Apple says the biggest hit came from China.

Angela Lang/CNET

Apple’s new lineup of iPhones didn’t have a happy holiday. And a rare sales forecast slash may bode poorly for the rest of the year.

In a letter to investors, Apple CEO Tim Cook warned the company’s fiscal first-quarter revenue would be weaker than previously expected. It now sees revenue of $84 billion, well below the prior range of $89 billion to $94 billion that it forecast in November. Its gross margin is now expected to be 38 percent, a tick below the high end of the 38-percent-to-38.5-percent range it previously forecast, suggesting a shift to lower-priced, less profitable products.

A warning from Apple, one of the most valuable and profitable companies in the world, is a rare occurrence that hasn’t happened in at least 15 years. The weaker holiday season — a critical period in which most of Apple’s iPhones are sold — will fan growing belief the company is struggling with fatigue for its popular smartphone and sales may be on a downward slide. The company raised a red flag in November when it said it would stop disclosing how many units it sells each quarter.

“iPhone units are likely down and I believe prices on the more premium, higher priced phones are down due to holiday discounting,” said Patrick Moorhead, an analyst at Moor Insights.

The warning is similar in vibe to concerns Apple endured more than a decade ago, when it missed its fiscal fourth-quarter numbers amid an economic downturn. Then-CEO Steve Jobs broke his practice of skipping analyst calls in order to quell investor fear, reiterating Apple would be fine. (He was right.)

Blame China

This time, the economic downturn isn’t in the US. Cook blamed much of the shortfall on China, where the company underestimated a decelerating economy. The company saw a decline in sales of iPhones, Macs and iPads in the country.

Cook cited macro factors like trade friction between the US and China, the world’s two biggest economies.

“We believe the economic environment in China has been further impacted by rising trade tensions with the United States,” Cook said.

Beyond demand in China, Cook also blamed fewer carrier subsidies, price increases in foreign markets caused by a strong US dollar and customers taking advantage of cheaper battery replacements as other factors.

Cook also blamed a slowing smartphone market, which has taken a toll on other big players like Samsung. But Avi Greengart, an analyst at Global Data, says Apple’s not taking into account the rise of players like China’s Huawei, the second-largest phone maker in the world. Or players like Oppo, which also owns the hot upstart player OnePlus.

“Apple does have a strong franchise in China, but it is not immune from competition,” Greengart said.

In an interview with CNBC, Cook said a host of new products introduced in the quarter contributed to the sales miss.

“We had an unprecedented number of new products during the quarter, we had new watches, we had new iPad pros,” Cook told the financial network. “Both of these were constrained for all or most of the quarter.”

Still, he remains bullish.

“We had sort of a collection of items going on.” Cook told CNBC. “Some that are macro economic and some that are Apple specific. And we’re not going to sit around waiting for the macro to change — I hope that it does and I’m actually optimistic — but we’re going to focus really deeply on the things we can control.”

Questions about demand

Apple was already fielding questions about demand for its next lineup of iPhones. Last fall, Apple unveiled the iPhone XS and iPhone XS Max, which offered modest upgrades like a faster processor and, in the case of the Max, a big size increase. The other new product was the lower-priced iPhone XR, which came in different colors and cost less than the iPhone XS because of its cheaper components.

Addressing concerns that the new iPhones weren’t selling well, Apple said the iPhone XR has been its top-selling iPhone since its launch, which came a month after the iPhone XS and iPhone XS Max.

But the iPhone XR sits in an awkward position. It doesn’t have the latest and greatest specs to satisfy the hardcore Apple fanboy, but at $750, it is still an expensive upgrade for consumers used to that baseline $650 for a new iPhone.

In the meantime, Apple’s older iPhone 7 and iPhone 8 models remain available for consumers who don’t want to break the bank for a new smartphone.

Apple has been shifting its strategy so it’s less reliant on the iPhone and generating more of its revenue from services like iTunes, the App Store and its upcoming streaming video service.

Apple shares fell 7 percent to $147.02 in post-market trading. Shares were briefly halted before the news came out.

First published Jan. 2, 1:42 p.m. PT.
Update, 1:57 p.m.: To include further details
Update, 2:14 p.m.: To include further details, stock market price and background.
Update, 2:55 p.m.: To include analyst comments.
Update, 3:10 p.m.: To include further comment from Tim Cook from a CNBC interview.
Update, 4:40 p.m.: To include more Tim Cook comments.


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