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Apple Warns of Lower Revenues, Blaming Slower Sales in China
For the first time since 2002, Apple has revised its guidance to investors, lowering revenue estimates for Q1 2019 to $84 billion, down from the early November projection of $89 to $93 billion. In an open letter to investors, CEO Tim Cook blamed the shortfall primarily on “economic deceleration,” particularly in the Greater China market, resulting in fewer sales of the iPhone, Mac, and iPad. The growth of Chinese GDP in the September 2018 quarter was the second lowest in the last 25 years, and Apple also believes that rising trade tensions with the United States have played a part in China’s economic slowdown. Despite the problems in China, Apple expects to set all-time revenue records in the United States, Canada, Germany, Italy, Spain, the Netherlands, and Korea.
While slower iPhone sales in China account for the lion’s share of Apple’s revenue woes, Cook acknowledged that iPhone upgrades weren’t as strong as Apple thought they would be in other markets too. He listed three causative factors, each of which is worth unpacking:
- “Consumers adapting to a world with fewer carrier subsidies.” iPhones seemed cheaper several years ago, when it was standard (at least in the US) for people to buy carrier-subsidized iPhones in exchange for being locked into an expensive 2-year cellular plan. In 2014, for instance, you could pay $199 for an iPhone 6—a far cry from today’s $749 iPhone XR and vastly less than the $1449 top-of-the-line iPhone XS Max. Even though iPhone installment programs remain common, customers still see that one-time price tag, which was previously hidden. Plus, the iPhone installment payment comes on top of a cell plan rather than being bundled in—even if the amounts are comparable to cell plans of yesteryear, the iPhone’s share is more obvious.
- “US dollar strength-related price increases.” Regardless of how people pay for iPhones, the list prices of recent models are notably higher. Apple has also raised prices on the Apple Watch, iPad Pro, and even accessories like the Apple Pencil and Smart Keyboard Folio. This claim about the strength of the US dollar implies that the increases may have been necessary to maintain gross margins on products that are also likely more expensive to build. Whatever the reason, higher prices will slow sales—lots of people have seen the stratospheric price tags on the new iPhones and decided to wait another year.
- “Some customers taking advantage of significantly reduced pricing for iPhone battery replacements.” Let’s hope this is a case of unintended consequences. Starting with the iPhone 6, 6s, and SE, Apple silently reduced performance on iPhones with weak batteries to avoid unexpected shutdowns. When that change was discovered, the resulting hue and cry caused Apple to lower the price of battery replacements from $79 to $29 for all of 2018 (see “Apple Apologizes for iPhone Battery Issue, Drops Replacement Prices to $29,” 3 January 2018). The lower price caused many people to replace the batteries in older iPhones rather than upgrading, and the coverage educated many others about the utility and possibility of battery replacements. Had Apple played the iOS performance card differently, many more people might have upgraded.
- iPhone size? The three previous items can be bundled into the general category of “Apple’s new iPhones aren’t enough better than what I have to justify the price.” Although Cook didn’t get into specifics, I believe Apple’s insistence on making iPhones ever larger has also reduced upgrades. Many people have complained to me about how they’re not upgrading from an iPhone 5s, iPhone 6, or iPhone SE mostly because the new models are so much larger.
As much as Apple’s reduced revenue guidance isn’t good news, Cook took pains to call out bright spots in the company’s financials. In particular, revenue outside the iPhone business grew by nearly 19% year-over-year, with all-time revenue records for the Services, Wearables, and Mac segments. The popularity of the Apple Watch Series 4 and the AirPods caused Wearables revenue to grow by almost 50% year-over-year, and Apple admitted to being unable to make enough of both to meet demand. Sales of the iPad Pro and the MacBook Air were also constrained due to supply problems.
So no, Apple is not doomed, although there will undoubtedly be pundits coming to that conclusion. The real question is what Apple can do to increase sales in China. In May 2017, analyst Ben Thompson of Stratechery pointed out in Apple’s China Problem that the most important layer of the smartphone stack in China is WeChat, not iOS, and by extension, any of Apple’s other services that support platform lock-in. Thompson says:
Connie Chan of Andreessen Horowitz tried to explain in 2015 just how integrated WeChat is into the daily lives of nearly 900 million Chinese, and that integration has only grown since then: every aspect of a typical Chinese person’s life, not just online but also off is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).
