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Apple Will Miss Its Guidance Due to Coronavirus Outbreak

By Evan Niu, CFA - Feb 18, 2020 at 12:30PM

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The Mac maker's supply chain is being disrupted and demand in China is taking a hit.

When Apple (AAPL 0.00%) reported blowout fiscal Q1 earnings results last month, it warned that the coronavirus outbreak could impact its results for the quarter ending in March. The company incorporated a relatively wider range in its revenue guidance to accommodate for the heightened uncertainty. That was three weeks ago, and conditions have only gotten worse as the epidemic continues to spread.

Yesterday, Apple issued a warning to investors saying that it now expects to miss its revenue guidance.

Worker inspecting an iPhone

Image source: Apple.

Supply constraints and reduced demand in China

For reference, Apple's outlook had called for revenue of $63 billion to $67 billion in the current quarter. Due to the ongoing crisis, Apple says it is doubling its donations to public health groups that are trying to contain the coronavirus. Workers recently started to return to work from the Chinese New Year holiday but Apple is "experiencing a slower return to normal conditions than we had anticipated" and does "not expect to meet the revenue guidance" it provided last month.

The Cupertino tech giant cited two primary factors: Global iPhone supply will be impacted and demand within China is also being hurt. Even though most of Apple's contract manufacturing facilities are located outside of Hubei province -- the epicenter of the outbreak -- ramping production back up to normal levels is taking longer than expected as Apple takes the necessary precautions for worker safety. Apple has closed all of its stores in China, and the company plans to "gradually" reopen stores as safely as possible. Corporate offices had been temporarily closed but have since reopened.

Demand outside of China is largely unaffected and remains strong, according to Apple, although supply constraints may hurt the company's ability to meet that demand.

It's different this time

Apple had kicked off 2019 with a similar warning that it would miss its revenue guidance, but that episode was more concerning since it was more related to poor execution on Apple's part. At the time, Apple was struggling to sell iPhones in China, upgrade activity in developed markets was sluggish, and the company suggested that high prices were hurting demand.

In contrast, the coronavirus outbreak is a public health emergency far beyond Apple's control, one that will impact many companies and major world economies. For example, Japan just reported the biggest quarterly decline in GDP in six years, in part due to coronavirus risks, putting the third-largest economy in the world on the brink of recession. Japan is also an important market for Apple, representing roughly 7% of sales last quarter.

Apple is prioritizing health and safety while emphasizing that the challenges are temporary in nature. The crisis continues to evolve rapidly and the company will provide more detail when it reports fiscal second-quarter results in April.

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