How the iPhone Will Maul Tech Sector Earnings

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This is what we can look forward to this week.

Apple will report earnings on April 26 for the quarter ending March 31, its second quarter. According to Zacks, the ex-bad-items non-GAAP consensus earnings forecast is $1.97 per share. FactSet pegs it at $2.00 per share. A year ago, Apple reported $2.33 a share.

This would be a 15% year-over-year decline. It would be the first since the decline in the July-September quarter 2013. Apple could throw in miscellaneous disappointments in its numbers or its outlook – because it has been tough out there.

There has already been a slew of disappointing tech reports last week – the week of bad omens. On Monday, highflier Netflix scared investors with its lagging subscriber growth. Shares crashed 14%. They’re down 28% from their peak in January yet still sport a nose-bleed PE ratio of 330!

Other tech companies also reported inglorious results last week, such as IBM whose revenues fell for the 16th quarter in a row. The only hope is that it can continue to lay off people and buy back enough of its own shares – until what? No one knows.

On Friday, Microsoft rattled investors with a further decline in revenues, down 5.5% from a year ago. For the first three quarters of its fiscal year, revenues are down 9.4%. Among analysts, this triggered some “growth concerns” apparently. Its shares plunged 7.2% on Friday.

And Google, or rather Alphabet, rattled investors with disappointing profits and margin concerns stemming from higher mobile phone use and the growth in automated ads. Its shares dropped 5.4% on Friday. Between Netflix, Microsoft, and Alphabet, $68 billion in illusory stockholder wealth evaporated.

But Apple is bigger than any of them. According to FactSet, “Apple is expected to be the largest contributor to the blended earnings decline for the Information Technology sector for Q1 2016.”

These “blended” earnings are based on a mix of companies that have already reported and the consensus forecast for those that have not. FactSet’s numbers are based on non-GAAP ex-bad-items earnings. As reported under GAAP, earnings tend to look a lot grimmer.

And this blended ex-bad-items earnings “growth” for the tech sector is a decline of 7.4%!

Apple is the giant in the group. Based on these estimates, Apple is going to be responsible for 3.3 percentage points of that 7.4% decline.

The last time the tech sector in the S&P 500 had any earnings growth without Apple was in Q4 2014. All last year, tech earnings without Apple declined. Apple single-handedly propped up the tech sector’s earnings growth!

But Q4 was the first time in this cycle that Apple’s earnings weren’t strong enough to prop up the charade for the tech sector, and the sector’s earnings fell year-over-year even with Apple included. And Q1 this year is going to be a lot worse. This time around, Apple is going to drag down the already crummy earnings of the entire tech sector (chart by FactSet):


This 7.4% earnings decline in Q1 2016 comes off Q1 2015, when the tech sector without Apple had already booked a decline from Q1 2014. So for the tech sector without Apple, it would be the second year in a row of Q1 declines!

Turns out, Apple has, let’s say, a little bit of an iPhone problem, including what is estimated to be a year-over-year iPhone-revenue crash of 18%. FactSet:

Over the past three years on average, the iPhone product segment has accounted for nearly 60% of the total revenues generated by Apple. In four of the past five quarters, the iPhone product segment has reported year-over- year revenue growth in excess of 35%.

However, last quarter (Q4 2015), the segment reported year-over- year revenue growth of only 7%. For Q1 2016, the segment is projected to report a year-over-year revenue decline of -18%.

This iPhone revenue crash would “mark the first year-over-year decline in iPhone sales since FactSet began tracking sales for this product segment in the calendar fourth quarter of 2010.” This chart shows just how important the iPhone has become to Apple, and by extension, to the overall tech sector:


It used to be that “tech” was synonymous with “growth.” Tech was one of the big engines of the US economy. Much of this growth was centered on the PC ecosystem (hardware and software) and the internet. It then migrated from the PC ecosystem, which is now sinking into irrelevance, to the smartphone ecosystem and the “cloud.” That was going to be the new savior.