There is nothing in any other country that is comparable, particularly the Facebook properties (Facebook, Messenger, and WhatsApp) to which WeChat is commonly compared. All of those are about communication or wasting time: WeChat is that, but it is also for reading news, for hailing taxis, for paying for lunch (try and pay with cash for lunch, and you’ll look like a luddite), for accessing government resources, for business. For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything.
In other words, for people outside China, switching from an iPhone to an Android is non-trivial. You’d lose access to all your iOS apps, you wouldn’t be able to communicate as easily with friends using iMessage, you wouldn’t have Apple Pay or be able to use Apple Pay Cash, you wouldn’t be able to have an Apple Watch, you’d lose access to iCloud Photo Library, integration with your Mac would suffer, and so on. Android has alternatives for all these Apple ecosystem features, but switching to them would be painful.
For Chinese users who rely on WeChat, however, the iPhone is just another smartphone and has to compete every upgrade season on its hardware merits and perceived brand value against a crop of pretty good Chinese Android phones. That likely means that Apple’s every-other-year approach to major new iPhone releases may hurt it in China in off years such as this one.
The “hands on deck” meeting should be interesting:
https://www.bloomberg.com/news/articles/2019-01-03/here-s-tim-cook-s-memo-to-employees-about-iphone-sales-slowdown
Well, considering their stock value I’m sure Apple’s execs feel like their hair’s on fire right now. They’re around $750M market cap right now. So apparently, that’s what it looks like when $250B just vanish.
https://finance.yahoo.com/news/apple-lowers-quarterly-revenue-forecast-213856098.html
Hal Eddins, chief economist at Apple shareholder Capital Investment Counsel, said Cook’s comments on how the U.S. trade tensions with China were hurting the company’s outlook “might be a dig at (U.S. President Donald) Trump, but mostly he may be using the trade turmoil as an excuse for some missteps they’ve made over the last year.”
Today alone, Apple’s value decreased by about $50B.
Things looked many billion times worse during the clone disaster.
I assume you’re employing that as a figure of speech. I cannot recall any other time in the company’s history where it lost one quarter of its value within 90 days.
As a regular consumer/user I’m not that concerned, but the shareholders I’m sure have a very different opinion on this matter.
Not at all. As of 11/2018 they had $237.1B cash in hand, which is a rather substantial sum.
https://www.cnbc.com/2018/11/01/apple-now-has-237point1-billion-in-cash-on-hand.html
Things were a lot worse when Steve Jobs sold $150 million in Apple Stock + accepted an undisclosed sum (IIRC, estimated to be somewhere between $500 million to $1 billion) to settle lawsuits from Microsoft that would literally keep Apple afloat. Apple was then trading at about $4.00 a share:
http://fortune.com/2012/10/05/apple-from-1980-to-2012/
Of course most of them probably aren’t happy, but last I looked shares were down about 7-8%. Here’s what Warren Buffett had to say:
https://www.reuters.com/article/us-apple-stocks-berkshire/for-warren-buffett-sinking-apple-shares-a-wish-come-true-idUSKCN1OX05Y
Facebook has been weathering a lot worse lately.
Not good news:
The aggressive price bumps this year can’t have helped. Partly defensive against external factors, they came across as a step too high when there’s a range of good phones in the existing models as well as (ahem) from competitors. Apple do best when the draw of the new pulls people just enough to get them over the hump of buying. The hump can’t be too big. When the new phone is significantly more… people find what they have is good enough.
Bought my daughter a 6s this Christmas, my wife has a 7 Plus, I am still on my trusty SE. I’d like the camera boost the new models have but for not much more cash I put my money in a new Fuji X100F. Happy to carry that around.
According to Horace Dediu
iPhone quarterly revenue growth, last 8 quarters.
1%
3%
2%
13%
14%
20%
29%
-15%
So a strong year bar last quarter. Those tariffs on China at work it seems.
Aren’t iPhones exempt from those tariffs?
Parts included could be affected I guess. But with the BOM of an iPhone at less than half its ASP and with tariffs IIRC not exceeding 25%, I have trouble explaining a 44% drop in revenue with a 13% increase in manufacturing cost (and that’s assuming all parts come from China and are hit by the 25% tariff).
