Apple just saw its quarterly revenue fall year-over-year for the first time since 2003. It sold fewer iPhones than it did a year ago for the first time ever in that product's history. And when the company reports numbers for the current quarter three months from now, it expects those numbers to dip again.
So is it time for Apple and its legion of fans to panic? Not exactly.
Certainly Apple's fiscal second quarter was poor by any measure you care to use, and declining iPhone sales was a big part of that. Apple sold a little less than 51.2 million phones during the January-to-March quarter, compared to a little less than 61.2 million for the same period in 2015. A glance at that drop, coupled with the flat iPhone sales growth Apple saw during the holiday quarter, would suggest that 10 years in, our love affair with the iPhone may be over.
But the iPhone's best days may not be entirely behind it. Buried in Apple's earnings report were a handful of reasons that flagging interest in Apple's smartphone could perk up — provided Apple has a compelling successor to the iPhone 6s and 6s Plus in the works.
1. People are still upgrading their older iPhones.
Apple famously follows a tick-tock update cycle with its iPhone product launches, where a major overhaul of the lineup one year is followed by a more incremental update the next. Last fall's release of the iPhone 6s and 6s Plus was the tock to the tick of the iPhone 6 and 6 Plus. Those September 2014 releases fueled an upgrade frenzy from 2013's iPhone 5s and 5c, making this year's drop-off in sales look even more stark.
If Apple would have had the same upgrade rate with the iPhone 6s as it did with the iPhone 6, CEO Tim Cook told Wall Street analysts during a conference call today (April 26), "it would be time for a huge party."
But compare the 6-to-6s upgrade to the last tick-tock cycle — when the 5c and 5s replaced the iPhone 5 — and the picture brightens for Apple. Cook noted that the upgrade rate for the iPhone 6s and 6s Plus was slightly better than the iPhone 5s upgrade cycle from two years ago. That suggests the next major overhaul to Apple's iPhone lineup could see an increasing in the number of existing iPhone users trading up for a new device.
MORE: iPhone 7 Rumor Roundup
2. People are still switching from Android.
When Apple reported its holiday sales back in January, Cook noted that a record number of Android users had jumped over to Apple's mobile devices. That trend continued in an otherwise dour quarter for Apple, with Cook now telling analysts that more Android users switched to iOS in the first half of Apple's fiscal year than at any other six-month period in Apple's history. While it's likely that Android switching tailed off a little bit from the holiday quarter's record highs, it's clear that Apple still thinks it can grow by getting more disaffected Android users to give its phones a try.
3. Apple's numbers don't include iPhone SE sales. Apple's second quarter ended on March 26. The iPhone SE — the 4-inch phone that features components on par with Apple's larger flagship phones — went on sale March 31. That means Apple's sales figures didn't reflect any iPhone SE numbers, and those could be noteworthy, since Apple says demand has been strong for its compact phone.
The 9.7-inch iPad Pro also shipped after the quarter ended, and that could also spruce up Apple's bottom line; Cook told analysts that iPad revenue comparisons in the June quarter could look the best they've been in two years.
The iPhone SE won't be enough on its own to improve Apple's overall sales picture. The company is still forecasting a year-over-year drop in revenue for the June quarter, as it reduces inventory (including stagnant iPhone 6s and 6s Plus models). But it does indicate that Apple is finding ways to reach customers with a new phone that sells for a lower price than past iPhones. "We're optimistic about attracting new customers."
4. Everyone with iPhones keeps buying other things. Apple's Services segment was a bright spot for the company during the quarter, with its revenue increasing 20 percent to $6 billion. The App Store was a big driver of that, with its revenue growing 35 percent to an all-time high. Apple executives also noted that the average amount spent per customer on content through Apple's services hit a record, too.
The bottom line: Apple may be selling fewer phones than it was last year, but those of us with iPhones are still happily handing over money to the company for music, movies and apps — something that should keep iOS developers very interested in the platform.
5. The Apple Watch is doing pretty well, too. Sure, it's not a phone, but the success of the Apple Watch does speak to Apple's ability to expand its ecosystem. And while Apple continues to keep exact sales figures for the watch under wraps, things are going well, according to the company.Apple sold more Apple Watches during the just-completed first year of that device's existence than it did iPhones in that product line's first year. That hints at strong potential growth for the Apple Watch, particularly if, as rumored, Apple equips the watch with cellular connectivity, making future versions independent from the iPhone.
Why You Should Panic
Of course, all these silver linings could easily recede back into the clouds if Apple fails to deliver a compelling update to the iPhone lineup later this year. Rumors about the iPhone 7 are not encouraging, with many analysts and Apple watchers predicting only modest changes to the iPhone, such as a waterproof design, the removal of the headphone jack, and dual cameras topping the latest rumblings about Apple's next phone. More significant changes like a redesign case and OLED displays may wait until 2017.
If that's the case — and remember, these are all rumors at this point — this quarter's dip in iPhone sales growth may be the first one Apple's ever experienced, but it won't be the last.