Apple cuts outlook on Chinese slowdown

The news triggers a slump for Asian suppliers and a wave of lower price targets on Wall Street


SAN FRANCISCO • Apple Inc cut its revenue outlook for the first time in almost two decades citing weaker demand in China, triggering a slump for Asian suppliers and a wave of lower price targets on Wall Street.

CEO Tim Cook said sales will be about US$84 billion (RM347.76 billion) in the quarter ended Dec 29, down from earlier estimates of US$89 billion to US$93 billion.

Apple posted sales of US$88.3 billion in the fiscal first quarter a year earlier, so the new forecast would mean Apple is reporting a holiday quarter slowdown for the first time since Cook became CEO in 2011. The news sent its stock down as much as 8.5% in extended trading.

The announcement, made in a letter from Cook to investors, comes after weeks of signals from inside Apple and its supply chain, indicating the Cupertino, California-based company is struggling to sell the latest iPhones released in September.

The flagship product earns Apple about two-thirds of its revenue, and allows the company to generate more money from attached products like Apple Watches, AirPods and services like Apple Music.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook wrote.

Greater China, a region that includes the mainland, Hong Kong and Taiwan, accounted for most of the revenue shortfall, but iPhone upgrades also weren’t as strong as the company anticipated in some developed markets, Cook said.

“The fact that they missed that wasn’t the shock,” said Daniel Ives, an analyst at Wedbush Securities. “It was the degree and how confined it was to China. The fact that China basically fell off a cliff was a jaw dropper, and combined with the lack of metrics, it makes investors feel like they’re walking blindfolded in the dark.”

Suppliers in Europe and Asia slumped on the news. AMS AG, which produces optical sensors for mobile phones, fell as much as 19.4% in Zurich, and Dialog Semiconductor plc, which makes power-management components, fell as much as 8.5% in Frankfurt.

SK Hynix Inc, a producer of memory for Apple, dropped 4.8% in Seoul, while Samsung Electronics Co Ltd, which makes chips and displays, fell 3%. IPhone assembler Hon Hai Precision Industry Co Ltd lost 1.7% and rival Pegatron Corp slipped 1.2%. Taiwan Semiconductor Manufacturing Co Ltd fell 1.8%.

At least four Wall Street firms, including BITG and RBC, lowered their share price forecasts by more than 15% after Cook’s letter.

In his letter, Cook said the new iPhone models were released earlier than the flagship iPhone X last year, which created a difficult year-overyear (YoY) comparison. The iPhone X launched in November 2017, while the iPhone XS and XS Max were released in September. Cook also noted supply constraints to new models of the Apple Watch, iPad Pro and AirPods.

“IPhone upgrades also were not as strong as we thought they would be,” he said, meaning the sales of new models to current customers replacing their old phones.

The CEO attributed much of the company’s “shortfall” in its outlook to struggles in China that he pinned on the economy and “rising trade tensions” with the US.

“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,” Cook said.

The timing of Apple’s announcement blaming its shortcomings partly on US President Donald Trump’s trade war with China may increase pressure on American officials to ease the tensions quickly. Mid-level officials from the Trump administration are scheduled to travel to Beijing for talks early next week.

While iPhone revenue accounted for the forecast cut, Apple’s other product categories, including the iPad and services, grew a combined 19% YoY, Cook said. Services generated US$10.8 billion in revenue for the quarter — a 27% increase from a year earlier.

Apple’s decision to cut its sales outlook, “isn’t a huge shock at this point”, said Shannon Cross of Cross Research.

“It will be interesting to see how Apple shares react if there’s a China trade agreement.”