I think the reference was to what our tariffs are doing to the chinese economy and the consequent slowdown in demand for iphones there.
I agree, and we held on to our 4s models for over 5 years. We’ll probably be trading in our 8 Plusses when 5G iPhones are established in the wild. From what I remember about Apple’s history with 3 and 4G, they usually wait to see how the competition works out bugs before jumping in.
At the last big iPhone release shebang, Apple made it quite clear that they are building phones to last, and emphasized longevity as a selling point. I also think that Apple started investing heavily in services years ago, and greatly upgraded the $$$$$$$ because they needed new revenue streams that would lock people into iOS and Mac. Watch, TV, etc. all feed into the ecosystem. They’ve added a number of new products and services over the past 3-4 years, with more exciting stuff to come.
Pricing can be problematic for Apple; iOS development is a never ending, big bucks requirement. Huawei, LG, Sony, etc., etc. do not invest in OS development, Google gives away Android for free because they earn money form everyone you do on or with these phones, Samsung tried it’s own mobile OS with Tizen, which tracks as much as Android, but iTixen as been spectacularly unsuccessful, You’re not just buying phone hardware when you buy an iPhone, you are buying privacy, security and iOS.
There are no indications that even a slightly significant number of people are switching to Android from iOS. In fact, I did recently read that the number of Android users switching to iPhone was continuing to be strong globally. And high prices haven’t stopped people from buying iPhones before.
Apple, since the return of Steve Jobs has always been very conservative with estimates and exceeded the goals. They revised them down and announced the revisions early rather than waiting till the big quarterly reveal for a big zinger. Most publicly traded companies usually wait till the last second to do this. Apple is still hugely profitable this quarter and there is no indication that they will be loosing money or will be in the near future. The new projections indicate the humongous cash stash will increase.
The stock price has fallen to around $133 yesterday, and maybe it will go a little lower before it climbs back. It’s nowhere near Apple’s lowest of around $4. Other than the iPhone slowdown, there was no indication in the announcement of softness in any other products or services. IMHO, the slowdown in iPhone sales is bad news, but I don’t think it’s a guarantee the sky is falling.
That makes sense. Cook seemed to indicate revenue in the US and Germany was strong. It’ll be interesting to see actual numbers as well as estimates for units sold.
Yes. Important to stay aware they are still swimming in a huge pile of actual cash.
I don’t think its worrying, just interesting. The Chinese market seems to have a particular ‘enthusiasm curve’ - when its keen, its really keen but when its cautious… its really cautious.
Still a great year for them.
Luxury brands are tanking across the board in China, and the tariffs are making things a lot worse for American products:
https://www.cnn.com/2019/01/03/business/luxury-goods-apple-china/index.html
https://www.cnbc.com/2019/01/03/us-companies-are-flashing-warning-signs-about-the-chinese-economy.html
I think the key issue, which I mention in my article, is that in China, WeChat is the platform, and the iPhone is merely a conduit to it. As a result, it’s trivial for Chinese users to switch phones, unlike anywhere else in the world, where people tend to be locked in to Apple’s platform by all the integrations.
So in China, Apple is competing purely on brand perception, hardware coolness, and price.
Very true Adam. Likely exacerbated if the phone is the sole computing device. So much of Apple’s key appeal/lock-in is about ecosystem, both across devices and applications/services.
Ben Thompson has expanded his thoughts on the China problem and other aspects of Apple’s lowered revenues estimate. Well worth reading.
https://stratechery.com/2019/apples-errors/
Apple isn’t the only global high tech powerhouse having problems in China. Samsung just sprung an even bigger surprise in their than Tim Cook did
Samsung Electronics warns profit will tumble 29%
https://www.marketwatch.com/story/samsung-electronics-warns-profit-will-tumble-29-2019-01-08
Something else interesting in the article:
“Smartphone shipments fell by 7% world-wide for the three months ended Sept. 30, compared with the prior year, their fourth straight quarter of declines, according to Canalys, a market research firm.”
And LG too:
And although LG continues to ship a significantly larger number of mobile phones globally than Apple, their sales continue to be unprofitable:
“Analysts said likely causes included profit margins for its high-end TVs being thinned by increasing competition, while the firm’s smartphone business continues to lose money.”