Apple blames weak iPhone China sales as it cuts revenue forecast

Tech giant expects quarterly revenue of $84bn, below analysts’ $91.5bn estimate, acknowledging iPhones demand is waning.

US tech giant Apple has taken the rare step of slashing its quarterly sales forecast, acknowledging that demand for iPhones is slowing and confirming investor concerns that its most profitable product has lost some of its consumer appeal amid competition from cheaper rivals.

In a letter to shareholders, Chief Executive Officer Tim Cook said Apple’s revenue for the October-December quarter – including the crucial holiday shopping season – will drop well below the company’s earlier projections and those of analysts.

Apple now expects revenue of $84bn for the period, below analysts’ estimate of $91.5bn, according to IBES data from Refinitiv. Apple originally forecast revenue of between $89bn and $93bn. The official results are scheduled to be released on January 29.

The news sent Apple shares tumbling 7.7 percent in after-hours trade, triggering a broader selloff in the stock market and dragging the company’s market value below $700bn.

Cook traced most of the revenue drop to China, where the economy has been slowing and Apple has faced tougher competition from smartphone makers such as Huawei and Xiaomi. US President Donald Trump has also raised fresh tensions between Washington and Beijing by imposing tariffs on more than $200bn in goods, although so far the iPhone has not been affected directly.

China’s “economy began to slow there for the second half”, Cook said during an interview with CNBC on Wednesday afternoon. “The trade tensions between the United States and China put additional pressure on their economy.”

In his letter, Cook, who became Apple’s CEO in 2011, said the company anticipated challenges in key emerging markets but “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,” he wrote.

Cook also acknowledged that consumers in other markets are not buying as many of the latest iPhones, released last autumn, as Apple had anticipated – a factor that could stem from a starting price of $1,000 for Apple’s top-of-the-line iPhones.

The economic toll of China-US trade war (2:43)

“What Apple would like to do, as much as possible, is to cite China and the trade war as the cause of this – but over the last couple of years Apple has significantly increased the price of the iPhone,” Shaun Nichols, technology reporter at The Register, a tech news and opinion website, told Al Jazeera.

“Tim Cook’s official explanation for this kind of a combination – the trade war is causing problems in China, worries over the economy and that’s making people less likely to go and purchase Apple products.”

Hal Eddins, the chief economist at Apple shareholder Capital Investment Counsel, said Cook’s comments on the effect of the US trade tensions with China “might be a dig at Trump, but mostly he may be using the trade turmoil as an excuse for some missteps they’ve made over the last year”.

Analysts say Apple must now try to find a way to win back Wall Street’s confidence and reverse a steep decline that has erased $350bn in shareholder wealth in just three months.

“This is Apple’s darkest day during the Cook era,” Wedbush Securities analyst Daniel Ives said. “No one expected China to just fall off a cliff like this.”

While Trump’s trade war with China is not helping Apple and other US technology companies, Ives believes Apple’s price miscalculation created an opening for rivals with less costly alternatives that still worked well.

The price gap is one reason Huawei surpassed Apple in smartphone sales from April through September last year to seize the number two spot behind industry leader Samsung, according to the research firm International Data Corp.

Apple's board of directors named Tim Cook as the company's chief executive officer in 2011 [File: Marcio Jose Sanchez/The Associated Press]
Apple’s board of directors named Tim Cook as the company’s chief executive officer in 2011 [File: Marcio Jose Sanchez/The Associated Press]

Premium pricing strategy

Wednesday was the first time that Apple issued a warning on its revenue guidance before releasing quarterly results since the iPhone was launched in 2007.

Apple’s move was not entirely a surprise, however.

COUNTING THE COST: The big tech lash – Tech giants under scrutiny (25:02)

In November, the Cupertino-based company said it would stop disclosing unit sales data for iPhones and other hardware items, leading many analysts to worry that a drop in iPhone sales was coming. And after several component makers in November forecast weaker-than-expected sales, some market watchers called the peak for iPhones in several key markets.

In November, Cook cited slowing growth in emerging markets such as Brazil, India and Russia for lower-than-anticipated sales estimates for the company’s fiscal first quarter. But Cook specifically said he “would not put China in that category” of countries with troubled growth.

That all came before the damage to the Chinese economy from trade tensions with the US and long-simmering structural issues became evident.

Apple is now the highest-profile multinational corporation to warn that the economic slowdown in China could hurt its business. Automakers such as Ford Motor Co, Hyundai Motor Co and Nissan Motor Co all previously said they planned to cut production in the country.

But Apple has held firm on its premium pricing strategy in China despite the risk of a slower economy.

“The question for investors will be the extent to which Apple’s aggressive pricing has exacerbated this situation and what this means for the company’s longer-term pricing power within its iPhone franchise,” James Cordwell, an analyst at Atlantic Equities, told Reuters news agency.

In the latest fiscal year, ended on September 29, unit sales of the iPhone were essentially flat from the prior year, while iPhone revenue expanded 18 percent to $166.7bn. That growth came entirely from higher prices.

But some investors were heartened by Apple’s plans on using its cash pile.

In his letter, Cook said Apple has $130bn in net cash and that it intends to continue its efforts to reduce that cash balance to net zero, which the company has so far accomplished through dividend increases and share buybacks.

“We would anticipate the company increasing share buybacks on the weakness to return capital to shareholders at discount prices,” said Trip Miller, managing partner at Apple shareholder Gullane Capital Partners.

Source: Al Jazeera, News Agencies