Apple this evening announced a rare revision to its Q1 2019 earnings guidance. The company adjusted its revenue expectation to $84 billion, down from its previous guidance of between $89 billion and $93 billion. Following that announcement, Tim Cook went on CNBC to offer a bit more color on things.
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First, Cook reiterated much of what he wrote in his “letter to Apple investors.” The Apple CEO explained that “over 100 percent” of AAPL’s shortfall is from iPhone, and primarily due to performance of the device in Greater China:
If you look at our results, our shortfall is over 100 percent from iPhone, and it’s primarily in Greater China. As we look at what’s going on in China, it’s clear the economy began to slow there for the second half. What I believe to be the case is the trade tensions between the United States and China put additional pressure on their economy. We saw, as the quarter went on, things like traffic in our retail stores, traffic in our channel partner stores going down, the reports of the smartphone industry contracting.
Cook also explained that factors such as foreign exchange and the lack of carrier subsidies are affecting iPhone demand. Perhaps most interestingly, Cook pointed to the iPhone battery program as another reasoning for the slowdown in iPhone sales:
We’ve started a program worldwide where we dramatically lower the battery replacement price. We had sort of a collection of items going on, some that are macroeconomic, some that are Apple-specific. We’re not going to sit around waiting for the macro to change. I hope that it does, and I’m actually optimistic, but we’re going to focus deeply on the things we can control.
Back in February on Apple’s Q1 2018 earnings call, Cook was asked whether or not the battery program could affect iPhone upgrades:
We did not consider what the battery program would do for upgrade rates. Sitting here now, I don’t know how it will impact upgrades. We did it because we saw it as the right thing to do for our customers. The effect on upgrades was not in our thought process in deciding what to do.
Elsewhere during the interview, Cook addressed Apple’s decision to stop reporting unit sales for the iPhone, iPad, and Mac – an announcement the company initially made last quarter.
The Apple CEO explained that, in Apple’s eyes, there is little reason to report unit sales because of the vast difference in price between various iPhone models. Cook pointed to the Apple Watch as an initial example of this, explaining that Apple never reported Watch unit sales due to varying prices between the different models of the device.
This doesn’t mean we’re never going to comment on units again. If we think we can better explain results with talking about units, I’d be glad to say something about it. But generally, to have it on a 90 day clock, I think it does the investor a disservice.
Lastly, Cook noted that Apple will start reporting the gross margin of its Services business:
We are making additional disclosures as well. For example, we’re going to give the gross margin of our Services business. We’ve never done that before. Services has grown an incredibly amount, we’re going to report over $10.8 billion for last quarter.
Read our full coverage of Apple’s rare adjustment to its revenue forecast here.
EXCLUSIVE: After cutting Q1 expectations, Apple CEO Tim Cook tells CNBC that the shortfall is primarily in Greater China as trade tensions put pressure on the Chinese economy https://t.co/iOf79ebo17 pic.twitter.com/Lm7Wyp1VOX
— CNBC Now (@CNBCnow) January 2, 2019
JOSH LIPTON: Tim, thank you so much for taking the time to chat. We appreciate it.
TIM COOK: Thank you for coming.
JOSH LIPTON: I want to dig right into the results, Tim, and iPhone revenue specifically. Because as you mentioned, that was lower than expected and that accounted for the revenue shortfall here. And I want to dig in specifically to the trend you’re seeing in China. Because you say something interesting, which it isn’t just the economy there, it’s also these rising trade tensions. What did you mean by that, Tim?
TIM COOK: Yeah. If you look at our results, our shortfall is over 100% from iPhone and it’s primarily in greater China. And so as we look at what’s going on in China — it’s clear that the economy begins to slow there for the second half. And what I believe to be the case is the trade tensions between the United States and China put additional pressure on their economy. And so we saw, as the quarter went on, things like traffic in our retail stores, traffic in our channel partner stores, the reports of the smartphone industry contracting, particularly bad in November — I haven’t seen the December number yet, but I would guess that wouldn not be good either. And so that’s what we’ve seen. And now there are a lot of things we can do to turn our — to sort of turn our business around in terms of the, both in China and more generally across. We’re focusing on — if you look at iPhone more at a macro level, the story on iPhone is in addition to the emerging market weakness, which is primarily in China, it’s that there’s not as many subsidies as there used to be from a carrier point of view. And where that didn’t all happen yesterday, for — if you’ve been out of the market for two or three years and you come back, it looks like that to you. FX was a big challenge in the quarter. As interest rate hikes have started in the United States, there’s more foreign capital coming in, that makes the dollar much stronger and the translation, we knew that was going to be a factor. It affected us by about 200 basis points. And then sort of in addition to those two things, we’ve started a program worldwide where we dramatically lowered the battery replacement price. And so we have sort of a collection of items going on, some that are macroeconomic and some that are Apple specific and we’re not going to sit around waiting for the macro to change. I hope that it does, and I’m actually optimistic, but we’re going to focus really deeply on the things we can control.
