While Apple reported another record breaking Quarter on November first, Wall Street was disappointed in their guidance. The combination of that news and the fact Apple also announced that they wouldn't be providing sales data on Apple hardware going forward, sent chills down investors spine. Just when you thought the market would stop punishing Apple, the company has just released a press release this afternoon stating that their Q1 2019 results will miss the mark by $5 to $9 billion. Apple's official press release issued this afternoon states the following:
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:
- Revenue of approximately $84 billion [down from $89 to $93 billion]
- Gross margin of approximately 38 percent
- Operating expenses of approximately $8.7 billion
- Other income/(expense) of approximately $550 million [up from $300 million]
- Tax rate of approximately 16.5 percent before discrete items
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.
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.
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.
The information presented in this letter is preliminary and our actual results may differ. Apple plans to discuss final results during our first quarter conference call on Tuesday, January 29, 2019 at 2:00 p.m. PST / 5:00 p.m. EST."
On December 3rd, Patently Apple posted a report titled "Apple Offers rare iPhone Sale with Big Trade-In Values for U.S. Customers." While we didn't add commentary to Apple's announcements, it was a move that triggered concern. Apple never held such a sale towards the end of the Christmas quarter.
While Apple's CEO doesn't say it, the fact is that the top four spots in China's smartphone market are now held by Chinese OEMs. These OEMs are no longer just following Apple's lead, they're now innovating by introducing new features ahead of Apple with excellent quality for half the price of iPhones.
On December 31st Patently Apple posted a report titled "According to Deeper Analysis, the iPhone's Dominance in the $600-1000 Premium Price Tiers Continued in Q3. As far as the premium market is concerned, Apple remains the leader.
The problem however is that the premium market only represents 20% of the total smartphone market. The Chinese OEM's are out to own the rest of the market with crazy rock bottom pricing that starts at $300 for Xiaomi's Pocophone with excellent features. The phone received rave reviews from Marques Brownlee and Lewis Hilsenteger of Unbox Therapy. Hilsenteger's show for that product earned him close to 6 million views to show you the interest in this product in North America, even though it's not available here yet.
Samsung has vowed to counter the Chinese OEMs with higher-end features moving quicker down the line or even debuting on mid level smartphones. Samsung's A8 smartphone introduced their new Punch Hole display before it comes to the Galaxy S10 in late February.
Whether Apple will review the attack on the mid-market smartphone sector by their competitors and make adjustments is unknown at this time.
Beyond pricing, politics are now creeping into the Chinese market which has to be a concern for Apple. We covered one side of this problem in a Christmas Eve report titled "The Tide of Support for Huawei against Apple is Growing as the Communist Party Pushes for Huawei Subsidies." Whether that's a blip in time or a growing problem is too early to call. Apple's Tim Cook told CNBC that he doesn't believe that the government is playing a part in this, contrary to the Nikkei's report.
After hours Apple's stock AAPL fell -7.26% or 11.46/share as noted in the screenshot from NASDAQ below. You could keep up to date with the stock's price here. When the opening bell sounds in the morning, the price will either rebound or worsen. So stay tuned.
Apple will announce their final financial results on January 29, 2019 for Q1 2019 results.
NOTE: The numbers in our report that are in red are numbers from Apple's guidance issued in their last quarter. Emphasis with yellow highlighting or bold text in the press release was added by Patently Apple and not Apple Inc.