Apple cuts sales forecast on China weakness

Apple shocked Wall Street with an extremely rare revenue warning late on Wednesday, blaming economic weakness in China and disappointing iPhone upgrades in the developed world for a shortfall of as much as 10 per cent from its previous expectations.

The news wiped more than 7 per cent from the company’s shares in after-market trading and stoked investor concerns over the outlook for the global economy. The warning sparked share price falls among Apple suppliers in Asia and Europe and saw the Japanese yen, seen as a safe haven currency in times of uncertainty, rise as much as 3 per cent against the dollar.

The scale of the disappointment was striking after Apple had appeared to rebut some recent suggestions of weakening demand for the iPhone. The company has been dogged in recent weeks by reports of falling orders among its suppliers and questions about the strength of demand for the new, lower-priced iPhone XR.

Only two months ago Apple said it expected revenue of $89bn-$93bn for the final three months of 2018, the most important period of its fiscal year. That would have represented revenue growth of as much as 5 per cent from the same period the year before.

On Wednesday, however, it said that revenue for the period was likely to come in at approximately $84bn, pointing to a decline of some 5 per cent instead.

In an open letter to investors, Tim Cook, chief executive, tried to minimise the extent of the shortfall, writing that Apple had predicted only “slight revenue growth” from the previous year’s $88.3bn.

Almost all of the disappointment could be attributed to the economic slowdown in China, the company said. It also said that “more than 100 per cent” of its revenue decline from the previous year could be attributed to lower Chinese demand for iPhones, Macs and iPads.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Mr Cook said. The economic environment had been impacted by rising trade tensions, he claimed.

By pinning the blame mainly on economic factors, Mr Cook hit a nerve for investors who are still reeling from a big equity sell-off in December, which reflected growing doubts over the global economy. Stock markets had also begun 2019 on a negative note, after Chinese data on Wednesday showed manufacturing activity contracting for the first time since May 2017.

Separately, Robin Li, chief executive of Baidu, the Chinese search engine, warned employees on Wednesday that “winter is coming” as the Chinese economy weakens. In a new year letter to staff, he said that shifts in the economy were “as cold and real as winter to every company”.

However, Apple also pointed to weaker than expected demand for the iPhone in developed countries, with fewer people than expected upgrading to new handsets. It blamed this shortfall on weaker economies, a decline in subsidies offered by mobile carriers, and its own recent subsidised battery replacement offer, which had led more people to hold on to their existing phones.

Mr Cook pointed to strength in other parts of Apple’s business as evidence that the company is not as dependent on short-term iPhone sales as it once was. Revenue from other businesses rose by 19 per cent in the quarter, he said, with services generating $10.8bn of revenue in the three months to December 29.

As a result, he said that Apple still expected to report record quarterly earnings per share for the quarter.

Even though the weakness was blamed in large part on a slowdown in China, Wall Street fretted that the update also signalled trouble for domestic US electronics retailers.

Apple products account for 15 to 20 per cent of sales at Best Buy, estimated UBS analyst Michael Lasser. Shares in Best Buy were down 2.3 per cent in after hours trading.