Howard/Getty Images)Getty Images</figcaption></figure>
Apple just blamed its weakest quarter in years on forces outside its control.

But something else could be behind Apple’s 5% drop in sales for the most recent quarter. Apple is violating one of the most basic requirements for growth: customers will switch to the product that offers them the most value.


Based on listening to my undergraduate students this week, many are feeling like fools for being locked in — via the iPhone — to Apple’s “ecosystem.” They would rather own a product that costs less and works better.

Apple’s business is dependent on essentially jailing its customers within its ecosystem. The iPhone is a 15 year old product — that accounted for 56% of Apple’s revenues in the latest quarter. It competes in a declining smartphone industry — shipments were down 18% in the latest quarter, according to the Wall Street Journal.


Apple’s growth problem is not really due to macroeconomics or supply chain kinks. Instead Apple should be blaming the loss of what once made it distinctive — the ability to innovate its way to success about which I wrote in 2013.
Simply put, just as Apple cannibalized the iPod in 2007, it needs to create a big new source of revenue growth by disrupting the iPhone. I do not see that happening as long as Tim Cook is Apple’s CEO.

<h2>Apple’s Bad Q1 2023 Report</h2>
Apple suffered its worst quarter in seven years. That’s CNBC’s conclusion based on the 5% drop in revenue for the December 2022- ending quarter.

While Apple had some bright spots in its results, CNBC reported that most of the news was bad:

<ul>
 <li>Revenue fell 5.5% to $117.15 billion — some $3 billion below the Refinitiv consensus</li>
 <li>iPhone revenue down 8.2% to $65.78 billion — $2.5 billion below estimates</li>
 <li>Mac revenue plunged 29% to $7.74 billion — $1.9 billion below the consensus</li>
 <li>EPS down 11% to $1.88 — 11 cents below the consensus</li>
</ul>



Here is the good part:

<ul>
 <li>iPad revenue soared 30% to $9.4 billion — $2.4 billion above estimates</li>
 <li>Services revenue up 6.4% to $20.77 billion $100 million more than the consensus</li>
 <li>Gross margin of 42.96% — slightly above estimates</li>
</ul>

Cook attributed the decline to three factors:

<ul>
 <li>Strong dollar — what Cook referred to as an eight percentage point headwind.</li>
 <li>Production issues in China affecting the iPhone 14 Pro and iPhone 14 Pro Max. Cook said that the primary iPhone assembly plant in China was affected by Covid lockdowns during the quarter “So we had a big hole there,” according to CNBC.</li>
 <li>The overall macroeconomic environment. In what appears to be a nod towards the effect of inflation on consumer spending and economic growth, Cook said, “We’re also recognizing the environment that we’re in is tough. And so we’re cutting costs. We’re cutting hiring, we’re being very prudent and deliberate on people that we hire,” noted CNBC.</li>
</ul>

<h2>Apple Declines To Forecast Its Future</h2>
Apple stopped providing guidance in 2020 and did do so for the current quarter ending in March. Analysts were expecting Apple to forecast $98 billion in revenue for its fiscal second quarter.
Despite the absence of specific guidance, CFO
 CFO
 Luca Maestri sees further decline — though perhaps not as much as Apple suffered in its first fiscal quarter. As CNBC reported, he said that “services are expected to grow, but Mac and iPad sales are both expected to decline double digits. He also anticipates a smaller decline in IPhone sales in the March-ending quarter.
Unlike its lack of specifics when it comes to revenue guidance, Apple is proud of its ability to cut costs. As Cook told investors on February 2, “We’re being prudent and deliberate. If you look at our OpEx guidance, what we said we were going to do this quarter, we came in half of a billion dollars underneath it. So we are squeezing costs out.”
Investors seeking growth may not derive much comfort from Apple’s efforts to cut its way to success and make excuses for its inability to staunch declining revenues.
<h2>Apple’s Murky Future</h2>
Apple’s most significant product competes in a rapidly declining market. According to IDC, global smartphone sales in the final quarter of 2022 fell 18% to about 300 million units — while iPhone shipments declined 15%, according to the Wall Street Journal.
Apple’s leadership is acting as though its biggest product will keep growing forever. But that is not how business works. Instead, products go through life cycles.
Many of the best products start off slowly, enjoy a growth spurt that attracts rivals, and eventually matures and declines until a new — more compelling product — comes along.
The iPhone is clearly in decline. Apple is not doing enough to make students want to buy the product. How so? Many of my students have their entire online life — such as messaging, social media, online payments, and more — on their iPhone and MacBook.
That would be fine were it not for the fact that their iPhone’s performance degrades so much that within two years they feel compelled to overpay — say, $1,000 — for a new one that lacks compelling new features.
While some would like to switch to a less expensive smartphone — say, a $600 Samsung — students judge the cost of exiting the Apple ecosystem to be too high. So they are locked in to a bad bargain.
Apple’s stock market capitalization — which peaked at $3 trillion — has suffered a 21% decline since. With analysts expecting Apple to suffer a 4% drop in sales in the March 2023-ending quarter, according to the the New York Times
 NYT
 , there is little to compel investors to buy the stock.
In the absence of a significant new growth curve that will restore Apple’s top-line growth — that averaged 15.5% a year from 2010 to 2020 — what will send its stock upward?
</div><div>Follow me on Twitter or LinkedIn. Check out my website or some of my other work here. </div></div>

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