Apple cuts Q1 revenue outlook due to weak iPhone sales, Chinese market

Revenues will come in lower than a year prior, Apple warned, due to a rough economic climate in China and fewer iPhone upgrades than expected.

Apple on Wednesday lowered its revenue guidance for the first quarter of 2019, citing rough Chinese market conditions and fewer iPhone upgrades than expected.

The Cupertino, Calif. company now expects revenue of approximately $84 billion for the quarter, which ended December 29. In November, Apple said it expected Q1 revenue between $89 billion and $93 billion. A year prior, revenues came to $88.29 billion.

Additionally, Apple is now expecting to report operating expenses of approximately $8.7 billion, a gross margin of approximately 38 percent, other income/(expense) of approximately $550 million and a tax rate of approximately 16.5 percent before discrete items.

While Apple expected economic weakness in some emerging markets, "this turned out to have a significantly greater impact than we had projected," CEO Tim Cook wrote in a letter to shareholders. "In addition, these and other factors resulted in fewer iPhone upgrades than we had anticipated."

Most of Apple's revenue guidance shortfall -- and over 100 percent of its year-over-year worldwide revenue decline -- occurred in Greater China across iPhone, Mac and iPad. As Q1 progressed, traffic to Apple retail stores and its channel partners in China declined.

Like other luxury brands, Apple's sales are largely tethered to the Chinese economy -- which began to slow in the second half of 2018. As Cook noted, government-reported GDP growth during the September quarter was the second lowest in the last 25 years.

"And market data has shown that the contraction in Greater China's smartphone market has been particularly sharp," he wrote.

Cook also cited "rising trade tensions with the United States" as a factor impacting the economic environment in China.

"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," he wrote.

While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, sales disappointed in some developed markets as well. Cook chalked it up to multiple factors, including macroeconomic challenges, fewer carrier subsidies and reduced pricing for iPhone battery replacements.

Apple is taking steps to counter the impact of these negative market conditions, Cook wrote. That includes making it easier for a customer to trade in a phone in an Apple store, finance the purchase over time, and get help transferring data from their current phone to a new one.

"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," he said.

Aside from iPhone sales, Cook said revenues for Q1 are solid. Revenues for all of its other categories -- Services, Mac, iPad and Wearables/Home/Accessories -- collectively grew almost 19 percent year-over-year.

Services generated over $10.8 billion in revenue in Q1, growing to a new quarterly record in every geographic segment. Wearables grew by almost 50 percent year-over-year, thanks to holiday sales of the Apple Watch and AirPods.

"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," Cook noted.

Meanwhile, Apple's installed base of active devices hit a new all-time high, growing by more than 100 million units in 12 months.

Apple expects to report a new all-time record for earnings per share in Q1, Cook said, and it expects to exit the quarter with approximately $130 billion in net cash.

While revenues overall will be down year-over-year, the company expects to set revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea, as well as in some emerging markets.

Despite the current challenges in China, Cook wrote that Apple still has a "bright future" there.

"The iOS developer community in China is among the most innovative, creative and vibrant in the world," he said. "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."