Now the smartphone ecosystem is struggling with growth. There’s a myriad of app-makers — from games and home-delivery services to car-hailing services. But they aren’t really tech. They’re retail, consumer services, and the like. They simply take a slice of the finite consumer-spending dollars, at the expense of other companies, such as brick-and-mortar retailers or taxi drivers, rather than adding to the overall economy.

It may be a needed renewal. But it isn’t helping the economy because it doesn’t come even close to filling the holes left behind by the decline in tech, which has become so dependent on the iPhone ecosystem – and the smartphone ecosystem more generally – just when this ecosystem has begun to deteriorate.

And on the other side of the equation, brick-and-mortal retailers are slithering into an existential crisis. Read… Retailer Bankruptcies Are Hailing Down on the US Economy

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  46 comments for “How the iPhone Will Maul Tech Sector Earnings

  1. Mike R.
    April 24, 2016 at 4:38 pm

    The ‘IT revolution’ was significant but many of the gains have been realized. Remaining gains are often marginal or even negative. The Iphone is a commodity now. Their watch is stupid. And people are slowly but surely starting to learn about a new technology…..FRUGALITY.

    • Nicko
      April 25, 2016 at 4:00 am

      IT revolution over? Hardly. The ‘internet of things’ is a real thing, and will revolutionize pretty much everything for decades to come, the smartphone was just the first.

      • Mike R.
        April 25, 2016 at 10:09 am

        OK, tell me some of the things it will revolutionize moving forward. I’m open to the possiblities but feel like alot of the recent stuff has been hype, marketing and fluff. Keep in mind also that IT requires energy and lots of it. So as energy goes up in the years to come, the payback on tech will lessen.

        • Lune
          April 25, 2016 at 8:56 pm

          2 Things I’m looking forward to:

          Driverless cars. This isn’t just so I can be lazy. It will reduce accidents, increase average speeds, and allow for greater densities. Time magazine had a great article a few months ago about just how big a revolution this could be. One interesting fact: even in a crowded highway, apparently only 18% of a highway’s surface is covered by cars. If driverless cars bumps that up by just 6% (cars driving closer, plus narrower lanes), we’ve increased our road capacity by 50% (compounded by an increase in speed) without spending a dime on building new roads. That’s a savings of easily several hundred billion dollars.

          2. The smart grid. Renewable energy (solar, wind) is much more variable compared to fossil fuel or nuclear energy. The only way we can have a reliable grid and push renewables beyond 50% of our needs, without constructing massive standby nat. gas “peaker” plants, is having every electric device connected to a smart grid that allows the power company to automatically power on and off different appliances based on sophisticated algorithms. For example, you could have a cheaper power bill if you agree to allow the power company to control your dishwasher, with the only guarantee being that the dishes will be done within 24hrs of you pressing the start button. Then the power company cycles your dishwasher based on when surplus electricity in your region needs to be burned off or routed away from the rest of their grid. Or take your refrigerator, reporting temperatures to the power company, who guarantees to keep the temperature within a specific range, but otherwise is free to cycle your fridge at the best times to optimize power loads.

          There are a lot of ways (beyond the Big Brother/NSA stuff which admittedly is a big worry) that the internet of things can truly make our devices much smarter. Improving our infrastructure utilization and efficiency is just one.

        • discgman
          April 26, 2016 at 3:47 pm

          Oculus is a technology you might want to keep your eye on. Once this gets cheaper I think you will have a new revolution of uses for VT. Smartphones, wearable tech, pc’s, laptops, cloud computing will all evolve. Its just the cost of the Iphone that will change as now people are charged for them. There goes apples cash cow. Apple watch is a joke.

      • Intosh
        April 25, 2016 at 11:10 am

        The “IoT” is on route to be an evolution more than a revolution. Connected watch, connected TV, connected car, etc., are not going to suddenly fuel any substantial growth in the sector. People make the typical mistake of transposing the success “formula” of something (e.g. smartphone) into something else (e.g. watch), thinking that the latter will magically have the same impact as the former. It doesn’t work that way.

