Apple’s earnings guidance is a China issue, not an iPhone problem

I have spent the last couple of days thinking about Apple and its recent troubles. There is no doubt Tim Cook’s message to investors lowering Apple’s earnings guidance for the first fiscal quarter sent shockwaves throughout the industry. For a company that continually crushed estimates to falter like this made people really think about the future of the iPhone, and indeed, Apple itself. But it’s not all bad.

Per Tim Cook, the majority of Apple’s revenue shortfall comes from the economic deceleration in China.

In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.

Apple rode that wave up to record revenues, so now it has to endure a tough quarter and ride that same wave down. However, this is an economic problem, not a product issue with Apple.

As Cook noted:

In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year.

What I mean by this not being a product issue is that there is nothing that Apple has done to cause this downturn in its earnings. It wasn’t caught abusing its user’s privacy like Facebook, and it didn’t release subpar products that caused demand for its products to diminish.

I would be a lot more concerned about this whole affair had that been the case. If Apple eroded the trust in its customer base, this would be a problem of its own making, but it’s not.

I’m not trying to put lipstick on this pig. This is a serious situation, and there are things Apple needs to address in the coming quarter. What I am saying is that if you take China out of the mix, Apple wouldn’t have had to issue an earnings warning.

I also wouldn’t be surprised to other companies report similar issues related to China’s economy.

Will China’s economy improve? I’m no economist, and there are a lot of factors that play into the answer to that question, but my best guess is, yes.

No amount of diversification would have led Apple to be in a better spot today. No matter their revenue guidance, the situation in China would still have led to an earnings warning based on iPhone sales.

Apple is already looking at better ways to allow users to trade-in iPhones, which should help them in many markets. I suspect there are other ideas the company is working on, as well.

While there has been a lot of focus on the negatives in Cook’s message to investors, here are a few of the positives from that same letter:

  • Our installed base of active devices hit a new all-time high—growing by more than 100 million units in 12 months.
  • Revenue outside of our iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from Services, Wearables and Mac.
  • Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment
  • Wearables grew by almost 50 percent year-over-year, as Apple Watch and AirPods were wildly popular among holiday shoppers
  • launches of MacBook Air and Mac mini powered the Mac to year-over-year revenue growth
  • The launch of the new iPad Pro drove iPad to year-over-year double-digit revenue growth.
  • We also expect to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea.
  • Finally, we also expect to report a new all-time record for Apple’s earnings per share.

The more I thought about this earnings warning, the more it came down to what Apple could have done to prevent it. The simple answer is nothing. It’s an economic problem that is entirely out of Apple’s control, and an issue that will rectify itself over time.

In the meantime, Apple needs to do everything it can to allow easy upgrades for users, and most importantly, continue to excel at making great products.