Apple takes a bruising as Cook warns iPhone giant may miss targets

2 Nov 2018

iPhone XR devices on display in an Apple store in Belgium. Image: ifeelstock/Depositphotos

Have the wheels come off the smartphone Apple cart? Is a cloud-first future the silver lining?

Apple has reported fourth-quarter revenues of $62.9bn, up 20pc on last year. During the quarter, it sold 46.9m iPhone devices, below analyst expectations.

After warning that sales for the crucial holiday quarter may not meet Wall Street expectations, shares in the California tech giant fell 4.3pc to $212.46, wiping $40bn off the $1trn company’s market value.

It appears Apple is suffering a similar malaise to its South Korean rival Samsung, which also this week warned of troubles ahead in terms of demand for high-end smartphones and memory components. Not only that, but both Apple and Samsung are experiencing unprecedented competition from ambitious Chinese companies Huawei and Xiaomi, whose high-quality, lower-cost devices have propelled them to second and fourth place respectively in the smartphone global rankings.

Last night (1 November), Apple reported quarterly revenues of just under $63bn. Services revenue – a crucial area to watch for the tech giant’s future – reached an all-time high of $10bn.

“We’re thrilled to report another record-breaking quarter that caps a tremendous fiscal 2018, the year in which we shipped our two-billionth iOS device, celebrated the 10th anniversary of the App Store, and achieved the strongest revenue and earnings in Apple’s history,” Cook said. “Over the past two months, we’ve delivered huge advancements for our customers through new versions of iPhone, Apple Watch, iPad and Mac as well as our four operating systems, and we enter the holiday season with our strongest line-up of products and services ever.”

However, weak guidance on growth in the crucial holiday quarter and the fact that Apple could miss Wall Street expectations sent jitters through the markets.

Apple said it expects between $89bn and $93bn in revenue for its fiscal first quarter ending in December, with Wall Street on average expecting $93bn.

Is tech turning and have we reached peak smartphone?

Apple’s weak forecast has fed the same investor fears that have sent shares of Facebook, Amazon and Alphabet tumbling over the past month.

To add to the uncertainty, Apple has also revealed that it will stop reporting unit sales for iPhone, iPad and Mac products from the next quarter, instead revealing only qualitative statements. This is significant as it means investors can only guess at how successful Apple’s flagship products are performing. It also makes it difficult to calculate exact unit shipments of core devices such as the iPhone. Rival Samsung doesn’t share exact unit numbers either.

In an earnings call, CFO Luca Maestri said that “numbers of units sold in a quarter is not representative of underlying state of business”. Apple has already halted revealing numbers for products such as Apple Watch, Beats and HomePod, categorising the Other Products business under a new category: Wearables, Home and Accessories.

During the quarter, Apple’s innovation engine was in full throttle as the tech giant revealed three new iPhones – the iPhone XS, the XS Max and the XR – as well as this week revealing new iPad Pro devices with USB-C connections and a new MacBook Air with a Retina display.

“We concluded a record year with our best September quarter ever, growing double digits in every geographic segment,” said Maestri. “We set September quarter revenue records for iPhone and Wearables, and all-time quarterly records for Services and Mac. We generated $19.5bn in operating cash flow and returned over $23bn to shareholders in dividends and share repurchases in the September quarter, bringing total capital returned in fiscal 2018 to almost $90bn.”

The silver lining for Apple

The problem tech giants such as Apple face after years of seemingly never-ending exponential growth is that if there is the slightest jitter or twitch, the markets recoil in horror. But there is trouble on the horizon and it affects all premium smartphone manufacturers.

A report earlier this year by the IMF pointed out that the world may have reached peak smartphone and that the past six years’ demand for smartphones is coming to a close as the global market for these products is becoming saturated.

Cook, in an interview with Reuters, said that Apple is “seeing some macroeconomic weakness in some of the emerging markets”. He was referring to sales being either weak or flat in markets such as Brazil, India, Russia and Turkey.

As pointed out earlier, relentless competition from lower-cost but equally relevant Chinese manufacturers could be taking a toll. This toll may already be felt by the likes of Samsung.

But you have to remember, Apple is still setting the trend for what is possible in terms of smartphones, from AI to camera tech. It is also worth remembering that Apple makes more money from its devices than any other manufacturer because of its ring-fenced hardware/OS stratagem.

The average selling price of iPhone devices was $793, above analyst estimates of $750, according to FactSet. Research earlier this year from Counterpoint indicated that last year’s iPhone X generated five times more profit than the combined profit of more than 600 Android original equipment manufacturers during the third quarter.

Another silver lining for Apple is Services, which includes Apple Music and iCloud, and which for the first time reached an all-time high of $10bn. This is a significant development for Apple, which could in the coming year mark the evolution from being a hardware-first business to being a cloud-first business with hardware bolted on. This explains the company’s penchant for streaming, content deals and the expected launch of a new streaming platform next year to take on Amazon and Netflix.

Simply put, Apple is evolving for its next major act, and the underlying macroeconomic shifts, smartphone saturation and intense competition are accelerating this.

iPhone XR devices on display in an Apple store in Belgium. Image: ifeelstock/Depositphotos

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years