Cook said the Chinese economy ground to its slowest pace in 25 years and that hurt iPhone sales. Escalating trade tensions with the U.S. didn’t help matters, either.
“We believe the economic environment in China has been further impacted by rising trade tensions with the United States,” Cook wrote. “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.”
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Cook said revised first quarter revenue forecasts to $84 billion, down from the company’s initial estimates of $89-$93 billion. That also represents a drop in sales revenue from the same time a year ago, when it reported record revenue of $88.3 billion.
The Apple executive said the company knew it would face challenges entering its fiscal first quarter. The timing of its high-end iPhone launches (the newest iPhone Xs and Xs Max hit stores earlier this cycle) would create tough comparisons with a year ago, when the tenth-anniversary iPhone X was introduced.
An unprecedented number of new products introduced in the holiday quarter would likely create shortages. Sales of the Apple Watch Series 4 and iPad Pro were limited by supply constraints, Cook wrote.
But the biggest factor, by far, was the cooling economy in China, which is Apple’s third largest market after the U.S. and Europe.
“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. “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 iPhone, long the company’s reliable cash cow, took it on the chin. Cook wrote that slower iPhone sales account for much of the revenue decline in Apple’s first fiscal quarter. China and other developing markets accounted for the vast majority of the decline.
But there were other factors in slowing iPhone sales, as well. Cook admitted that consumers aren’t upgrading their phones as quickly (replacing their older models for newer ones). Others are simply taking advantage of inexpensive new plan for replacing iPhone batteries, which cut the price from 429 to $79. Barclays analyst Mark Moskowitz estimated that plan alone cost Apple millions of iPhone sales, according to Bloomberg.
Cook attempted to emphasize some positives, saying that the number of active Apple devices reached an all-time high, services generated a record $10.8 billion in revenue for the quarter, and wearables grew by almost 50% year-over-year.
“We can’t change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results,” Cook wrote, adding that the company is working to make it easier for consumers to trade in phones and finance their next purchases.
The company reports its first quarter results after the market closes on Jan. 29.
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