Apple Just Posted Its Worst Earnings in 13 Years — Again. Here's What Happened, in 10 Charts

Apple's own guidance says next quarter won't be any better

• Apple reports record second-quarter results;
• Apple reports record third-quarter results;
• Apple reports record fourth-quarter results;
• Apple reports record first-quarter results;
• Apple reports second-quarter results;
• Apple reports third-quarter results.

Those are the headlines on Apple's own earnings press releases since 2015.

The last one — the April-to-June figures released early this morning — is the second time Apple has dropped the word "record."

Apple's revenue had grown without interruption since 2003, until that streak broke last quarter. Today's numbers show the slide is far from over: from April to June this year, Apple's revenue was $42.4 billion, down 15% from the same period last year.

That sets a new low. Last quarter the drop was 13%.

Meanwhile, sales of every hardware product are shrinking.

But Wall Street analysts had set their expectations for Apple so low that the market read this report as a sign the decline wasn't that bad after all. As of publication, Apple's stock was up 6.8% in after-hours trading.

Apple's problem is the iPhone's problem — and Apple doesn't sound optimistic about the iPhone 7 either

For a long time, the story Apple told the capital markets was simple: make the best products in the world, and make the most money.

The company still makes the most money — its quarterly profit stays above twice Alphabet's. Its most profitable product is unquestionably the iPhone, which has long brought in 60% of company revenue.

But the iPhone, which drove nine years of growth, no longer looks able to keep growing.

Along with today's results, Apple released its guidance for July through September: sales of $45.5 billion to $47.5 billion, well below last year's $51.5 billion.

That's a bad sign, because on Apple's usual schedule, next quarter's report will include two weeks of iPhone 7 sales.

The decline of the iPhone and Apple's other hardware has opened a huge hole in the company's numbers.

To hold on to today's market value, Apple has to fill that hole.

Over the past two years, Apple's finances have ridden a roller coaster. In 2015, the revenue Apple added was equal to the combined annual revenue of Baidu and Tencent that year. The extra profit it made that year came close to the entire annual profit of ExxonMobil, the largest oil company in the world.

Now the iPhone's decline has opened a hole of the same size.

If the slide over the next six months follows the trend of the first half, Apple's 2016 revenue will fall $32 billion year over year — nearly the market value of one Tesla. And the drop in profit will be about the combined profits of Baidu, Tencent, and Alibaba.

The iPhone's biggest problem: people replace their phones only once every few years

The iPhone isn't declining because Android is taking its users.

In major markets such as China, the US, and Western Europe, iPhone unit sales have long trailed Android's, but the number of people using iPhones hasn't fallen.

Apple's first problem is that there aren't enough people left on Earth who can afford an iPhone.

Close to 80% of the world's population over 16 now has a phone, and the great majority of those adults are already on smartphones.

The iPhone has captured about 26% of those smartphone users. By the calculations of A16Z, the top Silicon Valley venture firm, there are 630 million iPhones and 1.8 billion Android phones in use worldwide.

But most of the people who still don't own a smartphone live in poor or war-torn places. Even if they get a phone in the next few years, they are likelier to pick an Android handset under 1,000 yuan than an iPhone.

Apple still takes 90% of the industry's profit, yet it is finding it hard to win enough new users to keep the company growing.

At that point, persuading more existing users to upgrade is Apple's best option. But after the iPhone 6, Apple's first big-screen phone, delivered one good year, users no longer have much reason to switch phones.

Screen sharpness has already passed what the retina can tell apart. Fast processor or slow, it is enough to run any internet service and to play the hottest games, Pokémon Go and Clash of Clans (《部落战争》).

This past January — five quarters after the iPhone 6 went on sale and one quarter after the 6s — Tim Cook said 60% of iPhone users were still on a model older than the 6.

The iPhone has hit the ceiling no hardware product can avoid. The Mac ran into the same thing.

Like the iPhone, the Mac takes the great majority of the profit in the whole personal computer market. And like the iPhone, the Mac ran into a saturated market, where users have no reason to buy a new computer every year. Over the past three quarters, the Mac has started to decline too.

The rise and fall of the iPod, Mac, iPhone, and iPad shows that every hardware business reaches its ceiling one day.

Once it does, even Apple — which builds the best of them and takes most of the industry's profit — cannot avoid the decline.

Right now, Apple's entire hardware line has hit that ceiling.

Changing the iPhone itself isn't easy

Cook has done plenty to revive iPhone sales, but none of it is easy.

The low-priced iPhone SE, released this March, is the biggest change the iPhone line has ever seen.

But the abbreviation — Special Edition — already shows how cautious Apple was. The SE uses the body of the 5s and the processor of the 6s; clearly Apple didn't want it eating too far into its expensive product line.

Last quarter was the first quarter the SE sold in volume, and it pulled down the iPhone's average selling price:

But the SE failed to rescue iPhone sales. This quarter's year-over-year decline was only one percentage point gentler than last quarter's.

