There was drama last night after Apple took the highly unusual step of announcing an earnings revision for the first fiscal quarter of 2019, something that it has not done since 2002.

Apple shares were halted ahead of the market’s closing, with the company sharing a “Letter from Tim Cook to Apple investors” in which he announced the revised forecasts.

Tim Cook’s letter to investors outlined the reasons for the newly revised figures, saying that various economic weaknesses as a well as different iPhone launch things were part of the reason, while fewer iPhone upgrades than had been expected has also directly impacted iPhone sales as a whole. The current situation with the US dollar and how it compares to international currencies is also a factor.

First, we knew the different timing of our iPhone launches would affect our year-over-year compares. Our top models, iPhone XS and iPhone XS Max, shipped in Q4’18—placing the channel fill and early sales in that quarter, whereas last year iPhone X shipped in Q1’18, placing the channel fill and early sales in the December quarter. We knew this would create a difficult compare for Q1’19, and this played out broadly in line with our expectations.

Second, we knew the strong US dollar would create foreign exchange headwinds and forecasted this would reduce our revenue growth by about 200 basis points as compared to the previous year. This also played out broadly in line with our expectations.

Third, we knew we had an unprecedented number of new products to ramp during the quarter and predicted that supply constraints would gate our sales of certain products during Q1. Again, this also played out broadly in line with our expectations. Sales of Apple Watch Series 4 and iPad Pro were constrained much or all of the quarter. AirPods and MacBook Air were also constrained.

Fourth, we expected economic weakness in some emerging markets. This turned out to have a significantly greater impact than we had projected.

In addition, these and other factors resulted in fewer iPhone upgrades than we had anticipated.

Apple’s new forecasts are considerably down from those that it shared back in November, with the new numbers being:

  • Revenue of approximately $84 billion
  • Gross margin of approx. 38 percent
  • Operating expenses of approx. $8.7 billion
  • Other income/(expense) of approx. $550 million
  • Tax rate of approximately 16.5 percent before discrete items

This is in contrast to some of the even more stellar numbers that were being suggested in November, with revenue seeing a considerable drop.

  • Revenue between $89 billion and $93 billion
  • Gross margin between 38 percent and 38.5 percent
  • Operating expenses between $8.7 billion and $8.8 billion
  • Other income/(expense) of $300 million
  • Tax rate of approximately 16.5 percent before discrete items

Cook reserved special mention for the current trade tensions between China and the United States, something that shows little sign of easing given the stance of US president Trump.

We believe the economic environment in China has been further impacted by rising trade tensions with the United States. 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.

Apple has been working to try to get users to upgrade iPhones over the past few weeks, offering special trade-in programs as an incentive. Many had suggested that this was due to lower iPhone sales than were anticipated and it is now becoming clear that this was exactly the case.

(Source: Apple)

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