When Apple issued financial guidance back on Nov. 1, the company told investors to expect revenue of between $89 billion and $93 billion for the first quarter of its fiscal 2019. At the midpoint of that range -- $91 billion -- Apple was guiding for a slight year-over-year increase in sales.
The company's revised guidance is, for lack of a better word, ugly. The company is now calling for revenue to come in at $84 billion -- missing the low end of its earlier guidance range by an eye-popping $5 billion and the midpoint by a hair-raising $7 billion.
Let's take a closer look at what drove that shortfall and what it means for Apple investors.
The main culprit? Greater China
In a letter signed by Apple CEO Tim Cook, Apple explained that although it had "expected economic weakness in some emerging markets," that weakness "turned out to have a significantly greater impact than [Apple] had expected."
Indeed, Cook claimed that "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."
He then went on to cite a number of factors that drove the shortfall, including a slowing economy in Greater China (Cook said that "government-reported GDP growth during the September quarter was the second lowest in the last 25 years") and also stated that "the economic environment in China has been further impacted by rising trade tensions with the United States."
As evidence, Cook explained that "[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, in what looks like a bid to show that this isn't an Apple-specific issue, Cook claimed that "market data has shown that the contraction in Greater China's smartphone market has been particularly sharp."
It wasn't just Greater China, though. Cook explained that "in some developed markets, iPhone upgrades also were not as strong as we thought they would be." He continued:
While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.
It's an iPhone problem
Apple sells a wide range of products and an increasing number of services, but the bulk of its revenue still comes from the iPhone. Cook stated that "[lower] than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to guidance and for much more than our entire year-over-year revenue decline."
Indeed, as something of a consolation prize for investors, Cook added that "categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year."
Unfortunately for Apple and its shareholders, Apple's non-iPhone business -- the business that's apparently, in aggregate, doing so well -- made up just over 37% of the company's sales during its fiscal 2018. It's hard for those businesses to offset meaningful shortfalls in the company's core iPhone business.
There's a 2013 quote from Cook that's often used to minimize the credibility of negative supply chain reports:
I would suggest it's good to question the accuracy of any kind of rumor about build plans and also stress that even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business because the supply chain is very complex. And we obviously have multiple sources for things, yields might vary, supplier performance can vary, the beginning inventory positions can vary. I mean, there's just an inordinate long list of things that would make any single data point not a great proxy for what's going on.
Although it's still important to carefully weigh every data point that you get, the reality is that there were a lot of data points that, in aggregate, made it clear that this iPhone product cycle wasn't going right. These included everything from news reports claiming that Apple had cut production of its latest iPhones all the way to sharp guidance revisions from key component makers.
The key takeaway, though, is this: Apple couldn't deliver on its financial guidance during what is supposed to be the peak quarter for its latest iPhones. What I expect to happen now is that analysts will broadly reduce their Apple financial estimates and price targets, and I wouldn't be surprised to see many analysts who have buy ratings on the stock move to the sidelines for, at least, the remainder of this iPhone product cycle.
Until Apple's iPhone business shows signs of stabilization, Apple stock might prove to be a frustrating investment.
Check out the latest Apple earnings call transcript.