I have spent the last couple of days thinking about Apple and its recent troubles. There is no doubt Tim Cook’s message to investors lowering Apple’s earnings guidance for the first fiscal quarter sent shockwaves throughout the industry. For a company that continually crushed estimates to falter like this made people really think about the future of the iPhone, and indeed, Apple itself. But it’s not all bad.
Per Tim Cook, the majority of Apple’s revenue shortfall comes from the economic deceleration in China.
In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.
Apple rode that wave up to record revenues, so now it has to endure a tough quarter and ride that same wave down. However, this is an economic problem, not a product issue with Apple.
As Cook noted:
In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year.
What I mean by this not being a product issue is that there is nothing that Apple has done to cause this downturn in its earnings. It wasn’t caught abusing its user’s privacy like Facebook, and it didn’t release subpar products that caused demand for its products to diminish.
I would be a lot more concerned about this whole affair had that been the case. If Apple eroded the trust in its customer base, this would be a problem of its own making, but it’s not.
I’m not trying to put lipstick on this pig. This is a serious situation, and there are things Apple needs to address in the coming quarter. What I am saying is that if you take China out of the mix, Apple wouldn’t have had to issue an earnings warning.
I also wouldn’t be surprised to other companies report similar issues related to China’s economy.
Will China’s economy improve? I’m no economist, and there are a lot of factors that play into the answer to that question, but my best guess is, yes.
No amount of diversification would have led Apple to be in a better spot today. No matter their revenue guidance, the situation in China would still have led to an earnings warning based on iPhone sales.
Apple is already looking at better ways to allow users to trade-in iPhones, which should help them in many markets. I suspect there are other ideas the company is working on, as well.
While there has been a lot of focus on the negatives in Cook’s message to investors, here are a few of the positives from that same letter:
- Our installed base of active devices hit a new all-time high—growing by more than 100 million units in 12 months.
- Revenue outside of our iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from Services, Wearables and Mac.
- Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment
- Wearables grew by almost 50 percent year-over-year, as Apple Watch and AirPods were wildly popular among holiday shoppers
- launches of MacBook Air and Mac mini powered the Mac to year-over-year revenue growth
- The launch of the new iPad Pro drove iPad to year-over-year double-digit revenue growth.
- We also expect to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea.
- Finally, we also expect to report a new all-time record for Apple’s earnings per share.
The more I thought about this earnings warning, the more it came down to what Apple could have done to prevent it. The simple answer is nothing. It’s an economic problem that is entirely out of Apple’s control, and an issue that will rectify itself over time.
In the meantime, Apple needs to do everything it can to allow easy upgrades for users, and most importantly, continue to excel at making great products.
How is 84 billion profit in the quarter, the second highest in Apple’s history anywhere near a disaster? The capitalist/Wallstreet system is completely broken.
Wall Street doesn’t care about what happened last quarter. They want to know where growth is coming from in the near future. Cook’s announcement is a red flag that AAPL’s near-term growth won’t be near what it once was given the issues with China.
First of all, it’s not an “earnings warning”, that is a new record (per share), it is a revenue warning. What puzzles me is how they didn’t see a hint of this when they made their estimates for the quarter, which was by then 1/3 over.
I suspect that Tim Cook and the senior management are less worried about the markets and investors and more concerned about customer and employee happiness.
There is still lots of passion by customers around Apple products. Personally I am less excited than I was with iPhone since I’ve grown used to it over time. My Mac just works fine but what I really value is MacOS. Nowadays I am excited about my Apple Watch, AirPods, Apple Music (finally!), and my glorious 2018 iPad Pro. There is still plenty going on that I like and I don’t think I’m that much different than many customers.
What I worry about are the employees. Dropping stock means employee compensation drops as well. That always causes worry about losing people. Also these types of events affect employee morale and culture – and you can’t pay enough attention to culture.
Apple has a lot of strengths beyond a healthy business and balance sheet. They have good diversity which is a strength. They have steady trusted leadership in a time of stress. They have employees that directly see the positive effects of their products on customers. They have growing market segments which will give them economic diversity. Finally they have core values like best in class design and a fundamental respect for their customers and their privacy.
Markets and products lines change over time. Companies reinvent themselves, just look at Microsoft these days. Apple will have ups and down and will need to respond to problems outside of their control. I think if they stay focused on growing a strong leadership team, remain committed to values and culture, and continue to focus on their customers and employees then the rest will sort itself out.
The Apple apologist engine revs up. apple’s problems are systemic.
Hubris makes choosing alternatives easier.
It was a China issue when the stock was up too.
If China matters, it matters both ways.
Was it overinflated then versus undervalued now? It’s all gambling.
Recycling is probably a big issue. I will probably keep my iPhone X for three years simply because it’s so good I can worry about the environment a bit.
I hope some day the exterior will last even longer and we can recycle the innards.
Anyone interested in looking for : The Coming War on China by John Pilger.
The so call China problem runs deeper.
… And with that CRAZY Bolton now part of an USA administration, you never know.
Apple apologists can take a realistic view of the company. Dalrymple, Gruber, Ritchie, the non-paid apple PR specialists tell only a portion of the story in their apple reportage. Apple’s problems are deep and systemic.
Their service revenues do not reflect the type of service revenues enjoyed by other tech companies.
when Apple talks of service revenues, they are talking about revenue they derive from heir own customers.
So, as Netflix, and certainly others, pull away from Apple’s extortion system, Apple’s service sector will decline.
They have no services revenue not tied to an existing product. Services cannot stand alone in Apple’s current org chart. They are derivatives.
Apple Music is available on iOS, Android, and Echo devices. This spring Samsung Smart TVs will offer AirPlay 2 compatibility as well as an iTunes Movies and TV shows app. People don’t need Apple products to use Apple’s services. Nice try, though.
Yeah yeah, we know. Apple is doomed. People like you have been saying it for 40 years. And for 40 years you’ve been wrong.
Very strong analysis. It is absolutely a 100% exogenous event. All of the other headwinds were accurately projected by management, and factored accordingly in the original guidance.
It isn’t a disaster. It’s only a “disaster” in the click bait media and it’s large topline miss from a company that is expected to get to the upper part of guidance. Stock is overpriced based on the likelihood that future earnings for the remainder of 2019 and possibly into FY2020 will be lower than was anticipated at a $1T valuation.
Apple’s services business is a Fortune 100 company.
And yet, Nike recently crushed their earnings estimates. This was primarily driven by revenue growth in … China.
https://www.cnbc.com/2018/12/20/nike-earnings-q2-2019.html
And yet, Nike recently crushed their earnings estimates. This was primarily driven by revenue growth in … China.
I had a link to a CNBC article and then the comment got into approval hold. Just Google “Nike China earnings”
So far as I can tell, Jim is not making a point about whether the stock is over or under valued. He’s just trying to figure out if there was anything about Apple’s *product design* that could have been done differently to mitigate this revenue shortfall, and determining that the answer to that question is probably “no.”
Which is why it would be truly alarming for Apple if their *install base* was decreasing. Because service revenue is dependent on the install base of their hardware, if that number began to fall (e.g. because iPhone users started to switch to Android in droves) then that would be big trouble. But what actually appears to be happening is that the upgrade cycle is lengthening; people are using their iPhones for longer before buying a new one. That’s a problem for iPhone revenue, but it’s not a problem for service revenue which is unaffected by a decision to hold onto your old iPhone longer.
Was there anything about the *product design* that justified the previously high price?
It’s speculation, a.k.a. gambling.