        In the tech community, many think that the next revolution will stem from blockchain technology…

        • Sgt Milstar
          April 26, 2016 at 12:27 am

          The driverless car? There has to be a driver in the car! How will MADD and the courts make their money with driverless cars? A attorney friend of mine who’s family own breath analyzes leased to the states said “If DUI’s go by the wayside, the courts would lose their easy money funding.” Court costs would have to rise to pay for the court system without the DUI’s drivers.

      • Elwood
        April 25, 2016 at 12:40 pm

        Yes, productivty will soar as we’re all spied on by our Toasters and Micorwave ovens.

        Optimization only goes so far in certain realms- untill you realize that the peope selling you the Internet of Things are just pitch-men for more Theranos style quack companies that take more than they give.

        Of course you’ll also be spied on by your self-driving car, so you’ll have to walk places for any privacy until you realized that self driving cars are all camera equipped and your neighbors cars will photograph where you’re walking.

        I see a future market for privacy huts in steel shipping containers!

      • Thomas Malthus
        April 26, 2016 at 3:58 am

        Hmmm… revolutions… fire … wheel… steam engine…. computer…. internet….


        I reckon that one is a step backwards – the end result of this is a generation of zombies who are glued to their screens tweeting and facebooking

        It’s one big step for mankind towards Idiocracy.

    • Pakilolo
      April 25, 2016 at 10:19 am

      To keep growing continuously beyond the consumer’s ability to sustain that growth is called Cancer. We have a situation where the Planet’s Eco System – which we depend on for survival – is collapsing. We can’t grow our way out of this catastrophe. We need to come back to reality and drop illusions of growth forever and always.

      • Thomas Malthus
        April 25, 2016 at 2:39 pm

        The central banks are applying ever increasing dosages of chemo and radiation to the patient.

        But the cancer has overwhelmed the patient. It has metastasized.

        Soon the medicines will push on a string.

        And civilization ends.

        I was wrong only in terms of timing.

    • Intosh
      April 25, 2016 at 11:43 am

      The writing on the wall: “the party is over”.

      Phone becoming a commodity. Upgrade cycles are longer. And cheaper options finally becoming legitimate potent competitors.

      Apple has been relying heavily on the China market for growth but that is a market where they cannot be protected by their patents and lawyers. So we see competitors like Xiaomi are making a dent to Apple’s growth in China.

      Apple of course understands the trend is on cheaper phones. That’s why they released the iPhone SE.

      Very a propos article:

      “The rise of the $400 smartphone”

  2. 187neoliberals
    April 24, 2016 at 5:14 pm

    ha ha, you’re 100% correct Mike. Frugality is chic now. My friends and I have an ongoing contest to see how cheap we can be. Only idiots waste money these days.

    • polecat
      April 24, 2016 at 5:58 pm

      I might also add ‘actual real-time, in-the-flesh interaction’ w/other humans!

      I think it’s catching on……..

  3. Chip Javert
    April 24, 2016 at 5:14 pm

    As an old CFO, I’m not fond of “non GAAP”” or “ex bad” earnings. I understand the utility of EBITDA for a quick cash flow calc (which, by the way, is what the cash flow statement is for…).

    In the late 1980s-1990s Robert Allen was CEO/Chairman of AT&T. His specialty was “non GAAP” earnings” or “ex bad” earnings, until everybody caught on that, if quarter after quarter you have to exclude “extraordinary expenses”, it begins to look like they’re not so “extraordinary”, and you should have been paying more attention to them all along.

    Tech does indeed have a lot of “extraordinary” expenses, but that’s not because the finance gods inflict truly extraordinary pain on them, it’s because tech is truly a risky business.

    If you don’t even know what the bottom line is, much less keep an eye on it, very bad things tend to happen.

    • Petunia
      April 24, 2016 at 6:20 pm

      I just read that Uber has a valuation of 60B. Wouldn’t they need every person on the planet driving for them to generate enough income to warrant this valuation. Your thoughts?

