Apple shares fall 5% on weak forecast

With Apple pointing the finger at fluctuating currency, poor performance in emerging markets and supply issues, its busiest quarter might not be as busy as investors had hoped.

While CEO Tim Cook has defended the soundness of the supply chain, worries over whether the business can keep up with demand over the final quarter leading into Christmas seem to have spooked investors. Combined with warnings over performance in emerging markets as well as volatile currencies around the world, the team has stated it might miss guidance over the next three months, sending share price down 5% in afterhours trading.

“The emerging markets that we’re seeing pressure in are markets like Turkey, India, Brazil, Russia,” said Cook. “These are markets where currencies have weakened over the recent period. In some cases, that resulted in us raising prices and those markets are not growing the way we would like to see.”

India should be seen as quite a worry for the iChief’s as while the country has been undergoing its own digital revolution over the last 18 months, Apple seem to be missing out on the biggest rewards. With India now being the second-largest smartphone market in the world, but with half the penetration of China, the opportunities are clear. Despite attention from Apple, it’s opening new production facilities and shops across the country, according to data from Canalys it is yet to break into the top-five smartphone brands.

Shipments in India across the most recent quarter dropped by 1%, though Xiaomi grew 31.5% year-on-year to claim the number on spot, at the expense of Samsung, where shipments dropped 1.6%. Vivo, Oppo and Micromax complete the top five, while the ‘others’ saw shipments decrease 34%. The Chinese brands seem to have found the right recipe to appeal to the Indian user, while Apple is still searching for the sweet spot.

“To give you a perspective in of some detail, our business in India in Q4 was flat,” said Cook. “Obviously, we would like to see that be a huge growth. Brazil was down somewhat compared to the previous year. And so I think, or at least the way that I see these, is each one of the emerging markets has a bit of a different story, and I don’t see it as some sort of issue that is common between those for the most part.”

One market where this isn’t the case is China, with the business growing 16% year-on-year. On the money side of things, it certainly is a different story. Total revenues across the business grew to $62 billion, an increase of 20% over the same period in 2017, though guidance is not as positive. Cook expects Apple to pocket between $89 billion and $93 billion over the next three months, though Wall Street has generally been hoping $93 billion would be the bottom end of the guidance.

Looking at the explanation, CFO Luca Maestri has pointed to four areas. Firstly, the team have launched products in reverse order compared to last year. Secondly, with many international currencies depreciating against the US dollar, Maestri anticipates a $2 billion headwind as a result. Thirdly, due to the number of products Apple has pumped into the market, the team is nervous about supply/demand. And finally, at the macroeconomic level in some emerging markets consumer confidence is not as high as it was 12 months ago.

Heading back to the positives, Apple is making more money now than it was a year ago. Despite there being no shipment growth in any of the major product lines (iPhone was flat year-on-year, iPad was down 6% and Mac was down 2%), Apple is still a money making machine. iPhone revenue increased 29% thanks to ridiculously high unit costs, while the services business was up 17%. This is an area which will be of significant interest to investors, as there is only so much Cook and co. can increase the price of iPhones to compensate for flat growth.

As part of the services division, the App Store has been trundling along positively, though with companies like Netflix and Fortnite stating they would be circumnavigating both the App Store and Google Play, all involved will hope this does not encourage others to do the same. Cook pointed out that the largest developer only account for 0.3% of revenues at the App Store, losing one or two won’t matter, but if the trend spreads too far the product might find troubling times ahead.

Overall, Apple is still in an incredibly dominant position, though the inability to capitalise on opportunities in the developing markets should be a slight worry.

Apple Financials

Apple Products

Samsung launches its first phone based on the stripped-down Android Go platform

The world’s largest smartphone maker Samsung has unveiled the Galaxy J2 Core, its first phone built on Android Go for the entry smartphone segment.

Samsung is joining Nokia, Alcatel, Motorola, Asus, ZTE, etc. in addressing the entry segment smartphone segment, with the latest addition to its extremely diversified Galaxy series. Android Go, since it was introduced to 8.1 Oreo, has seen the product line-up slowly but surely growing, but the participation of Samsung is definitely a boost, bringing to the camp not only its expertise but also its brand clout.

