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Apple cuts outlook as Chinese slowdown hits iPhone demand

Jan 03 2019 15:45
Mark Gurman, Bloomberg
A person holds an Apple iPhone XS Max, left and iP

A person holds an Apple iPhone XS Max, left and iPhone XS during a launch event on September 12, 2018, in Cupertino, California. (NOAH BERGER / AFP)

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Apple cut its revenue outlook for the first time in almost two decades citing weaker demand in China, triggering a slump for Asian suppliers and a wave of lower price targets on Wall Street.

Chief Executive Officer Tim Cook said sales will be about $84bn in the quarter ended December 29, down from earlier estimates of $89bn to $93bn. Apple posted sales of $88.3bn in the fiscal first quarter a year earlier, so the new forecast would mean Apple is reporting a holiday quarter slowdown for the first time since Cook became CEO in 2011.

Apple shares fell as much as 9% during pre-market trading in New York Thursday.

The announcement, made in a letter from Cook to investors, comes after weeks of signals from inside Apple and its supply chain indicating the Cupertino, California-based company is struggling to sell the latest iPhones released in September. The flagship product earns Apple about two-thirds of its revenue, and allows the company to generate more money from attached products like Apple Watches, AirPods, and services like Apple Music.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook wrote. Greater China, a region that includes the mainland, Hong Kong and Taiwan, accounted for most of the revenue shortfall, but iPhone upgrades also weren’t as strong as the company anticipated in some developed markets, Cook said.

“The fact that they missed that wasn’t the shock,” said Daniel Ives, an analyst at Wedbush Securities. “It was the degree and how confined it was to China. The fact that China basically fell off a cliff was a jaw dropper, and combined with the lack of metrics, it makes investors feel like they’re walking blindfolded in the dark.”

Suppliers in Europe and Asia slumped on the news. AMS AG, which produces optical sensors for mobile phones, fell as much as 19.4% in Zurich, and Dialog Semiconductor, which makes power-management components, fell as much as 8.5% in Frankfurt.

Something amiss 

Several key Apple suppliers overseas had cut their revenue estimates during the past few months, suggesting something was amiss. In November, the company said it would stop reporting unit sales of iPhones, iPads and Macs beginning in fiscal 2019. That sparked concern Apple wanted to avoid disclosing weak growth numbers. Apple’s stock had fallen 32% from an October peak to its close of $157.92 Wednesday amid growing concerns about the iPhone.

In December, Bloomberg News reported the company was facing a “fire drill” to boost iPhone sales. That led Apple to aggressively market the iPhone XR on its website for $449, about $300 less than its official sticker price. The deal required customers to trade in an iPhone 7 Plus, a high-end handset from two years earlier.

At least four Wall Street firms, including BTIG and RBC, lowered their share price forecasts by more than 15% after Cook’s letter.

In his letter, Cook said the new iPhone models were released earlier than the flagship iPhone X last year, which created a difficult year-over-year comparison. The iPhone X launched in November 2017, while the iPhone XS and XS Max were released in September. Cook also noted supply constraints to new models of the Apple Watch, iPad Pro and AirPods.

“IPhone upgrades also were not as strong as we thought they would be,” he said, meaning the sales of new models to current customers replacing their old phones.

The CEO attributed much of the company’s “shortfall” in its outlook to struggles in China that he pinned on the economy and “rising trade tensions” with the U.S.

“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,” Cook said.

The timing of Apple’s announcement blaming its shortcomings partly on President Donald Trump’s trade war with China may increase pressure on American officials to ease the tensions quickly. Mid-level officials from the Trump administration are scheduled to travel to Beijing for talks early next week.

While iPhone revenue accounted for the forecast cut, Apple’s other product categories, including the iPad and services, grew a combined 19% year-over-year, he said. Services generated $10.8bn in revenue for the quarter - a 27 percent increase from a year earlier.

Apple’s decision to cut its sales outlook, “isn’t a huge shock at this point,” said Shannon Cross of Cross Research. “It will be interesting to see how Apple shares react if there’s a China trade agreement.”

apple  |  tim cook  |  china  |  iphone  |  ipad
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