  4. Paulo
    April 24, 2016 at 5:36 pm

    Wow, add to that oil company bankruptcies and it might be all up to Abe and Drahgi to boost this sucker up next week. :-)

    I like my laptop and can say I will never ever buy a smartphone. They just turn me off, big time. Last week I hit a local cafe for Chinese food. It was a pretty slow lunch crowd. A native family came in and I recognized the oldtimer as a long time local fisherman. He had the grandkids along, a couple of teenagers. I noticed because it was a school day and I thought that they should be in school. Instead, the family sat down and the kids pulled out their phones and began texting.

    I’m not sure if I like this world of phones and dumbed down people. The Granddad made his living out on the water; a good living. He knows the fish runs, the tides, where to set his nets, anchor up, (when to go home), relying a wealth of knowledge. The kids wear trendy logo clothes and text at the table. Something has been lost.

    I hope the tech companies lose their shirts. Let’s hear it for landlines!!!

    • polecat
      April 24, 2016 at 6:02 pm

      Just wait until energy reliability becomes problematic……….people will ‘relearn the old ways’…….or die in the name of Darwin1

    • david
      April 24, 2016 at 6:44 pm

      Walked into a hotel lobby on a ski trip a month ago. Adults all chatting and laughing….everyone that looked 18 and under were sitting around with their heads in smart phones not uttering a word. I actually stopped to double take what I was seeing.

  5. NotSoSure
    April 24, 2016 at 5:41 pm

    The I in IBM nowadays stands for Inane, Incomprehensible, Improbable, etc, etc. Every day I raise a glass to commemorate the amount of money Warren Buffet is losing from investing in this stupid company. No doubt, Uncle Warren will soon ask for a bailout of this national institution.

    • Owl
      April 24, 2016 at 10:40 pm

      Yes. I sold my IBM stock when they changed their business model to focus on selling services rather than technology.

      I can’t see there fortunes turning around until they abandon this failed model and do the inverse.

  6. william
    April 24, 2016 at 5:49 pm

    Apple has a few untapped markets to go after to boost growth: corporate IT and China still have a minuscule Apple presence. But the longer they wait, the more entrenched current leaders in those spaces will become. Corporate IT purchasing and usage is being redefined by Amazon. And China is becoming less Apple-friendly than more.

    • Petunia
      April 24, 2016 at 6:23 pm

      My husband got an Iphone at work to replace the old Blackberry. He likes it better, thought the Blackberry was too hard to use. Apple could finally put Blackberry under.

      • joel
        April 25, 2016 at 7:04 am

        I just bought a new phone, $130, 5.5″ screen, lightning fast compared to my 4 year old smartphone .
        It will do everything a $500 I-phone will do. You can also buy a smartphone for $10 which will do almost everything. The Apple chic will not last much longer.

    • NotSoSure
      April 24, 2016 at 7:28 pm

      You must not be getting the memo. China has been reducing technology purchases from the West for fear of the later putting in security backdoors (remember Snowden and the NSA?), etc. Just look at IBM for an example.

      It’s over.

    • MC
      April 25, 2016 at 2:27 am

      Actually China has long been one of Apple’s cash cows: last year Tim Cook had to go public to put to rest rumors iPhone sales in the Celestial Kingdom were weakening.
      By their standards Apple has been taking a beating in China between 2012 and 2015: smartphone market share has gone from 16.6% to 13.9%. Granted, compared to Blackberry (from 5% to 0.3% in the same time frame) they are doing well, but for a company built around the concept of evergrowing sales and market share, it’s hard to swallow.

      The main problems for Apple are two.
      First is market saturation. IPhone’s are highly desirable and tend to be well built and supported by a very vibrant aftermarket parts and service network, meaning they are thrown away only when seriously damaged. It means the person buying an iPhone 6S won’t throw away his old 4S but sell it or pass it over to somebody else who won’t buy a new Apple product.
      Second is competition. Chinese smartphone manufacturers such as Huawei and Xiaomi have put out truly excellent products at very attractive prices. Unless you are genetically predisposed against the Android OS (like your truly) they are great alternatives to more prestigious brands. In fact Xiaomi has overtaken Samsung as the #1 smartphone brand in China, quite an achievement, and like Huawei is starting to enter the European market, helped by excellent reviews and an enthusiastic following.