The Samsung management is obviously happy with its efforts to address the entry segment and the first time smartphone owners. “The Galaxy J2 Core offers a complete smartphone experience, incorporating some of the key features available on high-end devices with improved battery, storage and performance that is particularly appealing to first time owners”, said Junho Park, Vice President of Global Product Planning, Mobile Communications Business at Samsung Electronics.

The J2 Core uses the same chassis as the J2 Pro, with same display size (5.0 inches) and resolution (540 x 960 pixels, or qHD), same cameras (8MP rear and 5MP front) though the Pro is equipped with a flash for the selfie camera. Both house battery of the same volume, and both support dual-SIM. The key difference is in computing power and memory size. The J2 Core uses Samsung’s own Exynos 7 chipset, and only has 1GB RAM and 8GB onboard memory (compared to the Pro’s 2GB RAM and 16GB memory).

Android Go has modified the standard Android to be run on lower hardware configurations including stripped-down Google applications designed to consume less memory and less data. However, the biggest problem with the Android ecosystem when it comes to Android Go is that not all applications have followed Google’s example, therefore the saving on memory and data does not go very far. In particular, quite a few applications, most social networks, for example, have disabled the option to be offloaded to run on external memory card, which means the onboard memory is still likely to run out pretty quickly. This will frustrate users, especially those first-time owners who may not be the most tech-savvy consumers.

Samsung does not disclose J2 Core’s retail price levels in the first two markets it will be made available.

Huawei outlines plan for emerging markets

Connecting the unconnected is a topic which has been quite common over the last week, and it returned at the Global Mobile Broadband Forum during a session with Huawei’s Ming Cao.

Cao, President of the GUC product line, and lead for the Huawei wireless business in the emerging markets, outlined the company plan to stimulate growth; the sharing economy. Here, Huawei will aim to stimulate co-operation between various commercial entities, as well as the local government, to develop an asset sharing model, to reduce costs and accelerate the rollout.

It certainly sounds like a sensible idea, after all, with the price per MB in the emerging markets considerably lower than in the more mature areas, new products and new ideas have to be thought of to make economic sense.

The conversation also turned towards government influence. Cao believes more can be done to create a regulatory and legislative framework to encourage investment, but how much intervention should the government be granted in this space?

This was certainly a topic of conversation at AfricaCom last week. And while commercial entities and government bodies in Europe might play nice with each other, hiding behind co-operative and false smiles, Africa’s counterparts were anything but friendly. Operators, including Liquid and Safaricom, accused the government of trying to influence the market too much and create communications monopolies, while governments blasted the operators for not doing their jobs in connecting the rural communities.

In fairness, Cao did well to keep at arms’ length from a potentially sticky debate; Huawei doesn’t comment on such bureaucratic or political interests, though he was able to point out a couple of factors which might not help the connectivity question in Africa.

Firstly, site acquisition. When looking to develop any form of asset in any country, there usually has to be acquisition of real estate. In Africa, this process can take around 12 months, which some might say is a long period of time, after which only 50% are successful. These are not attractive numbers to consider when you are trying to rollout connectivity across an underserved continent.

Secondly, when looking specifically at the mobile broadband side of things, there simply aren’t enough smartphones on the continent. Part of this might be down to the taxation of the devices.

Around the world there are numerous smartphone manufacturers who have taken it upon themselves to design a device which is suitable for the African market. Some have been successful, offering devices for as little as $20-30, but in Africa these same devices can be as much as $60-70 due to taxation. This might not sound like a huge hike or amount to us in Europe, but this is a gamechanger on a continent with very little disposable income.

Without the appropriate devices in the hands of the consumer, the telcos will struggle to monetize the their networks, but this might be a moot point, as the processes are not in place to allow for an expansion of the infrastructure. These are two points which should be addressed relatively soon.

Huawei of course noted it had no official stance on the matter, but it did assure us that during a meeting at AfricaCom last week which included several Ministers from prominent African countries, it is a problem which has been recognised by the governments, and will be addressed in due course.

It must be frustrating to come across government regulations and policies that do not encourage the development of infrastructure in a region, but Cao did very well to contain any frustration, should it have been there! From our perspective, having attended AfricaCom and witnessed the spat between governments and operators, it seems like bureaucratic chaos which won’t get cleaned up very soon. But perhaps we are wrong, and taking the word of the politicians that they are sorted out the mess is a sensible idea…