iPhone, iPad Sales Continue To Slow, Apple's Earnings Drop

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Despite on-going declines in iPhone and iPad sales, Apple CEO Tim Cook says he remains hopeful and that the company continues to invest significantly in R&D.

Apple's earnings Tuesday highlight a company in limbo. Its core products, the iPhone and iPad, are mature and it's unclear if or when Apple will shake things up. Ever the optimist, CEO Tim Cook during the company's call with investors hinted that big things are yet to come.

Apple generated $7.8 billion in profit based on revenues of $42.4 billion. That's a drop from the previous quarter, when Apple generated $10.7 billion in profit on $49.6 billion in revenue. Apple's quarterly numbers are lower than they were in the year-ago period, and the company saw its cash-on-hand decline for the first time in two years.

Sales of the iPhone continue to slow. The company shipped 40.4 million iPhones in the three months ending June 30, a decrease from 51.2 million in the previous quarter and 47.5 million in the year-ago quarter. While consumers were quick to snap up the iPhone 6 and 6 Plus in the fall of 2014, the iPhone 6s and 6s Plus haven't generated the same level of interest.

Cook admitted during the earnings call that consumers' buying habits may be changing. Phone prices, for example, "can be a shock for people who are used to paying $199 for their smartphone -- they come back in and they pay less for their service but more for their smartphone." Cook is referencing carriers' shift away from two-year contracts in favor of month-to-month pricing for phones. More to the point, Apple is expected to keep the design of the iPhone 7 largely unchanged, something that is a deciding factor for some consumers.

One bright spot in Apple's iPhone business is the iPhone SE. "I really like what I've seen with the iPhone SE, and the fact that it's opening the door to customers that we weren't reaching before, and likely convincing some people to upgrade that wanted a smaller form factor," said Cook. Apple said the device is doing exactly what it was intended to do -- get people to try the iPhone for the first time. The iPhone SE starts at $399, while the larger iPhone 6s and 6s Plus start at $649 and $749, respectively.

iPad sales are down, but the rate of decline has slowed somewhat. The company shipped 9.95 million during the quarter, which is down from 10.25 million in the previous quarter and down from 10.93 million in the year-ago quarter. Interestingly, iPad revenues increased to $4.88 million, suggesting the more expensive iPad Pro models are finding buyers. Cook said about half of iPad Pro sales are going to enterprise customers.

Mac shipments increased from 4 million in the three months ending March 31 to 4.25 million oi the three months ending June 30.

The one real bright spot in Apple's earnings are services revenues. The company sale sales from iTunes and the App Store reach $5.9 million for the quarter, which is up 19% from the year-ago period. Apple Music, which costs $10 per month, may be playing a big role here.

"App Store revenue was the highest ever, as our installed base continued to grow and transacting customers hit an all-time record," said Luca Maestri, Apple's CFO, in a prepared statement.

Curious about sales of the Apple Watch? So is everyone else. The company shared no data on sales of its pricey wearable. The Apple Watch falls under Apple's "other" category, which generated $2.22 million in revenue, down from $2.64 million in the year-ago period. IDC says sales of the smartwatch are slowing.

Apple's research and development costs are the one clue it provided about new products.

"We do continue to invest significantly in R&D," said Cook. "The products that are in R&D, there is quite a bit of investment in there for products and services that are not currently shipping or derivations of what is currently shipping. So, I don't want to talk about the exact split of it, but you can look at the growth rate and conclude that there's a lot of stuff that we're doing beyond the current products."

In other words, Apple is spending a lot of money creating brand new stuff that we haven't yet seen. Could that stuff be a car? A TV? Who is to say.

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