Apple has slashed revenue expectations for the first quarter of 2019 (ended December 29) to $84 billion, which is lower than the earlier estimate of $89 – $93 billion. Apple CEO Tim Cook in a letter to investors wrote that the company knew the first quarter would be impacted by macroeconomic factors as well as some ‘Apple-specific’ issues.
Apple is predicting a revenue decline of nearly 5 per cent decline from the same quarter a year ago for the first quarter of 2019. In the first quarter of 2018, Apple reported a revenue of $88.3 billion, which was an increase of 13 percent from the year-ago quarter and had called it an all-time record.
The company’s shares fell by 8 per cent after today’s announcement. So what is the reason for fall in revenue in 2019?
Timing of new the iPhone XS launch compared to iPhone X in 2017
Cook has said that the different timing of iPhone launches has impacted the revenues. The iPhone XS and iPhone XS Max shipped in the the fourth quarter of 2018, which Cook notes accounted for early sales in that quarter.
However, last year the iPhone X shipped in first quarter of 2018 (October to December 2017 for Apple), thus accounted for early sales in the December quarter. In 2017, the iPhone X only shipped in November. The letter notes that this difference in shipping times has created a difficult compare for the first quarter of 2019.
The strong US dollar has created “foreign exchange headwinds.” According to Cook’s letter Apple had “forecasted this would reduce our revenue growth by about 200 basis points as compared to the previous year.” The strengthening dollar has meant higher prices for iPhones across the world, including in markets like India, where the rupee has seen as a major fall against the US currency.
Economic weakness in emerging markets like China
Cook says while they had expected economic weakness in some emerging markets, it has had a “significantly greater impact” than what the company projected. The “economic deceleration, particularly in Greater China,” has had a much more negative impact that expected.
Apple saw over 100 percent of year-over-year worldwide revenue decline in Greater China across iPhone, Mac and iPad, explains the letter.
“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,” Cook says in the letter.
He also talks of how the contraction in Greater China’s smartphone market has been particularly sharp. Still Cook insists that Apple’s business in China has a bright future, and that they have set a new record for services revenue in China. Apple also says that their installed base of devices grew over the last year in China.
The Apple CEO acknowledges that these and other factors have “resulted in fewer iPhone upgrades.”
Supply constraints and the number of new products from Apple also impacted sales of products during the first quarter. “Sales of Apple Watch Series 4 and iPad Pro were constrained much or all of the quarter. AirPods and MacBook Air were also constrained,” Cook said in the letter.
Lower iPhone upgrades
More importantly, Apple is no longer seeing iPhone upgrades like it used to, especially in some developed markets. Cook again said that macroeconomic challenges in some markets were a key contributor to this trend.
The reason for few upgrades in developed markets are consumers adapting to a world with fewer carrier subsidies, higher price given the US dollar strengthening. He also mentioned how some customers taking advantage of significantly reduced pricing for iPhone battery replacements contributed to lower upgrades.
Growth in services, Mac, Wearables and iPad
While the iPhone did not fare as expected, Apple has said that all categories outside of iPhone combined to grow almost 19 percent year-over-year. This includes Services, iPad, Mac, Wearbles, Home and accessories.
Apple says their 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,” Cook noted.
Services generated $10.8 billion in revenue during the quarter and Apple says they are on track 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 popular.
The new MacBook Air and Mac mini helped Mac’s year-over-year revenue growth, while the new iPad Pro helped drive the category 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,” Cook said in the letter.
Towards the end of the letter, Cook sought to reassure investors saying, “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.” He has also talked of how Apple is making it easier to trade in a phone in their stores, easier financing options. Apple will reveal its results on January 29, 2019.