Why Apple is lowering Q1 2019 guidance

Tim Cook, in an open letter to shareholders position on Apple.com (opens in new tab):

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
  • We expect the number of shares used in computing diluted EPS to be approximately 4.77 billion.

Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance.

Cook lays blame on a few factors, most notably, China:

While we anticipated some challenges in key emerging markets, we 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.China's economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. 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. And market data has shown that the contraction in Greater China's smartphone market has been particularly sharp.

But, also, on lower-than-expected upgrades:

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 are a lot of really... challenged hot takes already sweeping across Twitter and the blogs. I can't recommend ignoring and avoiding them hard enough. If you're interested in smart takes, bull or bear, optimistic and pessimistic, check out my Twitter — I'll be retweeting all the best and brightest I can find.

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Rene Ritchie

Rene Ritchie is one of the most respected Apple analysts in the business, reaching a combined audience of over 40 million readers a month. His YouTube channel, Vector, has over 90 thousand subscribers and 14 million views and his podcasts, including Debug, have been downloaded over 20 million times. He also regularly co-hosts MacBreak Weekly for the TWiT network and co-hosted CES Live! and Talk Mobile. Based in Montreal, Rene is a former director of product marketing, web developer, and graphic designer. He's authored several books and appeared on numerous television and radio segments to discuss Apple and the technology industry. When not working, he likes to cook, grapple, and spend time with his friends and family.

