The U.S. dollar has been on the rise recently, strengthening against almost all other global currencies. That poses a notable challenge for U.S.-based multinational companies that sell products and services abroad, since revenue that is generated in a foreign currency translates into less and less when converted back to U.S. dollars.
This has been an ongoing theme for many companies, not just Apple (NASDAQ:AAPL). But seeing as how international sales now comprise 64% of revenue, the U.S. dollar's continued strength is starting to hurt -- a lot.
Billions in lost revenue
When Apple reported earnings earlier this week, the company provided a few data points as insight into just how tough the FX environment is. For starters, here's what CFO Luca Maestri had to say about it:
So obviously FX has been a significant hit in many ways, of course. I mean it reduces our growth rate. We would be 800 basis points higher this quarter from the 33% that we've reported if it wasn't for the movement in currencies around the world. And really when you look around the world, it's really if you exclude China, essentially every single currency has weakened against the dollar.
Apple's revenue growth rate would have been 800 basis points higher, which is a lot when we're talking about a revenue base as large as Apple's. In other words, Apple would have reported total revenue of $52.8 billion if it weren't for the pesky U.S. dollar, or about $3.2 billion higher than the $49.6 billion that it did report.
It's worth pointing out that, like other multinationals, Apple hedges its currency risk with currency forward contracts and other derivatives, but those hedges can only provide a limited amount of protection and inevitably entails a lot of uncertainty about what the FX market will do. Also, the cost to hedge in certain markets is prohibitively expensive, so there are some regions where Apple has no currency protection.
So the hit that Apple took is beyond what is offset by the hedges that it has in place.
No easy answer
It's quite a dilemma. Apple can either suffer the losses or it can increase the price of its products in the local currency to help offset the exchange rate fluctuation. Apple is already priced at the premium end of all markets where it participates, so increasing prices further naturally hurts sales as well. As best as it can, the company tries to avoid changing prices in the middle of a product cycle, but sometimes you just have to bite the bullet and increase prices. Apple has had to reprice in a handful of markets this year since some currency movements have been so dramatic, like what it had to do twice last year when the Russian ruble was tanking.
The good news is that Apple said it increased sales and market share in all geographical markets around the world "without exception," despite some necessary repricing. There's that unparalleled pricing power coming in handy yet again.