Apple founder Steve Jobs was never that impressed by his stock investors or their needs – preferring, for instance, to hoard cash rather than give it back to shareholders as dividends. His successor Tim Cook made far more of an effort to court fund managers and give them what they want. However, this month that changed when Apple released its quarterly results.
Apple left investors and analysts speechless when it revealed that it would no longer disclose its unit sales figures for the iPhone, iPad and its Mac computers. The abrupt change to its disclosure practices was reminiscent of the high-handed style of Apple’s founder Jobs and the news shook the market, prompting some investors to exit.
Since November 1, Apple’s market value has fallen 13%. It is no longer a $1 trillion company but a $920 billion one. And in recent days, the share price has come under pressure again after news from the company’s Asian supply chain gave a few hints on why Apple might not want to release the shipment data in more detail.
On November 5, the Nikkei Asian Review reported that Apple’s two main suppliers, Foxconn and Pegatron, had been instructed to hold back on ramping up production for this year’s new iPhone release: the XR. The Nikkei estimated that Foxconn’s 45 production lines would end up producing 20% to 25% fewer XRs than originally envisaged.
Apple Insider, a website, initially countered that “changes in production levels after launch are not an unexpected phenomenon”. It also said the Nikkei had a “mixed track-record” in covering Apple’s manufacturing plans.
But in this instance, the Japanenese newspaper seems to have been right. On Monday, a second Apple supplier, Lumentum Holdings, slashed its revenue and profit forecasts because of reduced orders from a “major customer”.
Investors quickly deduced that this could only be Apple, which purchases Lumentum’s laser diodes for 3D sensing.
Lumentum’s share price promptly fell 37.5% and concerns that Apple’s stock could head further south pushed the US stock market down the same day.
Why has the XR not been as popular as predicted? Some blame weaker demand in China, a market that has been a driving force of Apple’s exceptional sales growth in recent years.
Chinese consumers are certainly more ambivalent about Apple than they were a few years ago. A quick analysis from WiC of online feedback on the brand put the ratio of negative to positive comments in China at 80/20. “Apple doesn’t innovate any more so I’m buying Huawei from now on,” wrote one. “I think Rmb1,000 ($144) for a mobile phone is more than enough,” added another. “Why pay 10 times more for Apple?”
Yet Apple’s quarterly sales results don’t really reflect these sentiments. Sales growth was up 11.41% year-on-year during the most recent quarter. As a percentage of overall sales, Greater China accounted for 18.1%. This is only slightly down on the 18.6% of revenue from China during the same quarter last year.
And come Singles’ Day last weekend, the iPhone was still the best-selling smartphone, beating all of Apple’s local rivals like Huawei, Oppo and Xiaomi, not to mention international ones like Samsung.
Financial analysts have generally split into two camps on Apple’s prospects, although both take a similar view that the tectonic plates of the smartphone market are shifting.
They all agree that the smartphone industry is going ex-growth, with IDC reporting that global shipments fell for the first time ever in 2017, down 0.1%. It forecasts they will drop again in 2018.
Bearish analysts believe this shift is going to create tremendous short-term volatility, not only for Apple but also its supply chain. The hardest hit will be companies like Foxconn, Pegatron and Wistron, each of which has already suffered from a fall in its share price. Taiwan-listed Hon Hai Precision (Foxconn) relies on Apple for about half of its sales, for instance. Its share price has halved since August 2017, dropping 25% since late September.
Likewise, Taiwan-listed Pegatron has lost 36% since the end of January. It depends on Apple for about three quarters of its revenues.
Component suppliers like Taiwan-listed Largan Precision (lens) and Hong Kong-listed AAC Technologies (acoustics) are also down heavily. The former has lost 40% of its value since late July and the latter almost half over the same period.
Having spent years poring over the details of Apple’s shipment data for signs of where sales are strongest, analysts are going to have to find something else to pinpoint its profit drivers. The bears are also unhappy with Apple’s guidance on margins, after it indicated that its gross margin will be flat during the December quarter. This is not what they had been expecting. DRAM and NAND prices are falling and Apple was expected to be one of the chief beneficiaries.
However, the company said that while this factor will boost its margins by about 30 basis points, the benefits would be outweighed by foreign exchange headwinds to the tune of 100bp.
This is also where the bulls and the bears part company. The bulls note that Apple is guiding that the forex hit will be offset by higher sales per unit. Thus although the smartphone industry may be maturing, Apple still seems confident about charging its customers more for each upgrade. In the last quarter, it reported a 28% increase in the average selling price of an iPhone, for example.
Its new product releases are also being marked up to significantly higher prices. The two new versions of the iPad Pro will retail at $799 and $999, compared to $649 and $749 for their previous incarnations. So too the new MacBook Air, which is being priced 16% above its previous iteration, and the new MacBook Mini, which is 60% higher.
Analysts note that all three products are receiving good reviews, which bodes well for Christmas sales. They may also mean that Apple can maintain its sales momentum. And while Apple told Foxconn and Pegatron not to ramp up production of the XR smartphone, it gave them higher target volumes for last year’s iPhone 8 and 8 plus.
In a bid to win back some of the confidence of the analyst community, Apple also says it will providemore granularity on other aspects of its sales performance, particularly on its services revenues. Of course, Apple would like investors to focus more on how it is monetiseing its wider ecosystem. During the current quarter, software, services and iTunes accounted for 25% of its revenues, compared to 65% for the iPhone and 10% each for the iPad and the Mac.
“It’s the end of the iPhone unit as we know it, but it ultimately might just be fine,” said one of the bulls.
Another declared that Apple’s’ “Houdini-like move” left the more bullish case for the company unchanged.
And yet one of the reasons why Apple might have chosen to stop providing unit sales data is because it knows it is in for a difficult period. The latest rumours suggest that it won’t release its first 5G phone until 2020 at the earliest, for instance. That could plug up the sales pipeline as customers decide to hold onto their current phones till the year after next, when the gamechanging handset belatedly arrives.
All of Apple’s rivals are planning 5G releases in early 2019. One of the Samsung phones previewed by the Wall Street Journal hinted too that it may have taken the lead over Apple in hardware design. The smartphone has a foldable OLED screen which when opened – think clamshell designs of the past – expands into a screen of tablet size.
The 5G delay for Apple is not of its own making. Progress has been stymied by a fall-out with Qualcomm, its previous supplier of modem chips, with the two now locked in a bitter court battle.
The chip designer accuses Apple of infringing its patents, while Apple disputes Qualcomm’s right to royalties from its technology.
Qualcomm also alleges that Apple has been passing on its patents to Intel, which is now designing the 5G modem chips that it previously provided. Either way, Apple is having to deal with delays. While Qualcomm’s 5G chips were said to be ready ahead of schedule, Intel is thought to be about a year behind in its own timetable for supply.
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