In a letter to investors dated January 2nd, Apple’s CEO Tim Cook announced that the company is revising its revenue guidance for Q1 2019. The announcement sent shockwaves through the market that resulted in Apple’s biggest stock price decline in six years. Cook says in the letter (emphasis ours):
“…most of our 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…with traffic to our retail stores and our channel partners in China declining as the quarter progressed. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.”
Cook is very explicit about the reasoning behind the announcement. Below we dive into the numbers behind it:
1. Majority of Apple’s revenue comes from iPhone sales
The Apple success story of last decade is largely the story of its uber successful smartphones. The company’s flagship product contributes to more than 60% of its total revenue and 75% of all its units shipments. iPhones are particularly important for Q1 earnings reporting, as it typically reflects holiday and newest model sales.
2. China is world’s biggest smartphone market but sales have been declining
As the market in the West reaches its saturation point, China has been the growth driver for the global smartphone market. China accounted for 31% of global smartphone sales revenue after selling 454 million units in 2017. The market, however, has seen some slowdown in recent times. Global smartphone shipments have declined for four consecutive quarters, with China’s third quarter (2018) shipments falling by 6% year-over-year.
3. China is critical to Apple’s growth
Given China’s significance to the global smartphone market, it comes as no surprise that China plays an important role in Apple’s profits. Apple’s 2018 Q4 earning statement shows 18% of its total revenue came from China. This makes China Apple’s third largest market after Americas and Europe.
4. Chinese companies are racing ahead despite declining global smartphone sales
According to the research from Strategy Analytics, Samsung saw 13% year-over-year decline in smartphone shipments in third quarter of 2018, while iPhone shipments stayed flat. This was not the case for all smartphone companies. Chinese manufacturers Huawei and Xiaomi grew their shipments 32% and 20% respectively in the same period. Such diverging performances begs the question: is Apple’s predicament a result of China’s economic slowdown or the company’s competitive failure?
5. Apple’s revenue growth largely comes from selling more expensive phones every year
Apple’s revenue growth in recent years have come not from shipping more smartphones, but rather from selling more expensive models that it announces every year. Annual iPhone shipments have stayed flat since 2015. In third quarter of 2018, Apple missed expectations after shipping 46.9 million units, up only 0.4% year-over-year. Relying on more expensive models could backfire, especially as it faces tough competition from Chinese manufacturers whose high quality flagship phones sell at much lower price points.