Apple has signalled the days that its principle cash cow, the iPhone, drives an ever increasing growth in revenue and profit, may be coming to an end.
In a letter to investors on Wednesday, Apple CEO Tim Cook, said that his firm did “not foresee the magnitude of the economic deceleration, particularly in Greater China.”
A potential global economic slowdown aside, there has been some criticism of a lack of “must have” features in the latest versions of Apple hardware, as well as its focus on making its flagship handsets even more expensive than they already are.
In the letter, Apple lowered its revenue forecast for its fiscal first quarter (ending 29 December) to $84bn (£67bn).
This was down from the $89bn to £93bn revenue it had forecast in November, a figure that had already disappointed Wall Street, which had on average been expecting revenues of $91.5bn.
Reflecting this investor disappointment, Apple’s share price (which had allowed it to reach a market value of $1 trillion in August), has declined more than 28 percent since November, dragging its market valuation to around $749bn.
And the news of the lowered revenue forecast, sent Apple’s share price down more than 7 percent in after hour trading.
And it should be remembered that this lowered forecast applies to Apple’s most lucrative financial quarter, which includes the Black Friday sales event and the Christmas holidays.
Reuters also pointed out that this is also the first time that Apple has issued a warning on its revenue guidance ahead of releasing quarterly results, since the iPhone was launched way back in 2007.
Apple’s Cook admitted that the firm had been expecting a tough quarter.
“Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance,” Tim Cook told investors. “While it will be a number of weeks before we complete and report our final results, we wanted to get some preliminary information to you now.”
He also admitted that “sales of Apple Watch Series 4 and iPad Pro were constrained much or all of the quarter. Sales of “AirPods and MacBook Air were also constrained.”
Cook also pointed out that Apple had expected economic weakness in some emerging markets.
“This turned out to have a significantly greater impact than we had projected,” he wrote. “In addition, these and other factors resulted in fewer iPhone upgrades than we had anticipated.”
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” said Cook. “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.”
According to Cook, China’s economy began to slow in the second half of 2018, and matters have not been helped by the rising trade tensions with the United States.
But lets be clear here, the slowdown Cook is talking about mostly is to do with sales of its iPhone handsets, which continues to be the principle money maker for Apple.
“Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline,” Cook said.
And Cook pointed out that it was not just a slowdown in iPhone sales in China that were to blame.
“While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be,” Cook admitted.
“While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements,” he said.
But there is little doubt that Apple is feeling the affects of stiff competition in the smartphone area from the likes of Samsung and Huawei.
The arrest in early December 2018 of Huawei’s chief financial officer Meng Wanzhou in Canada at the US’ request, as well as President Donald Trump’s aggressive posturing on trade, is also said to have driven a spike in Huawei sales in China as Chinese consumers reacted to the US move.
But the elephant in the room also continues to be Apple’s decision to stick with its hefty premium pricing strategy for its flagship handsets, despite the risk of a slower economy.
“The question for investors will be the extent to which Apple’s aggressive pricing has exacerbated this situation and what this means for the company’s longer-term pricing power within its iPhone franchise,” James Cordwell, an analyst at Atlantic Equities, told Reuters.
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