  • In regard to the lower than expected upgrades, what is Apple planning to do about it? Let’s be real. The $1,000+ price tag affected a good deal of people and played a role in their decision to continue using their current device. Could a facelift to IOS 13 or a lack thereof also affect future upgrades?
  • iOS 13 is supposed to be a much more significant release, given that iOS 12 was mainly an optimisation/stability update. I think both a price drop and significant changes in iOS 13 are needed to get sales back up.
  • If Apple didn't charge ridiculously high prices for their phones, people would upgrade their older models. But people aren't upgrading because who wants to pay $1,000+ for a freaking phone? Even the XR costs too much for what it offers.
  • Offer a compelling reason to upgrade. It’s quite simple. They have released nothing since the 6s that has been a wow phone. I am using an 8 now because the wife’s employer offered a great deal for it, If I had my time back, I would have just got my battery replaced and continued to use my 6s. Let’s move onto Mac, lack of anything here is causing decreased sales. Time to make the Mac touch, and make a 2 in 1 MacBook with pencil support or be left behind. iMac needs touch and a folding hinge to make a compelling artist platform. iPad, well, stop making it thinner for the sake of making it thinner. The bends are causing you issues. How about making all iPad models keyboard capable with the mag port for attaching a foldable keyboard. Add sd card support to iPhone and iPad will drive sales too. There is lots Apple can do to drive sale but chooses not to because of stubbornness. So, serves them right that they are hemoraging money.
  • "So, serves them right that they are hemoraging money." Yep. They've become cocky because of their success. They think their customer base will be willing to pay anything to have their devices. But boy were they wrong. I hope the Apple event in September will be a giant mea culpa.
  • They're unlikely to admit they were in the wrong, but I think we will definitely see a change from this. Whether it's the price being lowered or them introducing more innovation to their products, or both
  • Of course they will never say it. However, hopfully they will stop with the anorexic fad with their devices and move them into the future with proper features like touch on mac, etc. They (the devices and OS'es) have been essentially the same since the iPhone began.
  • Enough already. #FireTimCook
  • Apple is doomed!
  • Apple is FAR from doomed, however, they just had their wake up call that you cannot sit back and just release the same **** thing every year and expect the population to go WOW! which is essentially what was happening since steve died. The ipad never changed other than it got thinner, the iPhone essentially never changed except it got thinner, the MacBook air never changed except it got thinner, MacBook pro never really changed except it got thinner. See what's happening? NOW, APPLE, release a two in one MacBook pro with touch, pencil support, touchbar (its a cool feature, not a replacement for a touch screen) , a full touch 27" mac monitor with pencil support, and a keyboard with the touchbar built in and I will be spending ALOT of money at apple (if you clean up macOS). PS. Tim, it's not china, is your lack of innovation in your products. You have me hooked into iPhone, ipad and watch, I have yet to own another group of devices that work as well, but, macOS and macbooks are a no go here for the time being. Also, I am bored with IOS and my iphones, My last 3 were the same phone with crap removed. Time to step with something truly awesome. Apple's time is now to prove they are not just treading water since Steve's death.
  • Two reasons;
    1) Nobody needs a more expensive iPhone.
    2) Nobody needs a more expensive Intel personal computer.
    Sorry but common sense should kick in at some point.
    1) Where’s Apple Graphics/AI silicon in Macs? T2 should have inhaled hundreds of RAW formats and exhaled AVC/HEVC/JPEG/HEIF but where was 10-bit/HDR?
    2) Why haven’t they used iPad strategy on iPhone? Their silicon is 2-years ahead - where’s the $250 A10 product?
    3) Where’s iCloud groupware?
    4) Where’s iCloud/other Cloud wired/wireless attached storage tiering in iOS/macOS?
    Does Apple have subject-matter aware product managers anymore or just geeks like the rest?
  • Ironically, I listened to Renee and John (on The Talk Show), just today, belittle those saying supply chains were indicating iPhone demand was softening.
    Renee has said a dozen times that Apple has saturated the market and there is no where else to go. That is 100% not true. There are a billion Indians and Chinese that can't even dream of buying any current Apple product.
    The smartphone market is not saturated, Apple has just run out of affluent people and don't seem interested in steerage.
  • The market is saturated. You've made a mistake considering all the population as "the market". Market /= Population. Apple's target market is affluent people, and that target market is saturated. Hence the big push on trade-in program, that's because in a saturated market new customers are close to zero. Almost all customers are repeat customers that needs to upgrade. This is marketing ABC. Apple is a privileged spot here, because Apple's customers are more loyal to Apple's brand and Apple built a huge ecosystem with high switching costs. First you buy the iPhone. Then you try iCloud and Apple Music. Then you pull the trigger on the Apple Watch. Then maybe an iPad or replace the old PC with a Mac and boom, you are locked-in. But:
    - iOS 12 improved performance on old devices
    - Apple's tech is future proof and customers keep iPhones for more than 1-2 years.
    - No big innovations to give customers a compelling reason to upgrade. And without a compelling reason (e.g. huge innovations), the purchase decision is driven by the price more than ever, and that price is too ******* high related to the small incremental innovations. Missing targets is the result. It's not an easy recipe but considering that we Apple customers are their core target, they should give us very good reasons to upgrade at that price, or lower the price of their devices a little bit. Also, remember that they hit record sales with services and accessories and guess who's buying those? New customers? No. People that already owns an Apple device. iPhone users base is everything for Apple, and they know that really well.
  • Then you agree with me, Rene saying the market is saturated is incorrect. Just like I said, instead the affluent market is saturated. Time to broaden your customer base if you ask me.
  • To influx some needed revenues, offer facetime and imessage to windows 10 through the store. Millions of dollars pretty well instantly. Since 80% plus of their iPhone market is running windows computers. I would pay 29.99 or so for those two apps in a package for my awesome windows 10 computers. Or 3.99 a month to keep revenues rolling in.
  • Drop price and innovative then you’ll see a huge change. But doing none of the above and expecting an different result will prove insane!
  • Tim Cook and Apple need to take a hard look in the mirror instead of laying blame on everyone else.
  • Doesn't matter who they blame because at the end of the day if they're losing money they have to change their strategy, and ultimately the consumers must be happy too
  • Agreed. A shift to more customization of iOS, including mouse support, and touch/pencil support for Mac will go along way to push Apple forward.
  • "There are a lot of really... challenged hot takes already sweeping across Twitter and the blogs. I can't recommend ignoring and avoiding them hard enough. If you're interested in smart takes, bull or bear, optimistic and pessimistic, check out my Twitter — I'll be retweeting all the best and brightest I can find." Maybe we shouldn't limit our opinion pieces to those that one guy deems worthy? Alternative viewpoints may be beneficial, no? Something tells me the takes provided will be more Apple-friendly.
  • I agree, Rene has designated himself as Apple PR, nothing to see here, all is well.
  • Apple has designated Rene as PR since they toss him all the goodies! If you have someone giving you even passes, product, etc, would you say anything negative about them? Even though you know it's the correct statements? Of course not, you want your stuff, trips etc.!!!!