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Apple - Looking to the future despite falling sales

Nicholas Hyett | 27 July 2016 | A A A
Apple - Looking to the future despite falling sales

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Apple Inc Com Stk NPV

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Apple shares are back above the $100 mark, rising more than 6% in Pre-Market trading, after 3rd quarter trading saw customer demand and business performance exceeded management expectations. Dividends in the quarter increased by 10% versus a year earlier, to 57 cents.

The share price rally came as declines in iPhone and iPad unit sales slowed versus the previous quarter, although iPhone unit sales still fell 15% versus the previous year. Overall revenue continued to decline, down 15% year on year to $42.4bn and gross margins also suffered, falling from 39.7% a year previously to 38% this quarter.

Some good news was provided by the group's service business, which grew 19% year-on-year. App Store revenue and numbers of transacting customers both hit all-time highs.

However, in a call with analysts last night CEO Tim Cook focussed on the company's efforts to develop products outside its existing portfolio rather than current trading. Initiatives reportedly include Apple TV, artificial intelligence and augmented reality as well as plans to build an electric car. Work in artificial intelligence and machine learnings is already thought to have improved products including the Siri virtual assistant and Apple's Photos app. The group's focus on innovative new products is underlined by a 26% increase in R&D spending versus a year earlier.

Overall today's numbers might not be as bad as expected, but they still make for some pretty unpleasant reading if you focus on the performance of the current portfolio. Growing service revenues are welcome but the fact that Tim Cook chose to focus on the group's blue-sky development projects suggests that the group is starting to see its future beyond that portfolio.

Apple have an excellent track record where innovation is concerned, able to launch products and software that creates whole new sectors in which it can become the dominant player. If it can do the same again recent declines will be of little concern to investors, however creating that kind of blockbuster product is a very big ask.

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