If Apple’s first-quarter profits warning came as a surprise to you, then you haven’t been paying attention to the signs. Sure, it’s the company’s first since 2002, and fell right at the beginning of the new year, but the writing has been on the wall for some time now.
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In the last couple of months alone, we’ve had warning after warning that the high demand for the new iPhone that investors have come to expect didn’t materialize.
And if you weren’t a little concerned by Apple’s decision to stop reporting on iPhone unit sales, then you had your head buried in the sand. Apple was a company that used to boast about unit sales, and the only logical reason to move the focus off of unit sales was if those unit sales no longer fit the narrative that Apple had built around them for a decade.
But that said, the fact that Apple had to issue a profits warning two months after issuing guidance for the quarter shows how quickly things can change.
So, let’s get to the question that everyone is asking. Is Apple doomed?
The company is rolling in cash, and the iPhone will still pull in revenues beyond the dreams of avarice.
OK, so what happened?
I think the most obvious answer is that Apple is a victim of its own success. This is a company that’s been able to sell high-end smartphones faster than it can make them (in the letter to investors, Apple CEO Tim Cook cites supply chain issues – “… we knew we had an unprecedented number of new products to ramp during the quarter and predicted that supply constraints would gate our sales of certain products during Q1.”).
As I’ve said elsewhere, the iPhone has been an easy sell for Apple (to the point that the company has been neglectful of its other products, and has prioritized expensive iPhones over mainstream models).
In essence, Apple milked the iPhone market as much as it could. I understand why it hasn’t had a huge “next big thing,” because it would serve as little more than a distraction. The iPhone, between the hardware and the iOS side of it, on its own feels like it’s a bigger juggernaut than even Apple can control (hence the supply chain issues). I’m not sure Apple could cope with another big thing right now, and that might account for why neither the iPad nor the Apple Watch has attained the same levels of greatness.
But what’s next for Apple?
Well this is where things get interesting. As I’ve already written elsewhere, I see this falter by Apple as ultimately being good for buyers of iPhones and Macs and iPads as it will make Apple focus more on mainstream products and prices, and less on seeing how far it can push the price envelope. While I don’t expect Apple to make its expensive products any cheaper, I do anticipate an adjustment when it comes to mainstream pricings.
I guess the time might also be right for the “next big thing,” whatever that might be.
Will CEO Cook survive this?
Once the dust settles it’s likely that investors are going to start pointing the fingers of blame, and it’s likely that Tim Cook could be the focus of that. After all, this is the first time in over a decade that Apple has had to issue a profits warning. On top of that, it’s hard to overlook the fact that within the span of 60 days, the outlook turned from good to not good.
Add to that the fact that at the same time Apple decided to pull the plug on reporting unit sales, a move that upset analysts and investors alike.
Did management overlook something? Did someone take their eye off the ball? Is Apple tone-deaf to the Chinese market, after all, according to the letter to investors,” most of our [Apple] 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”?
And let’s be honest, while it’s clear that the wheels have fallen off the Chinese market over the holiday season for Apple, it’s likely this issue won’t be restricted to China over the coming quarters.
Apple has been busy pointing the finger of blame all over the place. In the letter to investors, Apple says that iPhone performance was affected by “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.”
Those factors are all valid, but the buck stops with Apple management.
I’ve never made a secret of the fact that I see Cook as a caretaker CEO. Rather than taking risks, he’s played things conservatively, choosing instead to squeeze as much as he could out of the legacy that the late Steve Jobs handed him. And he’s done a good job. And there’s no arguing that under Cook’s leadership Apple has morphed significantly, especially when it comes to services revenues, but this hasn’t allowed it to break free from its dependence on the health and success of the iPhone and the broader smartphone market.
It will be interesting to see whether this negatively affects investor confidence in Cook, or whether they think he’s still the right person to be at the helm of Apple.
I knew that 2019 would be an interesting year for Apple – every year is – but this profits warning falling on day two guarantees that it’s going to be a particularly exciting year.