Apple got stung by coronavirus, but just how badly?
When it comes to tech companies in a pandemic, Facebook, Google, Amazon and Netflix have seen increased usage, thanks to a rise in interest for social media, video streaming and buying e-commerce products at a time when most retail stores are closed.
But for Apple, which makes the lion’s share of its money from selling expensive iPhones, it’s a different story.
“Apple is in the eye of the storm,” says Daniel Ives, an analyst with Wedbush Securities, “because consumers are focused on health, groceries, jobs and hand sanitizers, rather than buying a $1,000 iPhone. It’s going to be dark days ahead.”
Just how dark will be revealed Thursday, when Apple announces earnings for the first quarter, which traditionally is Apple’s third least profitable of the year, following the holiday and summer quarters, which includes the last week of September. That’s when Apple traditionally releases a new iPhone.
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Apple has signaled that it expects the quarter, which closed March 31, to take a hit from the coronavirus, which curtailed Apple’s production in China and caused the company to close all of its retail stores. (Rival Samsung said this week that its profits would decline this year as well, due to the crisis.)
Gene Munster, an analyst and investor with Loup Ventures, predicts a 12% drop in Apple revenue for the quarter from the year-ago quarter, at $51.1 billion. He adds that iPhones will take the biggest hit, with a 25% drop in sales, to $23.3 billion. The iPhone now represents 46% of Apple sales, he says.
On Feb. 17, before the COVID-19 crisis had really begun to hit hard in the United States, Apple warned of lower guidance for the fiscal quarter. At the time, Apple said supply was constrained due to factories being closed in China and that demand for new phones in the region had slowed.
Apple has yet to address the situation in the United States, where over 1 million cases of coronavirus have been confirmed – nearly a third of the world’s cases – with 57,000 deaths. Ives expects Apple’s iPhone sales to be down 15% in the quarter and the new lineup of iPhones, still to be announced in September, he believes, but with production delays as late as Thanksgiving instead of the traditional third weekend of September.
Because of factories closing and social distancing, Apple lost two to three months from the supply chain, which will throw the company off its traditional schedule, Ives says.
Munster says execs usually sign off on new iPhone designs by February, spend the next few months refining and testing, and then start production in July. But executives need to not be socially distant from one another, meeting together as a team, going over test models with them in their hands, assessing and collectively enhancing them further.
Until they can return to physical work, production won’t be able to return to normal, he says.
“The hardware team needs to be in the office to get these out the door,” he says.
Ives says the next phone is Apple’s most important since the iPhone 6 in 2014, which brought out a new, larger form factor for the first time. Now, Apple is poised to introduce a new phone that will connect to the next generation of wireless service, ultra-speedy 5G. And with 350 million of the 925 million iPhone users who haven’t upgraded in 42 months, “such a pent up install base,” would be keen for a new device this year, Ives says.
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The bright spot for Apple, as it has been for the past several years, is the rise of its “Services” division which sells software on a recurring basis to customers in its huge base. Movie rentals from iTunes, music subscriptions from Apple Music and back-up from iCloud will see a rise in revenue, Ives says, because people are at home, looking for things to do. Services is a “savior” for Apple, he adds, that will reap some $50 billion in the quarter.
The latest iPhone, the budget-priced SE which was released last week, hasn’t experienced production issues, Munster says, because it’s based on an older design, the iPhone 8, and thus didn’t need to be updated.
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