Apple cuts revenue outlook after ‘fewer iPhone upgrades’ than expected

Apple’s value plunged by $55billion (£44billion) and its shares were briefly suspended after a shock slowdown in iPhone sales over Christmas was revealed.

CEO Tim Cook’s letter to investors downgrading sales by $5billion over the past three months spooked Wall Street because the festive period is traditionally the tech giant’s busiest time of the year.

He cited economic weakness in China, which accounts for 20 per cent of its global sales, as one of the primary reasons for ‘fewer iPhone upgrades’ while Mac computer and iPad sales also fell.

The market panicked and Apple shares were briefly halted as Mr Cook made his announcement that the quarter’s revenues would be $84billion instead of $89billion – a five per cent fall and the firm’s first decline since 2016.

Stocks then slid 7.5 per cent to $146.23 – wiping $55billion (£44billion) off its value in minutes – and the market shock also forced Amazon and Microsoft shares down with the FTSE 100 following today.

Experts said today that the poor sales suggest the lure of the iPhone could be waning and the Silicon Valley company will focus on making more cash from its services including iTunes, the App Store, iCloud and Apple Pay. 

Wedbush Securities analyst Daniel Ives said consumers are going for cheaper Samsung and Huawei handsets, adding: ‘This is Apple’s darkest day during the Cook era. No one expected China to just fall off a cliff like this’.

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Apple shares were briefly suspended and plunged on Wall Street after the tech giant was forced to announce poorer than expected sales

Apple shares were briefly suspended and plunged on Wall Street after the tech giant was forced to announce poorer than expected sales

Apple shares were briefly suspended and plunged on Wall Street after the tech giant was forced to announce poorer than expected sales

Apple was forced to lower its projected revenue to $84 billion - down from a range of $89 billion to $93 billion it called out in its previous earnings release in November

Apple was forced to lower its projected revenue to $84 billion - down from a range of $89 billion to $93 billion it called out in its previous earnings release in November

Apple was forced to lower its projected revenue to $84 billion – down from a range of $89 billion to $93 billion it called out in its previous earnings release in November

A woman in Beijing uses her iPhone today where sales are falling behind rivals Huawei and market leader Samsung

A woman in Beijing uses her iPhone today where sales are falling behind rivals Huawei and market leader Samsung

A woman in Beijing uses her iPhone today where sales are falling behind rivals Huawei and market leader Samsung

Tim Cook, pictured at an iPad launch in October last year, has written to investors warning of a disappointing sales in iPhones, iPads and Macs

Tim Cook, pictured at an iPad launch in October last year, has written to investors warning of a disappointing sales in iPhones, iPads and Macs

Tim Cook, pictured at an iPad launch in October last year, has written to investors warning of a disappointing sales in iPhones, iPads and Macs

FTSE 100 falls as shock Apple forecast casts a shadow over European stock markets

The FTSE 100 and all other European markets fell today as Apple share in the US plunged over poor sales for the Christmas period

The FTSE 100 and all other European markets fell today as Apple share in the US plunged over poor sales for the Christmas period

The FTSE 100 and all other European markets fell today as Apple share in the US plunged over poor sales for the Christmas period

A near unprecedented Wall Street revenue warning by Apple over poor iPhone sales caused the FTSE 100 to fall suddenly today.

The tech giant’s value plunged by $55billion (£44billion) in minutes yesterday as it was revealed revenues from new handsets, iPads and Mac computers all faltered in China

The bad news triggered a new sell off of UK shares on the FTSE 100 and FTSE 250, with stocks in luxury brands such as Burberry, which has huge Chinese sales, falling sharply as well as mining and oil stocks.

The contagion then spread to all major European markets as experts predicted reduced growth in China over the coming year.

Apple shocked the business world last night after predicting poorer than expected sales over the Christmas period, sending its own shares and those of rivals Amazon and Microsoft falling.

While President Donald Trump’s trade war with China isn’t helping Apple and other U.S. technology companies, Ives believes Apple miscalculated by continuing to roll out high-priced phones in China, creating an opening for rivals with less costly alternatives that still worked well.

The price gap is one reason Huawei surpassed Apple in smartphone sales from April through September last year to seize the No. 2 spot behind industry leader Samsung, according to the research firm International Data Corp.

‘The question now is will Apple change its strategy or stick to its hubris,’ Ives said.

