AAPL issues rare revision to earnings guidance, lowering expectations due to ‘fewer iPhone upgrades’ & China struggles

Apple shares were halted this evening ahead of the market’s close. CNBC was first to report on the development. Shortly thereafter, Apple published a “Letter from Tim Cook to Apple investors” in which Cook announced a rare AAPL earnings revision for the first fiscal quarter of 2019.

Author Ad Placeholder
Will only appear on redesign env.

This is what Apple is now forecasting:

  • 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

This is the guidance Apple had previously offered back in November:

  • Revenue between $89 billion and $93 billion
  • Gross margin between 38 percent and 38.5 percent
  • Operating expenses between $8.7 billion and $8.8 billion
  • Other income/(expense) of $300 million
  • Tax rate of approximately 16.5 percent before discrete items

This compares to Q1 2018 when Apple reported $88.3b in revenue and $20.1b profit from 77.3m iPhones, 13.2m iPads, and 5.1m Macs sold

In the letter, Tim Cook outlined several reasons for this adjustment. Cook points to factors such as different timing of its iPhone launches, foreign exchange headwinds, struggles ramping new products, and economic weaknesses. Ultimately, Cook says this all resulted in “fewer iPhone upgrades than we had anticipated.”

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.

Further, Cook outlined other factors potentially affecting iPhone performance: 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.

Cook also points to China as a pain point for Apple’s first quarter results. Cook says that revenue in China accounts for “over 100 percent of our year-over-year worldwide revenue decline.” Cook says that the economic environment has slowed significantly in China due to trade tensions with the United States:

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.

With all of that having been said, Cook also takes the opportunity to note that there are “many positive results in the December quarter” thus far. Cook says that revenue outside iPhone is up by almost 19 percent due to things like Apple Watch and AirPods. Apple’s wearables business is up almost 50 percent year-over-year, Cook says.

Cook also says Apple expects to set “all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands, and Korea.”

Ultimately, Cook says that Apple’s “profitability and cash flow generation are strong,” with the company expected to end the quarter with $130 billion in net cash. Further, Cook says that Apple is “confident and excited” about its product pipeline.

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.

Cook also notes that Apple is “undertaking and accelerating” initiatives to improve its performance. One of these efforts, Cook says, is the process of trading in an old phone, financing the purchase of a new phone, and getting help in transferring data between devices:

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.

Companies are supposed to call the exchange where they are listed 10 minutes prior to announcing any news that could significantly affect the stock. That is what Apple seemingly did here, halting trading prior to making this announcement.

Tim Cook addressed Apple’s earnings revision in an interview with CNBC:

Trading of AAPL has since resumed. The stock is down nearly 8 percent in after-hours trading, falling to around $145 per share. Shares of Apple suppliers are also down, as reported by Reuters.

Subscribe to 9to5Mac on YouTube for more Apple news:

FTC: We use income earning auto affiliate links. More.

You’re reading 9to5Mac — experts who break news about Apple and its surrounding ecosystem, day after day. Be sure to check out our homepage for all the latest news, and follow 9to5Mac on Twitter, Facebook, and LinkedIn to stay in the loop. Don’t know where to start? Check out our exclusive stories, reviews, how-tos, and subscribe to our YouTube channel



Avatar for Chance Miller Chance Miller

Chance is an editor for the entire 9to5 network and covers the latest Apple news for 9to5Mac.

Tips, questions, typos to chance@9to5mac.com