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Jan 3, 2019

5 Key Takeaways From Bombshell Apple Letter

By Daniel Liberto Updated Jan 3, 2019



Apple Inc. (AAPL) has added to investors' woes.
CEO Tim Cook told investors in a letter published after markets closed on Wednesday that fresh challenges have forced the company to reassess its revenue forecasts. The iPhone maker now expects first-quarter sales of $84 billion, a far cry from its previous guidance in the range of $89 billion and $93 billion, and the $91.3 billion predicted from analysts.
The warning led Apple’s shares to fall 7.55% in pre-market trading and weighed on S&P 500 futures ahead of Thursday’s opening.
Here are the main takeaways from the company’s latest update:

All Is Not Well in China

Apple blamed most of its revenue shortfall on weak demand for iPhones in China. Cook warned that the country’s economy had been affected by rising trade tensions with the U.S. and that jittery consumer sentiment had a particularly marked impact on smartphone sales.
“The government-reported GDP growth during the September quarter was the second lowest in the last 25 years,” said Cook. “We believe the economic environment in China has been further impacted by rising trade tensions with the United States. 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."

iPhones in Decline in Some Developed Markets, Too.

Cook was quick to blame Greater China and other emerging markets for the “vast majority” of falling iPhone sales. However, Apple’s CEO also conceded that iPhone upgrades "were not as strong as we thought they would be" in some developed markets.
Global economic uncertainty, fewer carrier subsidies, price increases caused by a strong dollar and lower battery replacement prices were cited as some of the reasons for these difficulties.


Steps Being Taken to Lift iPhone Sales 

In the letter, Apple revealed that is taking steps to stimulate iPhone sales growth during these uncertain times for the global economy. New initiatives include offering finance purchases over time, making it easy to trade in smartphones and providing support to customers keen to transfer data to new iPhones.

Services and Wearables Continue to Impress

Fortunately, Apple’s letter wasn’t all doom and gloom. The company reported that services, its main growth engine, generated revenues over $10.8 billion during the quarter. Those numbers indicate that the business is growing nicely and continues to outperform analyst expectations.
Apple’s wearables revenues also impressed, rising nearly 50%, despite facing tough comparatives and supply constraints for some products.

Cash to Burn

Apple continues to generate a decent amount of cash. The company said it expects to end the quarter with approximately $130 billion in net cash and reiterated its intention to “become net-cash neutral over time.”
That suggests that more buyback activity could be on the cards. Failing that, Apple could look to make a big acquisition. “We would anticipate the company increasing share buybacks on the weakness to return capital to shareholders at discount prices,” said Trip Miller, managing partner at Apple shareholder Gullane Capital Partners, to Reuters.

Source: Investopedia