Today Tim Cook sent a letter to investors. The letter contains some adjustment to their first quarter guidance for 2019. At the last investor call, in October, Apple issued guidance of $89 to $93 billion in revenue and grow margins of between 38 and 38.5 percent. This has been reduced to $84 billion in revenue, with gross margins of approximately 38 percent.
The adjustment is $5 billion less than the low end of their projection, and a full $9 billion below the high-end of their estimate. This range is 5.6% to 9.6% less than the overall guidance. There is no doubt about it, it is bad news. How bad this will ultimately be, will only be told in time.
This is not the first time that Apple has issued this type of guidance, but it is not done often. The last time this type of guidance was given was in June 2002.
In 2002, Apple’s reduction was given at $1.4 billion to $1.45 billion. This was down from $1.6 billion. This was a reduction of 9.38% to 12.5%. So, on the bright side, this year’s revenue reduction is actually better, even though the revenue is more than 50 times greater. Let us look at the reasons for this decline.
Apple provided a few reasons as to why they believe their initial guidance was off.
Staggered iPhone Launches
The iPhone X came out later than the iPhone XS and iPhone XS Max, so Apple indicates that it was difficult to determine how much of an impact this would have on quarterly revenue.
Foreign Exchange rates
A stronger U.S. Dollar means that devices purchases are more expensive in other countries, which will impact revenue.
The larger number of new products
Apple has indicated that the larger number products to sell lead to supply constraints for some products, like the Apple Watch Series 4 and the iPad Pro. Along with these, the AirPods and MacBook Air were also constrained. A supply constraint means that Apple could not sell more of the products, because they could not manufacture enough to meet demand. These supply constraints were throughout the quarter. The AirPods and Apple Watch are still supply constrained.
Emerging Market Sales
According to Apple, this is the biggest factor. In particular, revenue Greater China. To quote the letter
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.
In Q1 2018, revenue was $88.3 Billion. The revised guidance given is $84 billion in revenue. The difference between these two is $4.3 billion. So the statement above, to me, reads that Apple lost more than $4.3 billion in revenue in Greater China. The reasons provided are that China’s Gross Domestic Product, or GDP, has had its lowest growth in quite a while.
Not all of the information in the investor note is doom and gloom. The install base of Apple devices is 100 million more than in 2018, meaning it is currently 1.4 billion devices, because the install base in Q1 2018 was 1.3 billion.
Another positive is that revenue outside of iPhone is up 19%, which is definitely a good thing as Apple tries to become a services company. Speaking of services, services alone generated $10.8 billion in revenue, and all regions saw growth. Wearable revenue grew 50%. This is fueled by Apple Watch and AirPods.
There will likely be a lot of takes from this investor note. It is not surprising that Apple would add some positivity to the note, in addition to the reduced guidance provided. A single quarter where guidance is reduced will not break Apple. Apple has over $130 billion of cash on hand, so Apple will be fine overall.
There is one thing to keep in mind. As stated within the letter,
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.
This means that we could see better, or worse, results when Apple provides its final results at their quarterly conference call. The conference call will be on January 29th, 2019. As one last note, starting with this quarter, Apple will not be providing unit numbers for any of their products.