Down is up: iPhone slumps, iPad soars, and a massive quarter isn’t massive enough

If you were bored of all those stories every three months about Apple’s quarterly financial results setting records and posting one banner quarter after another, I’ve got great news! Apple’s first fiscal quarter of 2023–covering the holiday quarter of the calendar year 2022–was merely the company’s second-largest quarter ever, unable to match up with the same quarter a year ago.

The world of Wall Street doesn’t care so much about Apple’s tidy $30 billion profit during the quarter. It’s more worried about that 5 percent year-over-year decline–the company’s first such decline in almost four years. Fortunately, Apple executives were well prepared on Thursday to explain what happened. You see, it’s all about headwinds.

Captain Cook takes on the macroeconomic headwinds

You know things are bad when the nautical metaphors come out.

During Apple’s hourlong quarterly conference call with Wall Street analysts, the word “headwinds” was used 11 times, slightly edging out the 10 times we heard the word “macroeconomic.” (They were used together as “macroeconomic headwinds” three times.)

If you’re not someone who is as well-versed as Tim Cook and Apple CFO Luca Maestri in navigating the choppy seas of modern business, let me explain what’s going on here. The U.S. dollar has been strong, so strong that it makes Apple’s positive business trends in other countries look negative.

“On a constant currency basis, we grew year over year and would have grown in the vast majority of the markets we track,” Cook said on Thursday. This is the thing about Apple, as an American company, reporting all its results in U.S. dollars. In China, you might look at what Apple sold last year and this year and see that sales are up! But if the U.S. dollar has strengthened in the last year, the change in exchange rates will make last year’s number seem larger when converted to U.S. dollars.

According to Apple, the iPhone sales decline it reported was “roughly flat” when currency was held constant. These are the headwinds. (I guess it serves Apple right for, a few years ago, ceasing to report raw unit sales and deciding to only report revenue totals. Unit sales don’t face currency headwinds.)

To be fair, Apple also listed two other reasons for its bummer of a quarter. As the company warned about months ago, there were COVID shutdowns at the factory that made Apple’s most important products, the iPhone 14 Pro and Pro Max. Right during the first quarter of sales of those phones. That’s… not good. And it meant that, for much of the quarter, Apple was unable to meet the demand for those very profitable high-end iPhones. Fortunately, according to Cook, “from a supply chain point of view, we’re now at a point where production is what we need it to be, and so the problem is behind us.”

Then there’s the word “macroeconomic,” or as Cook described it, “a challenging macroeconomic environment as the world continues to face unprecedented circumstances, from inflation to war in Eastern Europe to the enduring impacts of the pandemic.” In other words, the world’s got inflation and maybe recession, and people aren’t buying like they used to, and that includes Apple products.

Is the macroeconomic situation due to get better or worse? Apple was more or less mum on the subject, but analyst Krish Sankar used the phrase “softening macro” on the call and… I don’t want to hear about a softening macro ever again.

Billions and billions served

In the last year or two, Apple has begun to pump up a new statistic by which it wants to be measured: the size of its user base. In other words, when someone buys a new Apple product and recycles the old one, the user base doesn’t grow. When someone buys a new Apple product and hands down the old one to someone who doesn’t have one, or someone switches from the competition to an Apple product, the user base grows.

On Thursday, Apple trumpeted a new milestone: two billion active Apple devices in its installed base. That’s impressive, especially when you consider that seven years ago, the installed base was roughly one billion.

Sure, one reason Apple likes to talk about the installed base growing is that it provides good news even when overall sales are down. But the bigger issue is how the installed base ties into Apple’s overall ecosystem. If you’re Apple, the more people and devices, the more opportunity there is to sell more devices to those people. And when you’re a company that is also increasingly reliant on services income, those users and devices are vitally important.

“The first step is always the installed base,” Maestri said. “The installed base is the engine for services growth, and the fact that the installed base is growing very nicely, and in a lot of emerging markets it’s growing even faster, that gives us a larger addressable pool of customers. That’s incredibly important.”

When people talk about the Apple ecosystem, this is what they mean. You buy an iPhone, then a Mac, then some AirPods, then an Apple Watch, and before you know it, you’ve got the Apple One bundle, and you’re buying yoga pants with Apple Pay to use with Fitness+. (Apple does not sell yoga pants. Yet.)

The iPad is a shining star

If you had “iPad revenue blows up” on the bingo card, come down to the front and pick up your free turkey. There’s no Apple product that seems to generate as much consternation and confusion as the iPad, but we have to give the little guy its due: it generated $9.4 billion in revenue, up 30 percent over the year-ago quarter, despite “significant foreign-exchange headwinds,” according to Maestri.

Of course, there are some good reasons for this big jump. The iPad faced supply constraints during last year’s holiday quarter, suppressing sales. And this year, there was plenty of supply–as well as the new 10th-generation iPad and the M2 iPad Pro. So the iPad sold and sold well–with more than half the people who bought it entirely new to the iPad! Amazing.

Since the iPad is taking a victory lap, let me hit you with a few other iPad tidbits. It’s the first time the iPad has sold better than the Mac in a quarter in seven years. It’s the second-biggest iPad quarter ever, and the biggest iPad quarter by revenue in nine years. The iPad is, at this point, basically a $32 billion a year business for Apple, when just a few years ago, it looked like it might be worth $20 billion at most. Sure, we might look at that janky Apple Pencil adapter on the 9th-generation iPad and at the aging design of the iPad Pro and wonder what’s up with the hardware design, but the numbers don’t lie.