In a direct letter to Apple investors issued after today’s U.S. stock market close, Apple CEO Tim Cook dramatically lowered revenue guidance for the current fiscal quarter that ended on December 31. He further pointed to revenue expectations hampered by supply network constraints.
News of the lowered guidance caused Apple stock to be briefly halted in after-hours trading, and when resumed, to drop by 7 percent on the news. Broader equity market reaction to what some are classifying as shocking news is yet to play out in global equity markets.
Information emanating from Apple’s supply network over the past several weeks hinted strongly of higher than expected declining iPhone sales and that is now the news being delivered.
Apple had previously set investor expectations for slight revenue growth for the fiscal Q1 quarter that ended at the close of 2018, to be in the range of $89 to $84 billion. In a direct letter to Apple investors, CEO Tim Cook reset revenue expectations to that of $84 billion, a $5 billion shortfall. Gross margin was expected to average 38 percent.
As readers are aware, revenue and earnings guidance are usually the purview of the company’s CFO. In the case of bad, or some may say, embarrassing news, it obviously becomes the purview of the person in-charge.
Cook pointed to four influencing factors that were previously noted to investors going into the quarter:
One was the timing of the new iPhone model launches in the Fall, positioning the most expensive iPhone Xs and iPhone Xs Max for earliest holiday customer demand consumption during the all-important holiday quarter. In our Supply Chain Matters blog update published in early November 2018, we pointed out that Apple prioritized development and production ramp-up of its priciest $1000 retail price models initially, to prevent lower-cost models from taking away from expected holiday demand. Product announcements and ramp-up related to the lower-priced new iPhone models were scheduled for product availability later in the holiday quarter. In the letter, Apple seemed to have fessed-up to the timing snafu, namely too-much revenue dependence on the highest priced models.
The letter acknowledged that emerging market customer demand for smartphones, specifically in Greater China was far worse than anticipated. Noted was that most of the revenue shortfall and over 100 percent of year-over-year worldwide revenue decline occurred in Greater China across iPhone, Mac and iPad product offerings.
Obviously that is not a good sign for Apple moving forward, either in emerging market growth or in the strategy for dominating the premium line of smartphone revenues. CEO Cook also pointed to the rising trade tensions with the United States affecting consumers across China.
A third factor was also previously noted by this blog, that being an unprecedented larger number of new product introduction ramp-ups occurring in the all-important holiday quarter. Noted was that sales of the Apple Watch Series 4 and iPad Pro were constrained much or all of the quarter while Apple AirPods and the MacBook Air were also constrained.
The message to Apple’s internal product development and marketing teams seems clear, stop the practice of delaying product launches to the all-important fiscal Q1, expecting that the China based supply network that is predominately pre-occupied with iPhone pressures to continue to work miracles to insure revenue numbers are attained in other, less volume-driven products. The reality that has been noted is that suppliers have little choice but to ramp-down any added flexibility in labor resources because of Apple’s ongoing cutbacks for future iPhone production.
Moving Forward
On the positive side, CEO Cook pointed to an installed base of active devices of over 100 million units that serve as a basis of recurring content and services revenues. Non-iPhone business segments are noted as growing 19 percent year-over-year including all-time record revenues from Services, Wearables and Mac.
That stated, the reality facing Apple is a profitability model that is highly dependent on the recurrent selling of newer model iPhones, not to mention trying to hold on the premium segment that is rapidly declining in consumer upgrade intentions.
For us, the most important statement included in the letter was the following:
“We manage Apple for the long term, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result. Most importantly, we are confident and excited about our pipeline of future products and services.”
From our lens, that implies that 2019 had better be the year of visible Apple innovation, including some major new product announcements or acquisitions.
Apple seems to be moving more quickly to alter iPhone or perhaps other product assembly operations to other Asia based regions. Last week we highlighted an exclusive report by Reuters indicating that Apple contract manufacturer Foxconn will begin assembling Apple iPhones in India as early as 2019. The report indicated that the move will include Apple’s most expensive iPhone models, such as the flagship iPhone X product family. With today’s news, that report takes on a meaning that Apple is now preparing to defend its presence in key emerging growth markets such as India to include a local manufacturing presence. Other reports from Vietnamese media speculate that Apple is also considering a manufacturing capability in that country to perhaps counter the implications of a prolonged U.S. trade war by having an additional manufacturing presence outside of China. Here again, Apple may be positioning to defend another emerging market.
The writing is on the wall that leveraging iPhone as the company’s primary cash cow now has its measurable limits and that the company’s mission in the New Year is indeed agility and adaptability across existing and perhaps very new product and supply chain segments.
Bob Ferrari
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