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Apple’s Downward Revision in Revenue Guidance
January 06, 2019 For the first time is several years, Apple announced a significant downward revision to its revenue guidance and blamed most of this downward revision on China. China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years.Applelowered its Q1 guidance to $84 billion, down from the $89 billion to $93 billion it had previously projected. The company lowered gross margin to about 38 percent from between 38 percent and 38.5 percent. Apple blamed a variety of factors for the lowered guidance, including a weakening economy in China and lower-than-expected iPhone revenue, "primarily in Greater China," but also said that upgrades to new iPhone models in other countries were "not as strong as we thought they would be." Cook's letter said fewer carrier subsidies, price increases based on the strength of the U.S. dollar and cheaper battery replacements caused the weak iPhone upgrades for the quarter.Previously, we have reported on Apple suppliers that cut their estimates last quarter, attributed to less consumers upgrading to the new models. Apple also took the unusual step of promoting discounted prices for iPhones on its website if customers traded in an older model. The company also increased the trade-in value of some older iPhone models. |
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Cook’ letter said, “Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of the revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year. iPhone upgrades also were not as strong as we thought they would be. 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. We can't change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results. One such initiative is making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone. This is one of a number of steps we are taking to respond. We can make these adjustments because Apple's strength is in our resilience, the talent and creativity of our team, and the deeply held passion for the work we do every day.”
What Really Happened
Cook blamed the decline on the economic conditions in Greater China as the GDP growth retreated from 8-9% to ~6% to perhaps even negative, as we describe below. Smartphones sales in 2018 are an estimated 393.6m, down from 430m in 2015 a CAGR of -3%. But Apple’s China sales had a CAGR of -15% over the same period. China’s big 4 (Xiaomi, Huawei, OPPO, vivo) grew total shipments from 198.2m to 298.2m, a CAGR of +15%.
Table 1: China Smartphone Shipments, Share and CAGR by Manufacturer
What Really Happened
Cook blamed the decline on the economic conditions in Greater China as the GDP growth retreated from 8-9% to ~6% to perhaps even negative, as we describe below. Smartphones sales in 2018 are an estimated 393.6m, down from 430m in 2015 a CAGR of -3%. But Apple’s China sales had a CAGR of -15% over the same period. China’s big 4 (Xiaomi, Huawei, OPPO, vivo) grew total shipments from 198.2m to 298.2m, a CAGR of +15%.
Table 1: China Smartphone Shipments, Share and CAGR by Manufacturer
Source: OLED-A, Counterpoint
Moreover, iPhone shipments peaked in Q417 and have been steadily dropping since that time. The trends are clear; the big 4 are growing in volume and share, while Apple and the Others’ (including Samsung and LG) shipments are dropping even faster than the big 4’s growth. One conclusion is that the big 4 have caught up and have a business model advantage allowing them to compete with comparable technology at significantly lower prices. They are also very aggressive in incorporating new technology, so that G5, multiple cameras and notch less displays will not be differentiators.
Figure 1: China’s Quarterly Smartphone Shipments by Supplier
Source: OLED-A, Counterpoint
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Barry Young
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