Tim Cook cites supply constraints and economic deceleration as the major reason for Apple missing it’s earnings target

Yesterday, Tim Cook, CEO Apple, wrote an open letter to Apple investors talking about why Apple missed it’s earnings target. They have also released a revised guidance for Apple’s fiscal 2019 first quarter, with Apple's revenue lower than what they had originally anticipated. The revised guidance states:

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

Cook has cited two major reasons for Apple’s revenue decline. First, supply constraints, that was responsible to block the sales of certain Apple products during Q1. This included Apple Watch Series 4, iPad Pro, AirPods and MacBook Air.

Second, they had initially expected economic weakness in some emerging markets which turned to have a significantly greater impact than originally projected. The major economic weakness was observed 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.” Traffic to Apple retail stores and channel partners in China also declined as the quarter progressed.

He cited China’s government-reported GDP growth during the September quarter and the trade tensions of China with the United States as the major reasons for slow economic environment in China.

Apart from Greater China, iPhone revenue also declined in some other developed countries due to weak iPhone upgrades. Cook said that macroeconomic challenges in these markets were a key contributor to this trend. However, he also added, “ fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements”, as other factors impacting iPhone performance.

On the positive side, Apple set a new record in China for Services revenue. Services generated over $10.8 billion in revenue during the quarter, with Apple on track to double the size of this business from 2016 to 2020. The installed base of devices also grew over the last year. Categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year. Their installed base of active devices grew by more than 100 million units in 12 months. Wearables also spiked with almost 50 percent growth year-over-year. This was attributed to new MacBook Air, Mac mini and the new iPad Pro. Apple Watch and AirPods were also wildly popular among holiday shoppers.

For the future, Apple expects to set all-time revenue records in several developed countries and to report a new all-time record for Apple’s earnings per share.

You may go through the entire letter from Tim Cook to Apple investors.

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