Tim Cook’s Turning Point

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Photo Source: @tim_cook on Twitter

Analysts that cover Apple finally got to be the broken watch that’s right twice a day. After so many botched predictions, at last they got to celebrate calling a slowdown in iPhone sales. While there are some who did have sound financial reasoning behind their predictions, I have a hard time giving any respect to many who just threw crap against the wall until it finally stuck. But to the few who called this based on sound analysis, a tip of the proverbial cap for sticking to their guns when the rest of us thought they were crazy a couple of months ago.

Despite the mounting evidence, I held out for word from Apple before buying in to the wave of negativity. I wavered just before the post iPhone X earnings call last year when Apple had the last laugh again, so I figured fool me once…you know the rest. I still had a feeling that, as we have seen before, the numbers wouldn’t end up as bad as analysts were predicting based on supply chain rumors. However, yesterday we got word from the most reliable Apple source on Planet Earth that last quarter really didn’t go as planned.

Excuses and reasons why

I’m not a financial guy, but while pinning most of this on China seems like a convenient excuse, there are legitimate reasons why it is a major cause of Apple’s current woes. I’m actually surprised that Tim Cook wasn’t even more direct about the negative effects of Donald Trunp’s tariffs, as they definitely had a major negative impact on sales in China.

The problem with these tariffs isn’t just about price. They are stoking resentment and a retaliatory nationalism in one of Apple’s most important markets. There were reports before Christmas that many Chinese companies are now moving away from Apple and are also encouraging their employees to purchase smartphones from Huawei and other China-based companies by offering discounts and incentives.

I’m not really sure what Apple can do about this, since they are being painted as the bad guy in a US trade policy situation they played no part in. In fact, Tim Cook has very clearly weighed in against these tariffs. However, that doesn’t matter in this game. Apple is the unfortunate target of the nationalistic fervor whipped up by this nonsense and there doesn’t seem to be an easy solution in the short term.

This tariff situation is far worse than a simple price gap, because Apple has absolutely no power to fix it on their own. They can lower prices to try and boost sales, but they really don’t have a way to repair the collateral damage to their brand in China. They are stuck between a rock and a hard place there until Donald Trump backs away from using a bazooka instead of a scalpel in trade negotiations. Good luck with that, Apple.

That said, China isn’t the only reason for Apple’s struggle. While I expected the iPhone XR to sell very well, and evidently it did during the Holidays here in the US, it clearly hasn’t been as popular as Apple anticipated. And while sales have certainly increased, that is partly due to recent sales and promotions, meaning Apple is pocketing a little less revenue per device that they initially expected. I know my wife absolutely adores her’s, and all other owners who I’ve talked to have expressed similar satisfaction. Despite this and very strong reviews in the tech press, the XR hasn’t been enough to move the upgrade needle.

On the subject of price, I won’t blame Apple for going more premium as a way to boost iPhone revenue per device. The iPhone X and XS Max are probably the two best mobile devices I’ve ever owned, and that’s a LONG list to be at the head of. However, this amount of revenue shortfall tells me that the company got greedy and took this approach too far. They are going to have to find a middle ground that keeps revenue up while not discouraging upgrades. A few small sales and a nice trade-in program likely won’t be enough to bridge this gap.

These aren’t the only reasons for Apple’s missed revenue projection. The entire smartphone market has matured and is sagging. Market research has recently shown that people are hanging onto their phones longer than they used to when device subsidies with contracts were still the rule, as well. All in all, there really isn’t any good news here that paints a clear path to a quick bounce-back for Apple. Reality finally caught up to the iPhone and now it has pulled into a solid lead. At least for now.

Still, don’t jump to dumb conclusions

This shortfall happened for plenty of reasons, but the old standby “lack of innovation” isn’t one of them. Why? iOS users aren’t flooding from Apple to another platform en masse, at least not in the US and other western markets. Many of them are standing pat with what they have. Apple isn’t an exception here, as sales for the competition are flat, as well. If lack of innovation really were a valid reason, US sales for Samsung and Google’s latest Pixel would be booming as a result. That just isn’t the case. Innovation isn’t the problem for them either. The maturity of the smartphone market is a reality for everyone.

