Trading on Apple shares was halted as the company warned of much lower sales than the guidance it had issued just two months ago. A punishing holiday season turned into lower than expected iPhone sales, which are the economic engine of the company. After-hours trading immediately sent shares down by more than 7 percent.
The guidance issued at the company’s last earnings announcement was for revenue between $89 billion and $93 billion, expenses of $9 billion to $9.1 billion, and gross margins between 38 percent and 38.5 percent.
The new guidance pegs revenue expectations at $84 billion, sharply below the low end of the previous estimates. Gross margin will be roughly 38 percent, at the low end of the previous range. Total expenses will be about $9.25 billion, or above prior estimates.
The earnings announcement for the holiday quarter won’t happen for a few weeks yet.
According to a letter from Tim Cook to investors, there are multiple reasons for the cut. He said that the company knew the timing of its iPhone launches could be a problem, shifting back as they did by a fiscal quarter. The number of launches was complex and caused logistics problems getting everything built and shipped. In addition, a strong dollar made overseas sales costlier for buyers.
But those were constraints on the top end of sales. The big issues were “expected economic weakness in some emerging markets.” Specifically, the big slowdown was 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,” the letter said.
At the heart was a slowing economy in China, in part likely because of the trade war with the U.S., but also a result of purely internal problems in the country. Whatever the balance, the result was “fewer iPhone upgrades than we had anticipated.”
Cook went on and tried to put some shine on the situation, pointing to almost 19 percent year-over-year growth in the combination of services, Macs, iPads, and wearables and other products. But while good for the future, that doesn’t matter.
Apple faces what happens to many businesses, particularly smaller ones. They become prisoners of one product line or a particularly big customer. When that happens, all you can do is try to diversify, because the day will come when the source of money trips and what was a profitable dependence begins to hit financial results.
Apple has tried to do that, but none of the new growth comes close to the magnitude of the iPhone contribution. And China was supposed to be the new engine of growth when none of the other product lines–iPads or Watches–showed itself possessing the potential once shown by the company’s smartphones.