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At the same time it came with the first forecasted decline in Apple’s revenue in the last thirteen years. And, just yesterday it was disclosed that Apple believed it had rectified a bug that caused its Safari web browser to crash when users initiated a search via its address bar. Users had complained that they had experienced the bug on both the firm’s Mac computers and its mobile devices.
Indeed, Luca Maestri, Apple’s CFO, commenting in an official company statement this Tuesday (26 January) on the company’s financial results for its fiscal 2016 first quarter ended December 26, 2015, stated: “Our record sales and strong margins drove all-time records for net income and EPS [earnings per share] in spite of a very difficult macro-economic environment.”
And, while the firm generated operating cash flow of $27.5 billion (bn) during the quarter, posted record quarterly revenue of $75.9bn as well as record quarterly net income of $18.4bn ($3.28 per diluted share), and returned over $9bn to investors via share repurchases and dividends (completing $153bn of their $200bn capital return program), the stock price has been on a downward path of late and is now the lowest for a year. In fact it's down 19% from hitting the $115 mark on 28 January 2015.
But guidance provided by Apple for its fiscal 2016 second quarter put revenue at between $50bn-$53bn and gross margin between 39% and 39.5%. The shares were trading today at around $93 at midday time in New York on Nasdaq.
Contrast this with early last November when the stock was up at over $120 a pop - about $7 higher than at the end of January 2015. Furthermore, Apple shares have fallen by a quarter since last summer, which has wiped over $200bn off the company’s market capitalization. So, is it time to panic just yet as an investor? It might be a little premature.
Well, the majority of equity analysts covering Apple currently rate the stock as a ‘Strong Buy’ (23), with three recommending it as a ‘Buy’ and six a ‘Hold’. None of the analysts listed rated the shares at present an 'Underperform' or a 'Sell'.
“Currency fluctuations and the cooling of China’s economy notwithstanding, Apple’s predicament is a reflection of tough times across the board in the mobile phone industry,” contends Professor Howard H. Yu, at the top-ranked IMD business School in Lausanne, Switzerland, who specializes in technological innovation, strategic transformation and change management. The school itself offered the world's best MBA program according to Forbes' 2011 and 2013 biennial rankings.
Just a few short years ago in 2011, Xiaomi, a Beijing start-up mobile phone maker founded a year earlier by serial entrepreneur Lei Jun, developed a social media platform to engage millions of Chinese, turning young consumers into casual programmers to enhance its mobile phone’s operating system. Jun believes that high-quality technology does not need to cost a fortune.
And, in just four years, Xiaomi saw its revenues soar. It surpassed the market shares of Samsung and Apple in China with the start-up becoming the country’s largest mobile phone maker, and the world’s third. Pretty stellar.
But things can certainly change. Indeed, fast forward to 2015 and Xiaomi’s short-lived glory was snatched up by Huawei - another telecom giant in China. Historically the latter billed itself as a low-cost provider.
One might well ask why is it that there is so much turbulence in the mobile space? According to Professor Yu, who has been at IMD since 2011, it’s down to two underlying forces. “Modularity and digitalization have been the main cause. And, they are, it turns out, also affecting other sectors,” he points out.
Modularity
Ever since Western companies began outsourcing manufacturing to Asia in search of low wages, engineers have been devising clever and innovative ways to standardize components. From microprocessors and memory chips to LCD panels, components have become inter-changeable and have been for the most part made in the Far East (Singapore, South Korea and Taiwan).
“A mobile phone today is highly modularized, and compared to 15 years ago, has become far cheaper and more flexible to manufacture,” notes Yu, who received his doctoral degree in management from Harvard Business School and last year was featured in ‘Poets & Quants’, a respected higher education resource, as one of the ‘Best 40 Under 40 Professors’.
He adds: “Consequently, the barrier to enter the industry has dropped. Xiaomi, unlike Apple and Samsung, does not run a single factory. All of its assembly and component fabrication are outsourced.”
Digitalization
What destroyed Kodak and Polaroid isn’t just confined to photography. Digitalization also inflicted profound and mortal wounds to
As our computing power improves apace, product features are increasingly driven by software. And, hardware has become commoditized.
“The seamless consumer experience delivered by iPod has little to do with cutting-edge hardware technology (those were off-the-shelf by third parties), but cutting edge software design,” argues Yu, who prior to his doctorate worked in banking in Hong Kong.
He adds: “Again, it was this influx of the two interwoven forces - modularity and digitalization - that contributed to the displacement of old timers. Out
Yu paints a picture where “inexorably the coming onslaught of the Internet of Things (IoT) will only further speed up digitalization and information transfer to the cloud.”
Services and offerings are becoming ever more modularized as new industry standards emerge. “The speed of change and toppling of industry leaders we have observed in the mobile space will naturally spread elsewhere,” posits Yu. Now, could your industry be next? And, if so are you ready? Food for thought.
Still, after Apple’s record sales unveiled earlier this week investors can at least look forward to receiving a cash dividend of $0.52 per share - not exactly stratospheric though - on the company’s common stock in around a fortnight’s time on February 11, 2016. This is payable to shareholders provided they are on the book's record as at the close of business on Monday, February 8, 2016. Shares in Apple were holding steady at $93.92 (+0.5%) this afternoon at 2.23pm New York (EST) time.