      Finally there’s the issue of margins. Apple has long had insane margins on its products, but lately seems to have fallen prey to the smartphone commodization. Prices on the 6-series iPhone have been cut across the board, starting from China, where they dropped 16%. I won’t even go into the whole iWatch fiasco.
      There have been some quality issues on 6S phones, like leaking displays, and Apple users are making a fuss about them as they have been spoilt for years by high quality.

  7. michael
    April 24, 2016 at 5:54 pm

    I have a work provided iphone. I do not see what all the excitement is about. I appreciate the map function and occassionally use the browser. However would I pay $50/ month or more for that. No. Phones are commodity and they will be following the trajectory of all electronics.

    • Jonathan
      April 24, 2016 at 10:12 pm

      Because when talking about a complete package of corporate security, modern apps with the most appealing ecosystem from a app developer PoV the only choice is the iPhone and that by definition means the iPhone is not a commodity.

      Only fools who don’t understand the smartphone business would brand Apple as a commodity or thinks moving zillions of profitless Android phones to buy worthless marketshare is a good business strategy.

      • Thomas Malthus
        April 24, 2016 at 10:59 pm

        Hang on …

        If enough people were to move to android devices … would that not mean that app developers focus more on these devices … with the iphone being considered the new after-thought?

        If the app story is all that differentiates Apple from the rest then that is very shaky ground considering you can get phones that do everything the iphone (or samsung) does — for 1/3 the price.

      • Bead
        April 25, 2016 at 8:01 am

        Simple rule, if you’re not a fanboy you’re a fool. The Android app developers are clearly deluded. Therefore vast profit margins are locked in for the next generation. Sure, I believe that.

        While I can afford an iPhone it makes little sense to upgrade mine. I think Apple Pay was supposed to be what was once called the “killer app.” Alas, that Utopia seems to have been postponed.

        • Thomas Malthus
          April 26, 2016 at 3:37 am

          The thing is …

          I don’t give a f7^%K if someone judges me because I have a 250 android and not an apple — I once bought a samsung top of the line – and a buddy of mine who is an IT engineer said next time don’t piss money away – get the windows phone… it does the same things

          People who need to pack the newest iphone (and meanwhile live in their cars) are toss pots.

          But that’s the way the world runs these days isn’t it

    • Álvaro
      April 25, 2016 at 11:48 am

      iPhone is more about social status than anything else.

      • Thomas Malthus
        April 25, 2016 at 2:13 pm

        You nailed it on the head.

  8. Thomas Malthus
    April 24, 2016 at 8:31 pm

    You can buy a phone for less than half the price of an iphone or samsung – that does everything those phones will do

  9. nick kelly
    April 24, 2016 at 8:44 pm

    It’s silly that IBM a company supposedly in the thick of the fight to rule cloud etc. can think of no better use of its resources than buying its stock.

  10. mosfet
    April 24, 2016 at 10:51 pm

    Yet markets will cover their eyes and plug their ears to see or hear no evil as they pump in more speculative hot air – ever skittish of any hint of omen to scatter them all. Indexes that rise and fall on every media utterance are supported by nothing more than smoke and vapor. Happy hunting Bears!

    • Bead
      April 25, 2016 at 8:20 am

      Lots of Darwin awards for bears trying to sneak past Yellen’s bazooka. The past couple months must have been particularly bloody. Hillary’s playbook doesn’t benefit TPTB unless she’s elected. So it should be a nice year for the bulls. As it’s been explained to me, a surface PE of 18 is fine when interest rates are nothing. Earnings will be great in six months.

      So buy stocks.

  11. Michael Gorback
    April 24, 2016 at 10:51 pm

    Wolf I think you’re ignoring the positive effects of seasonally adjusted hedonic pricing and changes in the birth/death estimates, as well as not counting the phones who have given up looking for owners and are depressing the cell phone participation rate.

