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Tim Cook: iPhone sales will grow again but investors don't believe

Has the global smartphone market finally peaked or is there plenty more growth to come?

While analysts and investors fret about market saturation, Apple (AAPL) CEO Tim Cook firmly rejected that view on Tuesday, despite having to concede that iPhone sales at the beginning of this year will be significantly lower than in 2015, the company's first ever year-over-year decrease.

"If we make a great product and have a great experience then we ought to be able to convince enough people to move over," Cook said, when asked about market saturation. "There's still a lot of people, a tremendous number of people in the world, that will buy smartphones and we ought to be able to win over our fair share of those."

Long time Apple analyst Steven Milunovich captured the dichotomy in a UBS research note on Wednesday. "The investor concern is that companies like Xerox and semi cap names start talking about services as they are going ex-growth," he wrote. "Apple told us in no uncertain terms that iPhone units can grow for years to come based on feature differentiation and emerging market opportunities."

It will take a year or more to find out who is correct, but in the short term, investors aren't buying Cook's optimistic outlook. Shares of Apple, which had lost 12% over the past year, dropped another 5% in early trading on Wednesday.

Historic Profits

Cook faced quite a challenge on Tuesday as he tried to explain how his company posted its largest quarterly profit ever -- the largest by any company in history, actually -- while also forecasting the first decline in iPhone sales next quarter.

Cook and his team chose to emphasize a laundry list of excuses and confusing new metrics instead of offering any fresh or revised strategy or vision for reigniting growth. Even if Cook is correct and Apple can get iPhones sales back on a path to growth later in the year, a sharper explanation, less defensive and more forward-looking, might have been more reassuring. Apple's stock price was actually up slightly immediately after the results came out, but turned down firmly towards the end of Cook's call with analysts.

Over the past two years, iPhone sales took off thanks to two smart moves by Apple -- negotiating a deal with China Mobile, the world's largest mobile phone carrier, to sell phones directly and adding larger screen phones. But now it's not clear what Apple should do next to get growth back on track.

The amazing holiday quarter -- 74.8 million iPhones sold, $75.9 billion in total revenue and a staggering $18.4 billion of profit -- was long ago priced into the stock, and not in a good way. Despite the record levels, the sales represented meager growth from 2014, when Apple sold 74.5 million iPhones with total revenue of $74.6 billion and profits of $18 billion in the final three months. And Wall Street analysts, who had been reducing their forecasts for weeks, still expected slightly higher iPhone sales and total revenue than the record levels Apple reported.

Cook chose to go on the defensive, noting that Apple's anemic 2% revenue growth would have been 8% if the major currencies around the world hadn't lost so much value to the dollar. "The Brazilian real is down more than 40% and the Russian ruble has declined more than 50%," Cook noted, heading into the weeds amid one of several lengthy digressions about the state of the world's economies, currencies and consumer markets.

The FX excuse has been cited frequently by suffering old tech companies like Hewlett Packard (HPQ) and IBM (IBM) for a year or more. "Let me talk for a moment about the global environment with the particular focus on unfavorable currency movements," HP CEO Meg Whitman told investors last February before launching into a lengthy digression about macro economics.

Apple, of course, was hurt by the foreign currency challenge back then as well, but didn't raise the issue regularly or prominently. That was an easy call when iPhone sales were rising smartly, thanks in large part to China. Now sales growth in China slowed to 14% compared with 99%, 112%, 71% and 70% the prior four quarters.

CFO Luca Maestri also admitted that Apple was prioritizing its profit margin over higher sales volume by raising the price of iPhones in some countries with weaker currencies. That's a double hit to sales growth, as the higher prices hit consumers in those countries where economies are weakest.

So Cook was asked about probably the most discussed strategy change Apple could possibly make: cutting prices and selling truly cheap iPhones. And, as he and his predecessor Steve Jobs have responded almost since the iPhone came out, Cook wasn't having any of it. Rehashing the current strategy of selling one and two year old models at somewhat lower prices than the newest units, Cook said: "I don't see us deviating from that approach."

Whose revenue?

Some of the new statistics and metrics that Cook and CFO Maestri offered on the call were misleading, silly or just plain useless. At one point, the CFO noted that Apple had collected $31 billion in service revenue last year related to Apple hardware, including a portion that went right to app developers, Hollywood studios and others as commissions, which Apple doesn't report in its revenue. On the call, he didn't make clear that the non-Apple portion was almost half of the total and that while the total grew 23%, the growth rate for Apple's portion alone was half that (although all of the figures were included in a disclosure Apple posted online that Maestri mentioned). Maybe Cook needs to negotiate some better deals with his content partners.

A graphic of the value of Apple's non-dollar revenue omitted actual revenue numbers, instead using an indexed value of 100 starting in the fiscal fourth quarter of 2014. All intemediate dates were omitted as the chart showed the revenue index dropping to 85 by the end of the latest quarter.

Apple also offered a sort of chart (it just had one entry) for the first time showing that there were 1 billion active Apple devices in the world. Alphabet's (GOOGL) Google announced hitting the 1 billion level for Android almost 2 years ago. But Apple's number included Apple Watches, Apple televisions and other items which cost much less than its core devices and provide much less additional service revenue.

For now, investors aren't buying Cook's vision or his new metrics.

(This story was updated on Jan. 27 to clarify that Apple CFO Luca Maestri made clear that the $31 billion of service revenue included a portion paid directly to app developers and other third parties.)