The R-Word

Friday, 18 January 2019

Bloomberg¹ ran an eye-catching article by Mark Gurman yesterday. It currently has the headline “Apple Plans to Cut Back on Hiring Due to iPhone Sales Struggles”. The title of the web page (what you see in a browser tab, for example) is “Apple Cuts Back on Some Hiring After Selling Fewer iPhones”. And the URL slug for the article — usually a sign as to what the original headline was — is “apple-is-said-to-plan-some-hiring-reductions-amid-iphone-woes”.

These three headlines paint very different summaries of the story. Are they cutting back on hiring, or planning to? “Due to iPhone sales struggles” is a lot punchier than “after selling fewer iPhones” — it attributes cause rather than merely implying it. And “iPhone sales struggles” paints a grimmer picture than “selling fewer iPhones”.

Did Bloomberg tweak the headline to arrive at “Apple Plans to Cut Back on Hiring Due to iPhone Sales Struggles” because that’s the most accurate summary of the story, or because it’s the most sensational?

And what the heck is actually going on at Apple? Keep in mind that even with their earnings warning, Apple’s holiday quarter is going to be the second best quarter (both by revenue and profit) for any company in history, second only to Apple’s holiday quarter a year ago. The basic narrative of Gurman’s piece, especially when you start from the impression left by the headline, is that iPhone sales are so problematic that the company is going to hire fewer people this year than it had expected to. Like they’re in financial straits.

Here’s the bulk of Gurman’s report:

Apple Inc. will cut back on hiring for some divisions after selling fewer iPhones than expected and missing its revenue forecast for the holiday quarter, according to people familiar with the matter.

Tim Cook, Apple’s chief executive officer, made the disclosure to employees earlier this month in a meeting the day after he penned a letter to investors about the company’s recent struggles, particularly in China. During the meeting, Cook was asked if the company would impose a hiring freeze in response. He said he didn’t believe that was the solution. Instead, Cook said some divisions would reduce hiring, according to the people, who asked not to be identified discussing private matters.

Cook said he is yet to fully determine which divisions would cut back on hiring, but said that key groups such as Apple’s artificial intelligence team would continue to add new employees at a strong pace. He also emphasized that a division’s importance to Apple’s future isn’t measured by hiring rates.

On the surface, this narrative doesn’t really make any sense. A $7 billion earnings miss is a big deal, yes, but we’re talking about $84 billion in revenue instead of $91 billion. Whatever hiring plans Apple had in place, it’s not like they needed that money to make the hires. There aren’t enough potential Apple employees alive on the planet for it to make sense that Apple had hiring plans that required Apple to hit its revenue guidance for last quarter.

Let’s take it as a given that Gurman is correct that Tim Cook has told employees that Apple is making plans to slow hiring in some divisions. Not that they are slowing hiring, but that they are drawing contingency plans to do so. But why? What’s the contingency? Bloomberg would have us believe it’s in response to one disappointing quarter. Or perhaps rather than just one bad quarter, a better description of the contingency in Bloomberg’s narrative is the fear that last quarter was only the start, and iPhone sales will continue decelerating precipitously.

That would strike me as a panicked overreaction. Tim Cook is not a panicky overreactor. And Apple went through a similar sales cycle with the iPhone 6S in 2015-16 — where the iPhone was still wildly popular but sales dropped a click or two from the previous model year. There was no talk of hiring slowdowns then.

Making plans for reduced hiring would indicate that Tim Cook is spooked, though. I think it makes a lot more sense that what he’s spooked by is not the drop in iPhone sales in China. Every company that sells anything in China is prepping Wall Street for bad quarterly numbers.

I think what has Cook spooked is not the drop in iPhone sales, but the fact that the iPhone sales drop in China might be a symptom of a bigger problem. An effect, not the cause. Apple has gotten crazily good at predicting everything about their financials. It’s almost freaky how accurate they’ve been for years. But they got something very wrong last quarter. Again, it was a slight year-over-year decline, but it was the second-best quarter in history. iPhone sales were disappointing compared to expectations, but weren’t bad in the abstract. What was bad was Apple’s guidance. A $7 billion miss is bad, but Apple not foreseeing a $7 billion miss is a red flag. I think they’re evaluating deeper plans just in case it was more than just one thing in one quarter. No one wants to say the word, but I think it’s what has Cook spooked.

Recession.

You can’t trust the numbers from China’s government, so it’s all a bit anecdotal. But it’s not just Apple, and not just one industry warning about a bad quarter in China. I’ve heard from a few people who travel to China regularly, and several have told me that inside China, everyone agrees the country is in a recession. The only question is how bad — is this a brief cold, or a bad case of the flu?

Cook doesn’t seem like a head-in-the-sand, I’m-sure-everything-will-be-fine optimist. It would be better if the problem were just something to do with the appeal of 2018’s iPhone lineup. That would be entirely within Apple’s control to fix — albeit over the course of years, given the two-year (or longer) lead time for new iPhones. A recession — whether limited to China, or worse, starting in China but spreading worldwide — is out of Apple’s control. And it’s not like the U.S. economy is currently looking rock solid or under steady-handed leadership.

If Tim Cook suspects that a recession is a credible possibility, he’d want plans in place to turn the company on a dime to adjust.