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Apple lowers guidance for fiscal 1Q19 on weak iPhone sales in China
Source: DIGITIMES   Editor: Helan   Update Time :2019/1/3 17:47:20

Apple has revised its guidance for fiscal first-quarter 2019 ended on December 29, expecting revenues of about US$84 billion, lower than the original estimate for the period, according to a letter to investors from company CEO Tim Cook, who admitted that the US vendor failed to foresee the extent of economic deceleration in emerging markets, particularly in Greater China.

Now Apple estimates its gross margin for the quarter to be about 38%, with operating expenses coming to about US$8.7 billion.

"Based on these estimates, Apple's revenues will be lower than its original guidance for the (fiscal first) quarter (2019), with other items remaining broadly in line with its guidance," said Cook.

Apple previously had estimated revenues of between US$89 billion and US$93 billion for the quarter.

Cook said that when Apple discussed its first-quarter guidance with shareholders about 60 days ago, it knew the period would be impacted by both macroeconomic and Apple-specific factors, but predicted that it would report slight revenue growth on-year for the quarter.

"During the previous shareholder conference, Apple estimates four major factors that would affect the company's performance in the quarter," said Cook. "First, the different timing of its iPhone launches, which would affect its on-year compares. Apple's top models, iPhone XS and iPhone XS Max, shipped in the fourth quarter of 2018 - placing the channel fill and early sales in that quarter, whereas last year iPhone X shipped in the first quarter of 2018, placing the channel fill and early sales in the December quarter. We knew this would create a difficult compare for the first quarter of 2019, and this played out broadly in line with its expectations.

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

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

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

Cook said these and other factors resulted in fewer iPhone upgrades than Apple had anticipated and the "last two points have led Apple to reduce its revenue guidance."

Emerging Market Challenges

"While Apple anticipated some challenges in key emerging markets, it did not foresee the magnitude of the economic deceleration, particularly in Greater China," said Cook. "In fact, most of its revenue shortfall to its guidance, and over 100% of its on-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad."

He noted that China's economy started to weaken in second-half 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years.

"Apple believes the economic environment in China has been further impacted by rising trade tensions with the US. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to its retail stores and its 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," he said.

iPhone

According to the Apple CEO, lower than anticipated iPhone revenues, primarily in Greater China, accounts for all of the compapny's revenue shortfall to its guidance and for much more than its entire on-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19% on-year.

While Greater China and other emerging markets accounted for the vast majority of the on-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as Apple thought they would be, Cook disclosed. While macroeconomic challenges in some markets were a key contributor to this trend, Apples believes there are other factors broadly impacting its 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.

But he said Apple's performance in many areas, including its services, wearable devices, and PCs, still showed remarkable strength in spite of these challenges.

He said Apple also expects to set all-time revenue records in several developed countries, including the US, Canada, Germany, Italy, Spain, the Netherlands and Korea. And, while it saw challenges in some emerging markets, others set records, including Mexico, Poland, Malaysia and Vietnam.

"Apple expects to report a new all-time record for the company's earnings per share," Cook said.

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