Apple issues profit warning, cuts revenue outlook

Geoff Blaber/CCS Insight

Yesterday, Apple delivered a fiscal 1Q19 investor update that set the tone for what's likely to be a difficult year for the technology sector as a whole. A succession of data points signalling a deceleration of the Chinese economy has been exacerbated by the trade war between the US and China, and created a climate of global uncertainty. Apple has been badly affected, with revenue for its first quarter now revised to $84 billion from previous guidance of between $89 billion and $93 billion (see Instant Insight: Apple Results, Fiscal 4Q18).

The company stated in its note to investors that "lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance". China accounted for 41% of Apple's revenue in fiscal 4Q18, so the impact is substantial. Indeed, the size and scale of the revision to revenue guidance is what's most startling.

With China's GDP growth in the September quarter falling to the second lowest rate in 25 years and a string of other companies with exposure in the country reporting similar challenges, Apple is a victim of macroeconomic factors like everyone else. However, challenges were evident in China long before recent economic concerns surfaced. Mounting local competition at significantly lower price bands was a consistent theme in 2018 as the market consolidated around Huawei, Oppo, Vivo and Xiaomi.

Although China is a significant factor, it's not the sole source of concern. Apple's position in the country is made more significant by its weakness in other important emerging markets. India is a major source of growth in smartphones, and Apple's marginal position must come into sharp focus in 2019, with expansion of distribution as important as competitiveness in products and prices.

Finally, longer phone replacement rates in the West have been a steady blip on the radar for a couple of years, but the alarm is now being sounded in parallel with a troubled Chinese market. Western Europe has been a difficult environment for several years, but the recent removal of subsidies in the US and shift toward instalment plans planted the seed for the steady lengthening of replacements. In the short term, it offered a fresh boost to the US market, as consumers were attracted by the ability to upgrade their device annually and spread the payment monthly through the year. The downside was that customers began to get a far clearer picture of the real cost of their smartphone and data plan. Combine that with rising costs of high-tier smartphones and the result is an inevitable slowdown.

It's no coincidence that in its investor update Apple put clear emphasis on initiatives focussed on trade-in schemes and device financing. Easing the burden to upgrade is a logical move when sales growth slows. This could be the ideal year for Apple to move closer toward CCS Insight's prediction of "Apple as a service".

There's no single problem facing Apple, and few of these obstacles are exclusive to the Cupertino-based company. Equally, concerns about China growth tend to come in cycles: the latest GDP scare is similar to that of early 2016. However, the more intensive competition from Chinese phone-makers such as Huawei, coupled with a global political environment that's fundamentally different, brings a new level of uncertainty. Resolution of the trade conflict could deliver a sudden lift to demand but the headwinds at the start of 2019 are stark compared with the growth-friendly environment of recent years.

This article first published in CCS Insight

Geoff Blaber is vice president of research for the Americas at CCS Insight.

 

 

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