To help boost iPhone sales, Cook said Apple will expand its financing plans and build upon its recent efforts to make it easier to trade in older models at its stores.

In a letter to investors, CEO Tim Cook outlined why Apple was forced to lower its projected revenue to $84 billion – down from a range of $89 billion to $93 billion it called out in its previous earnings release in November. 

Cook cited economic weakness in China as one of the primary reasons behind the iPhone slowdown.

Other factors impacting the revised guidance were difficult comparisons due to Apple’s latest smartphone launches, as well as supply constraints, according to Cook. 

The stock’s plunge managed to wipe $55 billion off of Apple’s value, based on the company’s market cap at the end of Tuesday trading. 

The revised guidance is a rare move for Apple, one that it hasn’t made since more than a decade ago in 2002, experts noted. 

‘Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on December 29,’ Cook explained.

‘…Our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance.

‘While it will be a number of weeks before we complete and report our final results, we wanted to get some preliminary information to you now. Our final results may differ somewhat from these preliminary estimates.’

Aside from its lowered revenue guidance, Apple reduced its gross margin to 38 percent, down from its previous outlook of between 38 percent and 38.5 percent. 

Apple shares for suffered in 2018 despite being valued at $1trillion just three months ago

Apple shares for suffered in 2018 despite being valued at $1trillion just three months ago

Apple shares for suffered in 2018 despite being valued at $1trillion just three months ago

Shares of Apple plunged minutes after a halt on the stock was removed, with the stock sliding 7.5 percent to $146.23 in after-hours trading. The stock has fallen 32 percent from earlier highs

Shares of Apple plunged minutes after a halt on the stock was removed, with the stock sliding 7.5 percent to $146.23 in after-hours trading. The stock has fallen 32 percent from earlier highs

Shares of Apple plunged minutes after a halt on the stock was removed, with the stock sliding 7.5 percent to $146.23 in after-hours trading. The stock has fallen 32 percent from earlier highs

Operating expenses are expected to be $8.7 billion, lower from the range of $8.7 billion and $8.8 billion it previously projected. 

APPLE’S GUIDANCE BY THE NUMBERS  

Apple’s revised guidance for the fiscal 2019 first quarter includes: 

  • Revenue of approximately $84 billion
  • Gross margin of approximately 38 percent
  • Operating expenses of approximately $8.7 billion
  • Other income/(expense) of approximately $550 million
  • Tax rate of approximately 16.5 percent before discrete items 

Cook said economic weakness impacted the results at a much higher rate than Apple had anticipated. 

‘While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,’ he explained. 

‘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.’

Rising trade tensions with the U.S., as well as decelerating GDP growth, contributed to weakness in China, Cook said.

‘As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed,’ he added. 

Cook cited economic weakness in China as one of the primary reasons behind the iPhone slowdown. Other factors impacting the revised guidance were difficult comparisons due to Apple's latest smartphone launches, as well as supply constraints, according to Cook 

Cook cited economic weakness in China as one of the primary reasons behind the iPhone slowdown. Other factors impacting the revised guidance were difficult comparisons due to Apple's latest smartphone launches, as well as supply constraints, according to Cook 

Cook cited economic weakness in China as one of the primary reasons behind the iPhone slowdown. Other factors impacting the revised guidance were difficult comparisons due to Apple’s latest smartphone launches, as well as supply constraints, according to Cook 

‘And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.’

Apple first warned that it might see a holiday slump when it reported its fourth quarter results in November. 

At the time, Apple cited macroeconomic uncertainty, foreign exchange headwinds and uncertainty around supply and demand balance. 

Patrick Moorhead, an analyst at Moor Insights, said he’s ‘not surprised’ by Apple’s announcement as its suppliers had ‘been telegraphing the issue for a few months.’

‘Apple’s challenge is very simple – to keep its meteoric growth going it either needs to drive more iPhones at an acceptable profit level, raise prices on the same or less iPhone units, or grow new product or service categories that more than fills the lack of iPhone profit growth dollars,’ Moorhead explained.

‘iPhone units are likely down and I believe prices on the more premium, higher priced phones are down due to holiday discounting. 

READ THE FULL STATEMENT FROM CEO TIM COOK  

To Apple investors:

Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on December 29. We now expect the following:

We expect the number of shares used in computing diluted EPS to be approximately 4.77 billion.

Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance.

While it will be a number of weeks before we complete and report our final results, we wanted to get some preliminary information to you now. Our final results may differ somewhat from these preliminary estimates.

When we discussed our Q1 guidance with you about 60 days ago, we knew the first quarter would be impacted by both macroeconomic and Apple-specific factors. Based on our best estimates of how these would play out, we predicted that we would report slight revenue growth year-over-year for the quarter. As you may recall, we discussed four factors:

First, we knew the different timing of our iPhone launches would affect our year-over-year compares. Our top models, iPhone XS and iPhone XS Max, shipped in Q4’18 — placing the channel fill and early sales in that quarter, whereas last year iPhone X shipped in Q1’18, placing the channel fill and early sales in the December quarter. We knew this would create a difficult compare for Q1’19, and this played out broadly in line with our expectations.

Second, we knew the strong US dollar would create foreign exchange headwinds and forecasted this would reduce our revenue growth by about 200 basis points as compared to the previous year. This also played out broadly in line with our expectations.

Third, we knew we had an unprecedented number of new products to ramp during the quarter and predicted that supply constraints would gate our sales of certain products during Q1. Again, this also played out broadly in line with our expectations. Sales of Apple Watch Series 4 and iPad Pro were constrained much or all of the quarter. AirPods and MacBook Air were also constrained.

Fourth, we expected economic weakness in some emerging markets. This turned out to have a significantly greater impact than we had projected.

In addition, these and other factors resulted in fewer iPhone upgrades than we had anticipated.

These last two points have led us to reduce our revenue guidance. I’d like to go a bit deeper on both.

Emerging Market Challenges

While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater 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.

China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.

Despite these challenges, we believe that our business in China has a bright future. The iOS developer community in China is among the most innovative, creative and vibrant in the world. Our products enjoy a strong following among customers, with a very high level of engagement and satisfaction. Our results in China include a new record for Services revenue, and our installed base of devices grew over the last year. We are proud to participate in the Chinese marketplace.

iPhone

Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year.

While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be. While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.

Many Positive Results in the December Quarter

While it’s disappointing to revise our guidance, our performance in many areas showed remarkable strength in spite of these challenges.

Our installed base of active devices hit a new all-time high—growing by more than 100 million units in 12 months. There are more Apple devices being used than ever before, and it’s a testament to the ongoing loyalty, satisfaction and engagement of our customers.

Also, as I mentioned earlier, revenue outside of our iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from Services, Wearables and Mac. Our non-iPhone businesses have less exposure to emerging markets, and the vast majority of Services revenue is related to the size of the installed base, not current period sales.

Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment, and we are on track to achieve our goal of doubling the size of this business from 2016 to 2020.

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 and 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. And, while we saw challenges in some emerging markets, others set records, including Mexico, Poland, Malaysia and Vietnam.

Finally, we also expect to report a new all-time record for Apple’s earnings per share.

Looking Ahead

Our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.

As we exit a challenging quarter, we are as confident as ever in the fundamental strength of our business. 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.

Most importantly, we are confident and excited about our pipeline of future products and services. Apple innovates like no other company on earth, and we are not taking our foot off the gas.

We can’t change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results. One such initiative is making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone. This is not only great for the environment, it is great for the customer, as their existing phone acts as a subsidy for their new phone, and it is great for developers, as it can help grow our installed base.

This is one of a number of steps we are taking to respond. We can make these adjustments because Apple’s strength is in our resilience, the talent and creativity of our team, and the deeply held passion for the work we do every day.

Expectations are high for Apple because they should be. We are committed to exceeding those expectations every day.

That has always been the Apple way, and it always will be.

Tim 

‘The company is growing its services and ‘other’ categories, just not enough to drive overall revenue growth. 

‘I am not concerned for the company, but it’s likely investors will not see the company value it was at until it can see a likely path to double-digit revenue growth,’ he added.

Cook elaborated on Apple’s decision to issue revised guidance in an interview with CNBC

‘If you look at our results, our shortfall is over 100 percent from iPhone and it’s primarily in greater China,’ Cook told CNBC. 

‘It’s clear that the economy began to slow there in the second half and I believe the trade tensions between the United States and China put additional pressure on their economy.’  

Apple will report its first-quarter earnings on January 29th.  

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