Apple Cuts Guidance for Q1 2019 by $5–9 Billion From Previous Forecast

Apple posted a statement to investors in its Newsroom today, attributed to Tim Cook:

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

  • Gross margin of approximately 38 percent

  • Operating expenses of approximately $8.7 billion

  • Other income/(expense) of approximately $550 million

  • Tax rate of approximately 16.5 percent before discrete items

That compares to forecasted revenue of $89–93 billion, margin of 38–38.5 percent, and “other” income of $300 million, with similar numbers for the rest of the guidance. This also compares to reported revenue in Q1 2018 of a little over $88 billion.

This is the first time since 2002 that Apple has had to advise investors that their previous forecast was too high.

Normally, this sort of thing would not be of great interest to yours truly. The company is still swimming in cash, a 38% margin guidance is ridiculously high, and this is still their second-biggest quarter ever. But I think there’s something to pay attention to in this case so, if you’ll bear with the turgid business speak, I think it’s worth a read.

Here’s how Cook explains it in his statement:

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.

There’s a lot to unpack there, but I’ve seen plenty of commentators on Twitter attribute this solely to an increase in the base price of an iPhone. But I think there’s far more to it than that; Cook says in his letter that China’s economic growth slowed hard in the second half of the year which, combined with more expensive products,1 hampered sales in one of the company’s critical markets. Perhaps the iPhone should have been priced lower there and in developing markets like India, and Apple could have eaten the difference, but would that be enough to compensate? I have doubts.

There’s a lot that happened in 2018 that might dissuade customers from readily upgrading. For example, the iPhone X stood out next to the iPhone 8 and 8 Plus, but Apple’s current flagship lineup, on its face, consists of three notched rectangles of slightly different sizes, at price points that do not fully correlate with those sizes. Plus, Apple still sells the iPhone 8 and iPhone 7, both of which still do most of the things that people want in a more familiar form factor. And then there’s iOS 12, which Apple promoted in part for how much it makes older devices perform better. Oh, and remember how, at the very end of 2017, Apple confirmed that it was silently reducing peak performance for devices with reduced battery capacity, which led to headlines proclaiming that they were deliberately slowing down older iPhones to make you buy a new one? That spawned the $29 battery replacement that Cook mentioned in his letter.2

So there’s that.

More than anything, though, it’s that smartphones have longer lives before needing to be replaced. That’s not great if a company like Apple is expected by shareholders to sell more of them every year, but it is pretty good news for consumers. In part, this longevity is attributable to the very existence of decisions like iOS 12’s performance focus and the cheap battery replacement program which, sadly, has now ended. These are good moves that should be celebrated, even though they may, perhaps, lead to reduced sales. But it’s also attributable to smartphones becoming a fully-rounded, mature product in hardware terms. My wish list for the iPhone is very long — as it is for pretty much anything I use regularly — but the vast majority of the things I wish it could do better could be delivered in a free software update.

There are clearly a lot of factors that would explain why the company is set to report a year-over-year drop and a guidance miss; Cook cites still more than this in his letter.

What I’m most interested in is where Apple goes from here. Put simply, I want to know whether Apple will react to this report.

They could choose not to; they could choose to stay the course and take potential further hits to sales figures, assuming everything will stabilize in the end. Trade wars suck. Or they could make changes. Some possible choices they could make may be highly beneficial to customers: reduced prices or new, lower-cost options; a simplified lineup; or more incentives to upgrade. But there is always a chance that their reaction could be less customer-friendly, but better for their bottom line. I don’t know that this is likely, but the possibility is there. A relatively minor example of this would be to increase push notifications urging users to upgrade.

This is a hell of a way to start a year. Apple was not the only company advising shareholders today of bad news; Tesla also announced that they were not going to meet expectations. 2019 is going to be very interesting for Apple, I think.

  1. Something I learned today is that Chinese customers pay tariffs, even though the iPhone is made in China. ↥︎

  2. Which, of course, makes it look like a tacit admission that not acknowledging when a battery needed to be replaced and then charging a not-insubstantial sum for the swap was driving sales. That’s not a good look. ↥︎