When Apple issued it fiscal Q4 2018 earnings report in early November, it forecasted revenue of between $89 billion and $93 billion for fiscal Q1 2019. Now, however, Cook is warning that revenue will come in at right around $84 billion. That is a shortfall of $5 billion at the low end and $9 billion at the high end of Apple’s previous guidance. Whichever way you look at it, that is still a big miss for a company like Apple.
So, who or what is exactly to blame for the earning revision? It appears that all of those channel reports and leaks regarding reduced supplier orders were indeed accurate. While Apple’s previous guidance had factored in a lot of potential headwinds that could affect revenue for the quarter, two particular points had a greater than expected impact on the company.
First of all, “economic weakness” in emerging markets meant that sales were hampered more severely than the company had expected. Secondly, customers simply haven’t upgraded to the new iPhone XS, iPhone XS Max and iPhone XR at historical rates. Instead, customers have stuck to their tried and true devices that continue to work just fine (we’ll elaborate more on this point shortly).
On the first point, Cook placed the blame on slowdowns in China, writing, “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.
“We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.”
To the second point, the $5 to $9 billion revenue miss can be attributed primarily to lower than expected iPhone sales – particularly in Greater China – which “accounts for all of our revenue shortfall to our guidance” according to Cook.
While it’s likely that trade tensions and poor economic markers in China contributed to a portion of Apple’s woes, much of the damage in our estimation was self-inflicted. For starters, #throttlegate left a big black mark on the company. Apple got caught secretly throttling the performance of iPhones with heavily-cycled lithium-ion batteries. Once presented with the evidence, Apple owned up to the throttling and said that it did so to preserve user experience and to prevent unexpected shutdowns.
As a penance, Apple rolled out a battery replacement program which allowed customers to bring in their iPhones and have the battery replaced for just $29 instead of the usual $79. With this simple upgrade, customers could have a device performing like it was fresh out of the box in their hands after roughly 45 mins to an hour of “surgery” at an Apple Store.
The reduced-cost battery program, which ended on December 31st, however, had two downsides for Apple. For starters, it was costly; that $50 discount spread across potentially millions of devices is nothing to sneeze at. Secondly, with a new battery installed and performance restored, many customers simply didn’t feel the need to upgrade to a newer device. That is huge revenue stream miss for Apple.
But probably more telling for the company is it decision to jack up prices across the board for its flagship iPhones. As we reported in an article earlier this week, iPhone pricing has simply gotten out of control. When the iPhone 7 and iPhone 7 Plus launched in 2016, they were priced at $649 and $769 respectively. Today, the iPhone XS and iPhone XS Max are priced at $999 and $1,099 respectively. However, if you max those phones out with 512GB of internal storage, you’re looking at $1,349 and $1,449.
And even Apple’s new “entry-level” iPhone XR isn’t exactly cheap. It is priced from $749, whereas the previous entry-level iPhone SE could be had for as little as $399, for those that wanted a relatively affordable iPhone (Apple has since discontinued the iPhone SE). For those wanting a new iPhone, the cheapest option these days is to get an iPhone 7 for $449 (32GB). Moving up through the ranks, the iPhone 7 Plus, iPhone 8, and iPhone 8 Plus will cost you $569, $599, or $699 respectively.
With all of that said, where does Apple go from here? Perhaps it’s best if we let Cook explain. “Our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.
“As we exit a challenging quarter, we are as confident as ever in the fundamental strength of our business. We manage Apple for the long term, and Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result.”
Mr. Cook, Wall Street is likely looking to you and Apple for real New Year's resolutions here, and sooner rather than later.
(Top Image Courtesy Tim Cook via Twitter)