Apple halted after-hours trading of its shares briefly on Wednesday afternoon to announce to shareholders that it had a worse-than-expected holiday quarter.
In a letter to investors, the company said it revised down its revenue for the quarter to $84 billion from the range of $89 billion to $93 billion it had provided on November 1. The company posted revenue of $88.3 billion for the 2017 holiday quarter.
All other guidance metrics–gross margin, operating expenses, other income, and expense, and tax rate–remained generally unchanged, Apple said.
Apple blamed slow iPhone sales–especially in China–as well as fewer-than-expected iPhone upgrades for the shortfall.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Apple CEO Tim Cook said in the letter. “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.”
Cook says China’s economy began to slow in the second half of 2018, with the Chinese government reporting GDP growth during the September quarter as the lowest seen in 25 years. “We believe the economic environment in China has been further impacted by rising trade tensions with the United States,” Cook adds.
The fact that Apple took the dramatic step of halting trading is an indication that the company was taken by surprise by the iPhone sales shortfall. It had, after all, predicted a record holiday quarter. But let’s add some perspective here, courtesy of Jason Snell over at Six Colors:
“To be clear, that’ll still be the second largest Apple quarter ever,” Snell tweets. “Apple is an enormous revenue and profit generator, and will remain so for years to come.”
And there was some very good non-iPhone news in Cook’s letter. Apple said it has put more than 100 million new Apple devices into service over the past year. And all of those devices can be used to buy Apple services, which many see as the company’s main revenue driver in the future. To wit, sales of services (like Apple Music and iCloud) generated more than $10.8 billion in revenue during the quarter, Apple said, growing to a new quarterly record in every geographic segment.
In addition, the holiday quarter was big for Apple’s wearables business. The company said wearables sales grew by almost 50% over last year’s holiday quarter, the Apple Watch and AirPods being especially popular this year.
Moor Insights & Strategy principal analyst Patrick Moorhead, for one, wasn’t surprised by today’s guide-down. “Suppliers had been telegraphing the issue for a few months . . . iPhone units are likely down and I believe prices on the more premium, higher priced phones are down due to holiday discounting,” Moor writes in a note to Fast Company. “The company is growing its services and ‘other’ categories, just not enough to drive overall revenue growth.”
Moor adds that investors are waiting for Apple to demonstrate a path back to double-digit growth. Until they see that, the Apple stock price may remain depressed.