JOSH LIPTON: And let me — in terms of things that are perhaps that are a little bit out of your control though, Tim.
TIM COOK: Yeah.
JOSH LIPTON: I want to touch on China specifically, and go back to that. Because the trade tensions are having an effect you’re seeing on the economy there. But do you see evidence that perhaps Apple is also getting caught in the crossfire, in terms of is there evidence that Chinese consumers say, “You know what there’s a dispute, there’s tension and they’re taking it out on Apple in some way as well”?
TIM COOK: Well, Certainly apple has not been targeted by the government so let me take away any kind of doubt of that right up top. There are reports, sort of sporadic reports, about somebody talking about not buying our products because we’re American, maybe a little bit on social media, maybe a guy standing in front of a store or something. My personal sense is that this is small. Keep in mind that China’s not monolithic. Just like America’s not monolithic. You have people with different views and different ideas. And so do I think anybody elected not to buy because of that? I’m sure some people did. But my sense is the much larger issue is the slowing of the economy and then this — the trade tension that’s further pressured.
JOSH LIPTON: And you talk — given that this was a headwind and more than you expected, have you talked, I’m interested, to President Trump or members of the administration? This is a big, important American economy. And you’re saying listen, this trade dispute is really impacting our business. Have you recently talked to the members of the administration and conveyed that?
TIM COOK: You know, I’m telling our investors first about what we saw last quarter, and that is the way it should be. But I’ve had obviously many, many discussions over the course of many months to be constructed and to give sort of my perspective on trade and the importance of it to the American economy as well. And I feel like I’m — that I’m being listened to in that respect. And so I’m actually encouraged by what I’ve heard most recently coming from the U.S. and from China and hopefully we’ll see some changes.
JOSH LIPTON: But given that those trade tensions, Tim, they do remain heated, given the pressure you’re seeing, you’re speaking to traders, investors, and business people now, in the quarters ahead, how do you then navigate this?
TIM COOK: Well, you focus on what you can control. And so when I look at this I say, you know, there’s some weakness outside of China as well. I would have liked to have done better in some of our developed markets. And so how can we do that? Well, the subsidies are fewer these days, that’s true. But we can start or we have started a trade-in program. And we started it primarily because it’s great for the environment. You know, it keeps a unit with someone that wants it and the person who wants a new one gets one as well, and it’s great for developers and so forth as well. But we haven’t really marketed it very much. And the truth is to a consumer the trade-in looks like a subsidy because it lowers the price of the phone that you want. And so just let me give you an example of that. And so the retail price of the iPhone 10R in the United States is $749. But if you happened to trade in a 7+ which many people are in order to get that, the price goes all the way down to $449 or less. And so there’s a substantial benefit, economic and environmental from trade-in. We’re also working on placing ability to do monthly charges in. And so it begins to look like more the traditional way of paying for it through the carrier by, you know, taking the rates out for 24 months or so and so you wind up getting an incredibly new phone that’s so much better than what you’ve had for $20, $30 a month or so. And so we’re doing that. We’re also putting a lot of focus on the service side. Our stores are unbelievable at service, and the ability — people are very worried about transferring their data. You know, they’re very worried that this new phone, there will be something that they lost in the process, and so we’re putting a lot of emphasis on doing that and doing that well. And so those are just some things. The other things, which are not different than we thought but did affect our revenue in the quarter, are things like we had some supply constraints, we had an unprecedented number of new products during the quarter, we had new watches, we had new iPad pros. Both of these were constrained for all or most of the quarter.
JOSH LIPTON: Did you think — I mean, looking back did you think – do you think you tried to introduce too much new too fast?
