Apple revenue falls - the end of its remarkable growth

Apple chief executive Tim Cook launching the iPhone 6. Photo / AP

Apple reported its first quarterly revenue drop since 2003 in what investors worry is the end of a remarkable period of growth that had catapulted the computer maker to become the world's most valuable company.

Shares fell sharply, as the Cupertino, California-based company said second-quarter sales of its flagship iPhones dropped for the first time since their debut in 2007. That, more than any other statistic, is most likely to have driven the stock down 8 percent in after-hours trading.

On the basis of Apple's guidance a few months ago, Wall Street analysts had been bracing for the firm to report a decline in revenue. But few expected the numbers to be this bad.

The performance of the company's latest smartphones was still significant, at 51.2 million units sold, but 61.2 million iPhones were sold in the same period last year. Because iPhones account for nearly 70 percent of Apple's revenue, the slowdown has been a significant concern to analysts.

Overall, Apple reported $50.6 billion in revenue - short of the $52 billion expected by Wall Street - and $10.5 billion in profit. In the same quarter last year, the company reported $13.6 billion in profit on $58 billion in revenue.

What happened? One factor is that last year's second quarter saw unusually high sales for Apple. Supply problems for the iPhone 6 and iPhone 6 Plus pushed back sales that normally would have been counted in the company's traditionally strong holiday quarter.

But another, far more troubling reason is that Apple - along with the rest of the smartphone industry - is seeing a serious slowdown in the number of people buying new smartphones. For years, analysts have warned that the smartphone market is becoming saturated, meaning that most people who would want to buy smartphones already have done so.

We are very happy with the continued strong growth in revenue from services, thanks to the incredible strength of the Apple ecosystem and our growing base of over one billion active devices.

Apple chief executive Tim Cook

Analysts do expect that iPhone sales will recover after the company introduces this year's expected model of the device. The next version, if Apple keeps up with its traditional product cycle, should be the iPhone 7 and deliver a major hardware makeover. Reports based on apparent weak links in Apple's supply chain indicate that the new phone could have a new kind of headphone port, be dust-proof and waterproof and may even sport a totally redesigned home button.

Sales of all other prominent Apple products also dropped from the previous year. The iPad continued a prolonged slide, down 19 percent from the same period last year. Mac sales were also down 12 percent.

Apple's services sales, which include the App Store, iTunes Store and iCloud, were a bright spot, with a 20 percent increase to $2.1 billion. So too was the "Other Products" category, comprising products such as Apple Watch, Apple TV and iPod, which Apple does not break out individually. That area posted revenue of $6 billion - a 30 percent increase.

The industry is in a lull between the mobile boom and what comes next in automotive, the connected home, health and industrial applications of the Internet of things.

Geoff Blaber, CCS Insight's vice president for research

"Our team executed extremely well in the face of strong macroeconomic headwinds," said Tim Cook, Apple's chief executive, in a news release. "We are very happy with the continued strong growth in revenue from services, thanks to the incredible strength of the Apple ecosystem and our growing base of over one billion active devices."

The second-quarter earnings report, however, demonstrates that it is critical for Apple to continue to deliver innovative products and find new ways to generate revenue as the smartphone becomes more of a commodity worldwide.

WATCH: Apple's release of new iPhones last year:

Apple unveiled a small new iPhone, a new iPad tablet for business use and price cuts for its Apple Watch at a product event Monday.

The company's interests in media and entertainment, smart home devices and health care - as well as persistent rumours of an Apple-designed car - all show Apple is hard at work to find and dominate the next technology revolution.

"The industry is in a lull between the mobile boom and what comes next in automotive, the connected home, health and industrial applications of the Internet of things," said Geoff Blaber, CCS Insight's vice president for research in the Americas, in a note ahead of the report. "Pressure is likely to mount on Apple to reveal the next big source of growth."

Apple also announced it will expand its capital return programme, adding up to $50 billion to the cash it has set aside to return capital to shareholders; that means Apple is planning to spend a total of $250 billion in cash this way by the end of March 2018.