Apple’s CEO Tim Cook issued a revenue warning at the beginning of January, indicating that revenues in Q4 had declined 5% to $84 billion. He added more information on positive growth items such as services, iWatch and the Americas. At almost any other time in our industry his announcement would have been unusual, but we live in volatile days. Apple is the largest supplier in the world, dwarfs every other ITC vendor in both revenues and net profit (see my Figure for its annual progress in both since 2003) and has been buffeted by its stock market valuation since just before Xmas along with others such as Facebook, Google and eBay. The early analysis reported on the TV and radio suggested that its business may be over-dependent on China as a region and its iPhone as a product. I want to add a bit more detail from my on-going research.
At the end of last year President Trump reduced the tax paid by American companies, resulting in temporary losses for those who held off-shore funds that otherwise would have incurred a 35% US tax when repatriated. For a one-off payment of 15.5% of the total companies brought the money home – Apple was the largest and agreed to pay $38 billion, indicating perhaps that it held $245 billion in its off-shore pot. Despite this Q4 2017 loss Apple (like all other US suppliers) was able to post stronger profits in 2018 due to the overall cut down to 21%. Looking at all ITC vendors (see my Figure opposite) there have always been long-term peaks and troughs in profit. Interestingly the 3-year cycles peaking in 2007 and 2010 have now been replaced by 4-year ones with a 2-year flat top in 2013-14 and again in 2018 (perhaps to 2019). Whether it happens in 2019 or 2020, it’s clear to me that our industry – including Apple – should be expecting a new trough, as my dotted line forecast suggests.
The suggestion that Apple is over-dependent on the iPhone is borne out by looking at the disproportionate revenues it makes from this product (see my Figure opposite). Its growth has been so tremendous it’s been hard until now to see where its peak was going to be – unlike the iPod and iPad, which have clearly had their day. Managing to keep the iPhone’s $140 billion annual revenues going will be harder than the success the company’s had in sustaining Mac revenues at $20 billion each year. Tim Cook mention a 50% growth in iWatch sales in Q4 this year in his note, but the company has never given absolute revenues for these, suggesting that they’re not yet significant for Apple to make a song and dance about. Another interesting point he made was that the number of its installed and active devices grew by 100 million units in the year; as its total shipments in 2018 will undoubtedly have been over 200 million, this indicates that around 50% of Apple’s business is in replacing its older products. I’m sure Apple will continue to innovate, but it will be virtually impossible for it (or anyone else) to find anything to emulate the iPhone. Apple’s business therefore is bound to shift towards farming its installed base of customers and persuading them to purchase add-ons, software and services.
Apple has managed to expand its business internationally to make up for the ‘problems of success ‘it had in the US and Europe. My Figure opposite shows how the proportion of its revenues have shifted over time, with China taking a significant share (18% of the total in 2018). China is of course the world’s largest single country and has been through its quasi-capitalist transformation over the last decade. Apple has managed to overcome the cultural and political difficulties other suppliers have had in creating a business proportionate with the countries size; one of its greatest achievements has been to sell its products at full price to the Chinese middle classes rather than producing lower-spec models. Its penetration of China is nowhere near the same levels it has achieved in countries such the US and UK, but it’s a lot closer than many ‘blue sky’ models predict. After all if population size was the sole indicator of success for ITC vendors both China and India would dwarf the USA in spending.
Getting back to my initial question, is Apple over-dependent on the iPhone and China? I don’t think it is… or at least that the company’s challenges are much wider. Its $261 million revenues in 2018 were the equivalent of each person in the world spending $36 on its products. We should praise it for its industry and success which sets a very high bar for others to attempt to follow. It’s surprised me that it hasn’t hit a brick wall already, but eventually it will have to turn from an innovator and international expansion specialist to a milker of its installed base, which in turn will result in higher profit margins but smaller revenues. Alternatively it could expand the number and range of products it sells beyond the handful of IT-focused ones it currently provides, which would help it sustain its revenues at lower profit margins. Whether or not either of these scenarios plays out, I think it’s highly unlikely it will increase its revenues this year…. but the again I’ve mistakenly made that prediction before!
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