Apple Makes Rare Cut to Sales Guidance
CEO Tim Cook cites slowing sales in China in letter to investors
By Robert McMillan and Tripp Mickle
Updated Jan. 2, 2019 7:50 p.m. ET

Apple Inc. AAPL 0.11% slashed its quarterly revenue forecast for the first time in more than 15 years, an unprecedented move in the Tim Cook era that was prompted by a downturn in sales of iPhones in China.

The surprise cut, issued Wednesday in a letter from the chief executive to investors, renews concerns about waning demand for Apple’s marquee product, the iPhone, which makes up the vast share of its revenue and has vaulted the company’s value and profits. It also raises fresh questions about Apple’s prospects in China, the world’s largest smartphone market, which represents nearly 20% of Apple’s sales.
CEO Tim Cook said the company anticipated challenges in key emerging markets, but didn’t expect the magnitude of the economic deceleration, especially in China.

And it was the latest sign of broader economic malaise in China, fueled by trade tensions with the U.S.

“Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall,” Mr. Cook said in his letter.

The move also was an inauspicious signal for markets on the first trading day of the year, with Apple shares after hours declining more than 7% and the broader market showing stress as well.

The company has lost more than $300 billion in market value since peaking above $1 trillion in early October. Last year was Apple’s worst yearly performance since the financial crisis.

While Mr. Cook pointed to China’s economic turmoil for the revenue shortfall in the quarter ended Dec. 29, Apple’s share of the Chinese smartphone market has been shrinking, crowded out by tech giants such as China’s Huawei Technologies Co. that market increasingly sophisticated phones at a lower price tag.

Apple’s share of the Chinese smartphone market contracted to 7.8% in the first three quarters of 2018 from a peak in 2015 of 12.5%, according to Canalys, a market research firm.

Apple was the country’s No. 3 handset maker, measured by unit sales, in 2015, according to International Data Corp. For the first three quarters of 2018, Apple ranked as the fifth-largest seller in China.

Analysts have also been closely watching China’s economy for signs that increasing Chinese nationalism, combined with higher-quality China-made products, is moving consumers to purchase local brands.
Signs have begun to emerge: For the first time, last year four of five of the top-watched films in China were Chinese, according to Box Office Mojo. Local brands continue to outgrow multinational corporations in the food and beverage sector, according to Goldman Sachs.

Mr. Cook said Apple anticipated challenges in key emerging markets, but didn’t expect the magnitude of the economic deceleration, especially in greater China. A contraction in the smartphone market in the region was particularly sharp, he said.

“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,” he wrote in the letter.

Mr. Cook sought to assuage investors with the company’s services business, which he said delivered a 27% jump in overall revenue to $10.8 billion in the December quarter, and in China a record level. He cited 50% growth in sales of its smartwatch and AirPods. He said the Mac business increased sales behind the recent updates to its MacBook Air and Mac mini. And the iPad Pro delivered double-digit growth in iPad revenue.

However, that all wasn’t enough to offset a slowdown in the iPhone sales.

Apple’s announcement could put further scrutiny on Apple’s emerging strategy of increasing revenue by raising prices on its devices and selling more software and services.

Apple is able to command premium prices in markets such as the U.S. and Europe but “when you look at a lot of emerging regions in the world, it just isn’t a great fit,” said Crawford Del Prete, chief operating officer with IDC.

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