TIM COOK: No. I think you — you know, our style, Josh, is we release things when they’re ready. And I think that’s the way it should be. If you ever start worrying about cannibalizing yourself, you can talk yourself into not doing both things. And so all of our products were ready over that period. Now would I have liked some of them to be ready a few months earlier? Of course. I would always like that, but generally we’re still going to march down the road of shipping things when they’re ready.
JOSH LIPTON: And let me ask you, Tim, with this release, investors get a lot of information and metrics.
TIM COOK: Yes.
JOSH LIPTON: But as you guys spelled out, listen, there’s going be changes in disclosure. You’re not going to get the number of iPhones shipped anymore. You guys don’t see that as a relevant metric so much in the past. If that is not the data point that investors should be focused on, what are the data points that investors should focus on?
TIM COOK: Yeah, that’s a good question. Look, what we did years ago, actually with Apple Watch, we’ve never disclosed units sold. Why? It’s not that we were secretive people. It’s that we looked at this is and the watches were wide range in terms of pricing. We knew that eventually we would have a cellular watch, there’s a stainless steel versus aluminum, there’s even an addition. And so you begin to say, what value is there in adding these things up? I’ve made the comparison — it’s sort of like you and I going to the grocery store and putting things in our cart and coming up to the register and the person saying, “How many you got?” It doesn’t add together anymore because the price ranges are so wide. So we didn’t do it on Watch from the beginning. We’ve never done it on iPod. As we now step back from the phone, we have phones being sold in the emerging markets, like an iPhone 6s for around $300. And so you’ve got a range from 300 to 1,000 or in some cases over 1,000 depending upon your selection of flash and so forth. And so this thing has lost its meaning. And so we felt that at the end of the day we were giving investors and sort of pointing them to something as if it had this incredible importance to it well beyond what it does. That doesn’t mean we’re never going to comment on the units again. If we think that we can better explain results with talking about units, I’d be glad to say something about it, but generally to have it on a, you know, every 90 day clock of releasing this, I think it does the investor a disservice frankly. But now we are making additional disclosures as well. Like, for example, we’re going to give the gross margin or services business. You know, we’ve never done that before. Services has grown, you know, incredible amount. We’re over — we’re going to have — report over 10.8 billion and when we report later this month for last quarter. That’s a new record.
JOSH LIPTON: And what drove that, Tim? Any color given? Was it the app store? Was it music?
TIM COOK: This is incredibly exciting for us because so many things hit records in there. The app store did. Apple music hit a new record. Apple Pay hit a new record. Our search ad product from the app store hit a new record. iCloud hit a new record. And so, you know, it’s very wide and each of the geography — geographies hit a quarterly record. So even in China the app store hit a quarterly record. Why is that? It’s because it’s driven by the installed base and our installed base grew, you know, nicely year over year in China as well. And as I say in the letter, we’ve picked up 100 more million active devices over the last 12 months alone. So this is an incredible number. And we’ll have — we’ve got some interesting things in the pipeline on services that, of course, we do on products as well. And so that’s sort of another way to grow the company.
JOSH LIPTON: Final question here, Tim.
TIM COOK: Yeah.
JOSH LIPTON: You say you’re going to end the quarter 130 billion in net cash.
TIM COOK: That’s right.
JOSH LIPTON: You know, Apple has a history, you do a lot of acquisitions. They tend to be though smaller. Biggest was 3 billion for Beats. Do you think maybe given that cash position, would Apple be open to maybe shifting how it thinks about acquisitions and doing acquisitions that maybe investors would think are bigger, more meaningful?
TIM COOK: You know, for us, we’ve never changed our view on acquisitions. We’ve never said ‘Thou shall not buy a big company,’ or ‘Thou shall not buy a medium company,’ or it has to be only in this country or that country. We’ve asked from a strategic point of view and asked, what does it do for the customer, what does it do for the user? And so a vast majority has been technology and people that we think would bring a better user experience, that there’s a feature or something that we could do in the future and that they could help on doing that. But that doesn’t — I’ve always been very clear. It’s — we look at many, many companies including very large companies. We’ve elected so far not to do those because we haven’t found one that we said, “wow, that’s a nice intersection of Apple.” But I’d never rule it out. We do have a lot of net cash, and I believe the company’s stock is an incredible value and so you can bet that we’re going to be buying some stock under the plan that we’ve had out there for quite some time.
JOSH LIPTON: Alright, Tim. Thank you so much for your time today. You were generous. Appreciate it.
TIM COOK: Thank you. It’s good to talk to you, Josh. Always a pleasure.