Apple could cut the price of its main iPhone, or build a small iPhone that looks no different from the main one. But either move would eat into the high profit margin Apple has held for more than a decade.

Apple's long habit of conquering the market with one or two models has also limited how it uses new technology.

Recent data from Kantar shows that Samsung's curved-screen S7 Edge outsold the iPhone 6s in the US.

Nobody thinks a slight curve at the edge of a screen makes a phone work better, but it does make the phone look different. And the S7 Edge shows users will pay for that difference.

Samsung has sold curved-screen phones since 2014. Held back by screen output, the first two generations shipped in small numbers and had hardware flaws.

As long as Apple sticks to its minimal product line, it cannot be first to use technology this raw to win users over.

All of this is the price of the iPhone's extreme success.

To offset the iPhone's decline, Cook is also trying to enter two new markets with the iPad Pro and Apple Watch — to build a new computing platform the way the iPhone once did, and buy years of growth.

The iPad became Apple's only hardware business selling more, thanks to the office

iPad unit sales have now fallen for 10 straight quarters, and this quarter was no exception.

The iPad's problem is that most people treat it as a household device: one per family, for watching video, browsing the web, playing simple games. In those uses, nobody has much reason to upgrade often.

The 12.7-inch iPad Pro released late last year and the 9.7-inch iPad Pro from this March are Apple's attempt to restart the whole iPad line.

Big screen, keyboard, stylus — Apple wants to turn the iPad from a dispensable home entertainment device into a touchscreen computer for work.

That effort is starting to pay off.

Although the iPad sold 9% fewer units than a year earlier, iPad revenue rose 7%. It was Apple's only hardware product to grow this quarter.

On the earnings call, Cook said the 9.7-inch iPad Pro drove the iPad's growth, and that half of iPad Pro buyers bought it for work.

Whether the trend holds, and whether it pulls in enough developers to build productivity apps for the iPad Pro, remains to be seen.

Apple Watch failed to open the next market

At first, Apple's goal for the watch was to open the fashion market. It invited crowds of fashion journalists to the launch, put Apple Watch on the wrists of entertainment stars and on the covers of fashion magazines, and got Montblanc, Fossil, and TAG Heuer to make straps for it.

Apple even changed its retail stores for the occasion, so you could try on the expensive gold-case version in something like the atmosphere of a luxury boutique.

Going by the numbers, fashion never became Apple Watch's business.

Apple doesn't disclose Apple Watch sales. But revenue from the "Other Products" line it sits in was 16% lower than in April-June 2015 — a quarter when Apple Watch had just gone on sale that April and supply was badly short.

As Apple's newest computing platform, Apple Watch is already declining year over year in its fifth quarter on sale. If that doesn't reverse, it will be the fastest any Apple hardware product has hit the ceiling in more than 20 years.

Over the past few months, Apple has cut its marketing push at the fashion market and quietly dropped the in-store try-on appointment.

As with the iPad, Apple wants to restart the Apple Watch line. Judging by the newest operating system, Apple Watch's target is sport and health.

Growth in services can't fill the hole left by hardware

Services revenue is the part of the report still rising, holding growth above 20%.

Cook has said more than once that services are "the power of Apple's ecosystem."

There are about 630 million iPhone users worldwide. If Apple can't sell more new devices, talking those users into buying more internet services is one way to find new growth. Apple Music, launched after the $3 billion purchase of Beats, is Apple's most determined attempt at it.

But growth in services revenue is nowhere near enough to offset the fall in hardware.

And services growth is slowing as well: this quarter's services revenue was tens of millions of dollars below the first quarter's. With iPhone users still increasing, a drop in internet services revenue says Apple's services have problems of their own.

Apple still builds internet services on the schedule of an operating system. Music, iMessage, and the rest are still upgraded slowly, alongside the OS, while the internet companies competing with them often update their apps every two weeks.

One rather ironic example: the new iMessage shown in June added some lavish full-screen effects, due to ship with the new system in September. Facebook Messenger, celebrating its billionth user not long ago, had already launched a very similar effect.

What will Cook use to turn the company's decline around? On this earnings call, the new technologies he talked about were AR, artificial intelligence, and internet services. We also know a car project is definitely under way — but that is still years off.

When the market changes, how the leading company of the moment finds its future is a permanent question. Very few companies have ever turned a decline like this around.

Apple still has $231.5 billion in liquid assets, enough to buy up plenty of companies, and it still has a team that can build good hardware.

But holding today's position will not be easy, and there are few precedents for doing it.

Below is QDaily's series of reports on what Apple has tried in several areas since the iPhone started to decline:

Apple can build the iPhone — so why can't it ever get internet services right?

How serious is Apple about cars? We went to look at its secretive campus

Apple Watch's new system, tried: Apple has basically torn the watch down and started over