    According to Chinese GAAP, Apple’s earnings will be about $5.

  12. ML
    April 25, 2016 at 1:28 am

    After steve jobs died, that was it for apple. A couple of ideas in the pipeline were brought to market but otherwise there has been nothing in the way truly innovative, earth shattering, products.
    I used to have an iphone but after for no apparent reason and despite my cancelling a message to log in to icloud kept popping up every few seconds. Also it often needed 3 or 4 attempts to connect an outgoing call which was irritating to say the least. So i switched to android and it’s much better, seamlss. I promised myself to stop buying third party apps i never much use.
    I still have an ipad but haven’t upgraded the os. Too much hassle and risk it will interfere with my custom settings.

    I have 2 imacs for my business, one of which I still use snow leopard because it is srable and lacks pointless features that apple is find of introducing. El capiitan i have on the other but i use it like snow leopard.

    An ex apple employee tells me apple has lost its way.

    • ML
      April 25, 2016 at 2:34 am

      Elsewhere someone has commented “Also some gadget items seem to have reached a plateau where the newest isn’t that much different from the previous. Even Apple have just released a new phone which is basically the model of 2-3 years ago relabelled. So until the current gadget fails, no push to shop.”

      • Thomas Malthus
        April 26, 2016 at 4:01 am

        I am struggling to decide which device had made the world stupider…

        A Tee Vee … or a Smart Phone….

  13. Keith
    April 25, 2016 at 3:49 am

    “The only hope is that it can continue to lay off people and buy back enough of its own shares – until what? No one knows.”

    You can have negative interest rates, as we know.

    You can’t have a negative employee count.

    When you reach zero the company has ceased to exist.

    The IBM master plan.

    • walter map
      April 25, 2016 at 11:12 am

      “You can’t have a negative employee count.”

      You can’t have a negative employee count per se, but you can accomplish the same thing by paying them in scrip that they can only use at the company store and then offer them credit they can never repay. Some people believe the Logic of Empire has already been done.

      How much should prospective employees be charged for an internship? Don’t worry, I’m not giving them any ideas.

  14. walter map
    April 25, 2016 at 8:55 am

    “On Monday, highflier Netflix scared investors with its lagging subscriber growth. Shares crashed 14%. They’re down 28% from their peak in January yet still sport a nose-bleed PE ratio of 330!”

    Netflix has long smelled like an excellent short opportunity, but a lot of others smelled it first. Redhat was also sexy back in the day, but that was before the dotcom crash.

    As we know, stock price is not necessarily an indicator of a company’s actual value. A lot of it is just gambling on the foolishness of other investors. In an easy money environment many or most will be way overpriced, but that doesn’t mean they’re going to come down any time soon.

  15. Julian the Apostate
    April 25, 2016 at 7:53 pm

    I like the iPhone for its durability. The truck can beat electronics of any sort to death. I still have my iPhone 4 and could switch back to it in an emergency. The iPhone 6 does have a lot of problems with dropping calls, where the 4 never dropped a call unless there was flat out no signal. The 6 is faster on the Internet side of things. I’ve never seen the point of buying an app. Everything I need comes with the phone. Apple has definitely entered its administrative phase with the death of Jobs, much as Walmart did when Walton died. They’re starting to make the same mistakes that took K-Mart down. Time marches on.

  16. Sgt Milstar
    April 26, 2016 at 12:59 am

    Blackberrys 10 OS is the best on the market. When using a Blackberry developed APP, I can pick and chose what application permissions I want to allow. I never understood why a flashlight app needed to be able to access your pictures, music, documents, and other files stored on your handset or at a remote storage provider, on a media card, on in the cloud.

    Further, the Blackberry OS 10 can run the android APP’s. For instance my banking, ebay, market APP’s are designed for the android OS. I cannot choose to deny any of the application permissions. It’s take it or leave it with the Android APP’s.

    And my Antivirus program for the BlackBerry just scans the files I have downloaded to the handset. The author for the APP said the BlackBerry OS 10 hadn’t experienced a virus in its core program yet.

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