By Jay Greene and Yoko Kubota 

Apple Inc. chief Tim Cook blamed China's accelerating economic slowdown for stumbling iPhone sales that hurt its global revenue in the past quarter. The company's problems run deeper in China and extend to markets beyond.

Chinese rivals including Huawei Technologies Co. are selling feature-competitive smartphones at lower prices, squeezing Apple's share of the world's largest smartphone market.

Meanwhile, it has faltered in the biggest untapped smartphone market, India, where Apple accounts for a scant 1% of overall sales, according to market estimates.

Mr. Cook also acknowledged trouble at home in his letter to investors on Wednesday. In the U.S., Apple has been stung by smartphone owners lengthening the amount of time they hold onto their devices.

The confluence of events poses a formidable challenge for a company whose revenue has grown 11-fold in the iPhone era. With global iPhone sales stagnant, Apple isn't able to rely on big emerging markets for explosive growth. And it hasn't yet found a transcending product that can offset the lost iPhone revenue.

After Mr. Cook highlighted the problems in China in a revenue warning Wednesday, Apple's stock fell 10% on Thursday to $142.19, its biggest single-day percentage drop in nearly six years. The slide wiped $74.65 billion from the company's market value.

At Apple's California headquarters Thursday morning, executives held an all-hands meeting to address questions about its performance, including the company's monthslong stock slide, said people familiar with the matter. Some employees have a significant portion of their compensation tied to restricted stock units. and, among other things, are concerned about when to pay taxes on them

Apple's stock has fallen nearly 40% since peaking Oct. 3 at $232.07.

The growth problem is exacerbated by Apple's reluctance to change its profitable strategy of selling a limited number of devices at premium prices. Apple didn't fully appreciate that its pricing power has diminished in price-sensitive markets, analysts say, the result of cheaper rival products, a lack of compelling new features and slowing economies, particularly China.

"There's nothing Mr. Cook said to make you believe there are disruptive opportunities for Apple around the corner," said Tom Plumb, president of SVA Plumb Financial, a Madison, Wis., wealth-management firm. It has $2.6 billion in assets and counts Apple among its top holdings, though it sold some shares in the past two months. "They're still a leader in many areas, but as large as they are, they need something really big," Mr. Plumb said.

In his Wednesday letter, Mr. Cook said the company is "confident and excited" about its product pipeline, adding that "Apple innovates like no other company on earth, and we are not taking our foot off the gas."

One component of Apple's strategy long considered its greatest weapon: an ability to charge ever-higher prices for its marquee device.

The average selling price for the iPhone has increased 12% over the past four years to $749.63 in fiscal 2018, helping to make up for slowing unit sales. When Apple said last year it would stop reporting unit sales for its iPhone and other products, the company signaled sales volume wasn't as important as pricing, said Wayne Lam, a mobile analyst at IHS Markit.

That strategy appears in trouble.

"The price elasticity snapped" in the fourth quarter, Mr. Lam said. Apple misread the market because it has always been able to sell iPhones at premium prices, he said. "There's going to be a lot of soul-searching within management now."

Mr. Cook acknowledged that the forecast revision would prompt review. "We manage Apple for the long term, and Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result," he wrote in his letter to investors.

Apple often had the ability to forecast iPhone sales "to the third decimal," said Daniel Ives, a Wedbush Securities analyst. That is what makes the revision so stunning, he said. "This is the biggest miscalculation by Apple in the iPhone era."

The macroeconomic issues cited by Mr. Cook probably accounted for about 20% of the shortfall, Mr. Ives said. "Eighty percent of it is that Apple just swung and missed," he said. "Fundamentally, this was an Apple execution issue."

A prime example of Apple's execution woes is the iPhone XR, its more modestly priced device among three new handsets it released last fall. For China, Apple had placed big orders for the XR, anticipating strong demand after it went on sale in October, according to a person familiar with the matter.

Apple is now grappling with excess XR inventory, this person said, a tough pill to swallow for a CEO who once described inventory as "fundamentally evil."

Apple may have underestimated how competitive domestic smartphone makers have become, analysts say. With a starting price of 6,499 yuan ($945), the XR is priced well above a competing model from Huawei that also launched last year, the Mate 20, starting at 3,999 yuan. The Mate features a triple camera system while the XR features only a single camera.

Apple's iOS operating system also is less of a selling point for Chinese consumers than in other markets because smartphone users spend a large chunk of their phone time inside WeChat, a chat, payments and social-media app from Tencent Holdings Ltd. that is identical on phones running Google's Android software.

The company has weathered poor performance in China before -- sales there dropped in both fiscal 2016 and 2017. But those moments usually were negative blips in otherwise stellar quarters of growth, fueled by the runaway success of the iPhone. Now, Apple is facing greater challenges at home.

The iPhone's first decade was driven by significant innovative leaps in everything from battery life to screen quality to camera performance. Two-year contracts from mobile-phone carriers coupled with subsidies for devices drove recurring sales.

But the breakthroughs have slowed, said Chetan Sharma, a mobile-industry consultant. While some changes in recent years, such as bigger screens with the iPhone 6, goosed iPhone sales, consumers in developed markets these days aren't jumping to new models as quickly as before.

Just four years ago, U.S. consumers upgraded phones every 24.4 months, according to BayStreet Research LLC, which tracks device sales. The upgrade rate hit 36 months in the quarter that just ended, the firm estimates.

And it expects the length U.S. consumers hold their phone to average 38.7 months over the course of this year.

Average sales prices of iPhones are nearly five times the average price of non-Apple smartphone sold globally, according to Sanford C. Bernstein analyst Toni Sacconaghi. That discourages upgrades, he said.

Melissa LeRitz used to upgrade her iPhone every two years. But the 29-year-old quit doing so when her phone provider stopped covering the majority of the cost. Her iPhone 7, purchased a couple years ago, still works fine, she said -- even without some fancy new features.

"I kind of find it ridiculous to spend $1,000 on a phone when there's not really too much of a difference," said Ms. LeRitz, an attorney in Medford, Ore. "I feel like they are churning them out so quickly I can't keep up anyways."

Mr. Cook said in his letter that Apple is trying to counter the trend in part by making it simpler to trade in a phone in stores and finance the purchase of a new one over time.

If Apple keeps its premium-pricing strategy, customers might hold on to their devices even longer and prospective new customers might opt for cheaper alternatives. Dropping prices to lure more buyers will pressure its margins and could cannibalize sales of its premium devices.

"It's a challenging and arguably intractable issue that Apple faces," Mr. Sacconaghi said. "There's no easy solution."

--Kirsten Grind and Tripp Mickle contributed to this article.

 

(END) Dow Jones Newswires

January 03, 2019 20:39 ET (01:39 GMT)

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