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HAPPY NEW YEAR!

Apple had a much rougher holiday quarter than it expected

By Mike Murphy

It wasn’t the best start to the new year for Apple.

Right before the closing bell on the first day of trading in the US today (Jan. 2), Apple halted shares to announce that it was cutting its guidance for revenue in the holiday quarter. In November, when it first announced its guidance for the quarter—traditionally its strongest, as consumers around the world buy phones, computers, tablets as gifts—Apple said it expected to generate between $89 billion and $93 billion for the quarter. Today, the company said it expects to generate around $84 billion for the quarter, which would be about $4 billion less than it generated in the same period last year.

In a letter to investors, CEO Tim Cook explained the rationale for lowering the company’s guidance. Cook and his team anticipated some hurdles when they made the original forecast, including the fact that its newest phones were shipped earlier than its flagship phones were the year before, and foreign exchange headwinds. However, others were unexpected.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook said in his note. The CEO blames the vast majority of the company’s revenue shortfall on iPhone, Mac, and iPad sales in China, suggesting that the country’s slowing GDP growth, and trade tensions with the US, were the issues. “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,” he added.

Once trading resumed, Apple shares were immediately hit, down about 7% at the time of publishing.

Beyond China, iPhone demand was apparently soft around the world. “In some developed markets, iPhone upgrades also were not as strong as we thought they would be,” Cook said. This holiday season, Apple introduced three new phones—the iPhone Xs, Xs Max, and Xr—and it’s possible that consumers  were confused by the differences in all three. Analyst reports in December suggested early on that consumers weren’t particularly interested in the Xr, the company’s supposedly “budget” phone, which started at $749. The company was offering trade-in deals, lowering the price of a new phone to as low as $449, soon after it went on sale.

Cook also partly blamed Apple’s revenue decline on “some customers taking advantage of significantly reduced pricing for iPhone battery replacements”—the company had been selling replacement batteries for $29 (down from $69) after the company had been caught throttling the batteries and performance on older iPhones.

It wasn’t all grim news in Cook’s note—he said that outside of the iPhone, revenue for Apple products and services was up 19% over the same period last year—and it had record revenue quarters from certain countries, including the US, Germany, and Korea.

Perhaps after 11 years of the iPhone’s dominance, consumers have started to look elsewhere. Or maybe they’re just fed up with having to pay for increasingly expensive Apple phones that don’t offer much more than their competitors do, with waning customer service. Or maybe investors shouldn’t be overly concerned, given that the company still plans to generate $84 billion in a 90-day period selling gadgets, more than all but 33 US companies generate in a single year.