What Apple's financial results tell us about its future

Jason Snell

July 24, 2015

6 Min Read
What Apple's financial results tell us about its future

This week was a big one for people who carefully watch the balance sheet of tech companies. Microsoft, Amazon, and Apple all released their quarterly financial reports. For some particularly secretive companies--I'm looking at you, Amazon and Apple--it's a rare bit of disclosure forced by financial regulations governing public companies. And it gives us a level of insight into those companies that we might otherwise be lacking.

But since this isn't a financial website, I'm not going to dwell on the finances. As your resident Apple analyst, I'm going to focus instead on what Apple's $49.6 billion results and associated data disclosures might mean for the future of its various product lines.

It's not all about the iPhone, but it's mostly about the iPhone. This year the iPhone has supplied Apple with nearly two-thirds of its revenue. The Mac, iPad, and online services like iTunes and the App Store are all nice businesses generating roughly $24 billion a year, but the iPhone alone is closing in on $150 billion a year. Apple isn't going to dump the iPad and Mac, but the company's primary focus needs to be on the iPhone. The iPhone business is huge and growth keeps acceleration. Is it any wonder that Apple's most recent major product launch, the Apple Watch, is actually an iPhone accessory? The iPhone's so big, you can build an entire new product category on its back.

A "cheap iPhone" isn't coming, or necessary. A lot of pundits have predicted that Apple will need to make a "cheap" iPhone in order to crack developing markets, but Apple has never shown much desire--even the iPhone 5C wasn't particularly cheap--and it seems comfortable with its current product spread. On his quarterly conference call with financial analysts, Cook said that Apple sees "very, very large numbers" of first-time iPhone buyers "in the countries that you would want to see those in, like China and Russia and Brazil and so forth."

Apple will increase its focus on Chinese features. Apple's growth in China outpaces its growth anywhere else in the world, and Cook expects it to ultimately become Apple's largest market. That means that Apple will undoubtedly continue--and in fact, probably step up--its attention to features that are either specific to China or play very well in China.

This isn't a new phenomenon. Apple's been baking support for Chinese services and social networks into its operating systems for a few years now. One of the major announcements for OS X El Capitan and iOS 9 was support for transit information, which the bulk of covered cities being those in China. I wouldn't be surprised to see Apple start a satellite development studio in China or hire a bunch of Chinese developers and move them to Cupertino, or both.

As someone who's never been to China, I couldn't even begin to speculate on how a focus on China might change Apple's products. But it's entirely possible that future products (especially iPhones) will have specific software and even hardware features that were prioritized because they're important in the Chinese market. In fact, the existence of the larger iPhone 6 Plus phone may owe itself to the fact that larger phones are far more successful in Asian markets than they've been in either North America or Europe.

The Mac continues to outperform the PC market. IDC estimates that the PC market contracted by 12 percent in the most recent quarter, but Apple's Mac sales went up 9 percent. This is just the continuation of a trend where the Mac has outpaced the overall growth of the PC industry for almost every quarter in the last four or five years. Mac growth isn't exploding, but it's continuing to slowly erode Windows PC market share.

I can't see Apple ever ditching the Mac, not even considering how huge the iPhone is. It's too much a part of the company's DNA and on its own, it's still an extremely profitable business. But I would also expect Apple to invest in the Mac at a level commensurate to its role in Apple's overall business--and last quarter the Mac contributed only about 12 percent of Apple's revenue total. OS X development continues, but many of the new features are matching up with new iOS features, making the Mac a better companion to the iPhone and iPad.

Apple believes in the iPad, even though sales have tailed off. There are two ways to look at iPad sales data. The glass-half-empty person will say that they're shrinking, a sign that the tablet market is a failure. The glass-half-full person--and Cook's definitely one of those--would suggest that initial tablet sales were about fulfilling pent-up demand for such a product, and that in the next couple of years sales will build as users upgrade their old iPads.

I'm inclined to believe the latter--my house has three iPads that get used all the time by three different members of our household--but I think it's also clear that there's a chunk of the market that tried the iPad (or another tablet) and ended up finding it inessential. We all have smartphones and computers, and while some of us can find a role in our lives for a tablet, too, some of us can't. Our expectations for the tablet market were probably unreasonable.

But as tablets become more powerful, I believe the market will continue to grow. Apple's focus on iPad productivity features in iOS 9 will help, and the company keeps trumpeting its enterprise deal with IBM. I think the tablet's going to do okay, in the end. But it's got a lot of hype to live down.

The Apple Watch may or may not be big. It's just too early to tell what the story is with the Apple Watch. People can't even agree on how many Apple has sold, and Apple's not saying. The company chalks that up to competitive issues, but it's hard to believe that Apple wouldn't crow about an enormous number. Still, Apple's story here is that it expects the Apple Watch to be huge at the holidays, and much of its business--especially the iPhone--is seasonal, with its peak during the holiday quarter.

What we do know is that the Apple Watch appears to be by far the most successful smartwatch ever. The question is, does that make it a major new product or just the leader in a lackluster accessory category of interest to few? We should know a whole lot more early next year.

Health and Apple Pay are a major future endeavors for Apple. Cook spent a whole lot of time during the analyst call talking about Apple Watch-related health programs with major hospitals, and at its recent developer conference it promoted its new open-sourced initiative, ResearchKit. Clearly Apple thinks that using our mobile devices to monitor our health, modify our behavior, and even communicate with our health-care providers is a major business opportunity. I'd expect many more products with health angles from Apple.

Similarly, Apple clearly feels it has an opening into the financial world with Apple Pay. It recently rolled out the service in the UK, and more countries should be coming online. As the U.S. transitions from swipe-only credit cards to chipped cards this year, new credit card hardware gives Apple an opportunity to grab more transactions. It's working with Square on an Apple Pay-compatible reader for deployment this fall, too. I don't know where Apple will go next with Apple Pay, but it seems comfortable poking its nose into the stream of money flowing from consumers to businesses.

Read more about:

Apple
Sign up for the ITPro Today newsletter
Stay on top of the IT universe with commentary, news analysis, how-to's, and tips delivered to your inbox daily.

You May Also Like