Apple also isn’t doomed. Not even remotely close. While the company falling up to $9 billion short of its projections for the last quarter is no laughing matter, Apple is still in great shape financially today. They aren’t growing at the moment, but they aren’t headed for some short term cliff, either. Anyone who says they are is a fool and doesn’t know what they are talking about. That said, more of the same won’t cut it in the long term. They definitely need to make some changes to get revenue stabilized, and it’s on Tim Cook to lead that charge.

Here’s another thing to avoid- any article that leads off talking about Apple “losing $9 billion.” They didn’t lose that amount of money. They didn’t come up that far short year over year. That is how much they fell short of their guidance for last quarter. In fact, even the $9 billion number is from the edge of Apple’s guidance scale, and is being used for dramatic effect. Apple initially projected between $89 and $93 billion in revenue last quarter, meaning they are likely to be down somewhere between $5 and $9 billion. There is nothing good about those numbers, but still, don’t fall for lazy or hyperbolic writing here. Many are trying to paint a bad situation far worse than it is, either out of ignorance or just for good old clicks.

Now Apple is likely to be down around $3.7 billion year over year, based on their new projection. This is nothing to sneeze at. However, the difference between $9 billion and $3.7 billion is also the GDP of a small country, so don’t be fooled by idiots who don’t do their homework and don’t know what they are talking about.

Really bad optics

Enough taking Apple’s side. Personally, I thought Tim Cook’s letter struck the wrong tone. I’m definitely not one of those “but Steve would have done it differently” Apple fans. However, his style of leadership was missed yesterday. The letter was too weak in some areas, but also tried too hard to justify what happened with poor examples. Cook only managed to dig his hole deeper, in my book. None of it looks good to most Apple users or investors.

From an optics standpoint, the first problem came at the last earnings call. Apple’s decision to no longer report iPhone device numbers looms really large right now. I defended the move at the time and it’s well within Apple’s rights to report their earnings this way. However, after yesterday’s admission that last quarter’s results didn’t measure up, this looks bad. It looks really, really bad.

Whether they are or not, the change in reporting gives the appearance that Apple’s brass is trying to hide something. And let’s be clear- that isn’t just bad optics. It would be flat-out illegal for a public company to withhold information from its shareholders. I think that fact has a lot to do with yesterday’s admission that bad news is coming in last quarter’s results. Apple had to get out in front of the news, or the backlash would have been even worse.

I think the truth has more to do with hubris than hiding. I think Apple’s executives may have bought into their own hype too much and ignored warning signs that a bigger slowdown in iPhone sales was coming. That is their job, and there is no way around the fact that they didn’t do it very well. But still, Tim Cook and company made it worse by not making the change in iPhone device sales reporting when the sales outlook was more promising. He will have to address these questions at the next earnings call, and he had better have some good answers.

This isn’t the only thing that leaves a bad taste in the mouth. Tim Cook having the gall to mention last year’s reduced-price battery replacements as a reason for fewer device upgrades is really something. The man is usually smooth and polished, but this is 100% tone deaf at a time like this. It may be completely true, but that doesn’t matter. It just sounds so petty to offer up a program that was instituted to cover over a previous issue of poor PR and disclosure in their handling of battery issues and processor throttling as a reason for poor sales. “We gave you cheap batteries and now this slowdown is partly YOUR fault.” I just don’t understand how someone didn’t raise a hand and let Apple’s brass know how absolutely and completely brain dead this statement was.

The turning point

This is definitely the defining moment of Tim Cook’s tenure as CEO. How he responds to this drop in revenue and the results over the rest of the year will decide his fate and his legacy. Make no mistake, if Apple has another quarter or two of bad news, Mr Cook will likely be forced out by Apple’s Board of Directors. At the very least, he would be on the chopping block and under extreme pressure at that point. These very wealthy and powerful people have watched billions evaporate over the last month and a half, so the clock is already ticking.

I’m not making any predictions here and I’m not calling for Time Cook’s ouster. Not right now. The man has had too much success as the head man at Apple’s to make a panicked and reactionary move like that. I like and respect him as a manager-style CEO, but he’s also never been in this spot before. He’s a great numbers and supply chain guy, but he isn’t a visionary like Steve Jobs was. As such, I have no clue whether he can stem the negative tide and get Apple on the path to less dependence on the iPhone sooner than originally planned.

I do know one thing. Tim Cook will be under the microscope and everyone in the tech world will be watching his every move this year. The $9 billion question? Can he insure that this is a small speed bump rather than a lasting negative shift in Apple’s revenue? Stay tuned.


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