Which functions lead to product launches at Apple
Tim Cook's letter to Apple investors
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PRESS RELEASE January 2, 2019
To Apple's investors:
Today we are revising our guidance for Apple's first fiscal quarter 2019, which ended on December 29th. We now expect the following values:
- Sales of around $ 84 billion
- Gross profit margin of around 38 percent
- Operating expenses of approximately $ 8.7 billion
- Other income / (expense) of approximately $ 550 million
- Tax rate of around 16.5 percent before special items
We expect the number of shares used to calculate diluted earnings per share to be around 4.77 billion.
Based on these estimates, our revenue will be below our original forecast for the quarter, while other items will be broadly in line with our forecast.
Although it will be a few more weeks before we finalize and publish our final results, today we want to share some preliminary information. Our final results could differ slightly from these preliminary estimates.
When we discussed our forecast for the first fiscal quarter about 60 days ago, we knew that this quarter would be influenced by both macroeconomic and Apple-specific factors. Based on our best possible estimates at this point in time of how these would develop, we forecast slight year-on-year sales growth for the quarter and discussed four factors:
First, we knew that the different timing of our iPhone launches would affect the year-over-year comparison. Our top models, iPhone Xs and iPhone Xs Max, were delivered in Q4'18, which means an earlier delivery to the trade and an earlier start of sales, while the iPhone X was delivered in Q1'18 last year and thus the Delivery to the trade and the first sales took place in the December quarter. We knew this would make a difficult comparison with Q1'19 and that was largely reflected in our expectations.
Second, we knew the strong US dollar would have a negative impact on foreign exchange rates and we forecast that this would reduce our revenue growth by around 200 basis points year over year. This also turned out to be largely in line with our expectations.
Third, we knew we would be launching a large number of new products during the quarter and we forecast that supply bottlenecks would affect our sales of certain products in the first quarter. This also largely met our expectations. Apple Watch Series 4 and iPad Pro sales were severely limited throughout the quarter. AirPods and MacBook Air were also limited.
Fourth, we expected a weaker economy in some emerging markets. This had a significantly greater impact than we had forecast.
Additionally, these and other factors resulted in fewer iPhone device upgrades than we expected.
These last two points have led us to reduce our sales expectations. I would like to go into more detail on both points.
Challenges in Emerging Markets
While we anticipated diverse challenges in key emerging markets, we did not anticipate the extent of the economic slowdown, particularly in the Greater China area. In fact, most of our drop in sales, and over 100 percent of our worldwide year-over-year sales decline for iPhone, Mac, and iPad is due to Greater China.
China's economy began to slow down in the second half of 2018. Government-reported GDP growth for the September quarter was the second lowest in the past 25 years. We believe that the economic environment in China has been further adversely affected by mounting trade tensions with the United States. As the climate of increasing uncertainty weighed on the financial markets, the effects also seemed to reach end customers, so that the number of visits to our retail stores and to our sales partners in China fell during the quarter. And the market data shows that the decline in the smartphone market is particularly strong in Greater China.
Despite these challenges, we believe that our business in China has very good future prospects. The iOS developer community in China is one of the most innovative, creative and dynamic in the world. Our products are very popular with customers, with very high levels of commitment and satisfaction. Our results in China include a new record in service revenue and our installed base of equipment has grown over the past year. We are proud to be part of the Chinese market.
The lower than expected sales of iPhone devices, especially in Greater China, are responsible for the entire decline in our sales forecast and for all of our year-over-year sales decline. In fact, the categories outside of the iPhone business (services, Mac, iPad, wearables / home / accessories) grew by almost 19 percent year-on-year.
While Greater China and other emerging markets accounted for the majority of the year-on-year decline in sales, iPhone upgrades were also not as strong as we expected in some industrially developed markets. While macro challenges in some markets were a major contributor to this development, we believe other factors impacted our iPhone sales as well, including changing consumer behavior as a result of lower mobile operator subsidies, price increases in relation to the strong US -Dollars as well as customers who have used the significantly reduced price for replacing iPhone batteries.
Many positive results in the December quarter
It is of course disappointing to have to revise our forecast, but despite these challenges, our performance shows a notable strength in many areas.
Our installed base of active devices reached a new high - with a growth of more than 100 million devices in twelve months. More Apple devices are being used than ever before, and that is another testament to the continued loyalty, satisfaction, and commitment of our customers.
As mentioned earlier, sales outside of our iPhone business grew nearly 19 percent year-over-year, including record sales in services, wearables and the Mac. Our non-iPhone businesses are less dependent on emerging markets and the vast majority of revenue from services depends on the size of the installed base and not on revenue generated in the current reporting period.
The Services division had sales of over 10.8 billion US dollars during the quarter and set a new quarterly record in any region of the world. We are well on the way to achieving our goal - to double the size of this business area from 2016 to 2020.
Wearables grew nearly 50 percent year over year; Apple Watch and AirPods were very popular in the run-up to Christmas; the introduction of the MacBook Air and Mac mini drove sales growth for the Mac, and the introduction of the new iPad Pro resulted in double-digit year-over-year sales growth for the iPad.
We also expect to see record sales in several industrially developed countries including the US, Canada, Germany, Italy, Spain, the Netherlands and Korea. And while we saw challenges in some emerging markets, other countries set records, including Mexico, Poland, Malaysia and Vietnam.
Last but not least, we expect a new record for Apple's earnings per share.
Our profitability and cash flow generation are strong and we expect to end the quarter with approximately $ 130 billion in net cash. As mentioned earlier, we plan to become net cash neutral over time.
At the end of a challenging quarter, we are more convinced than ever of the fundamental strength of our business. We control Apple for the long term and Apple has used difficult times in the past to review our approach, to take advantage of our corporate culture of flexibility, adaptability and creativity and thereby become even better.
Above all, however, we are confident and enthusiastic about the future products and services that we are planning. Apple is innovative like no other company in the world and we are not going to slow our pace of innovation.
We cannot change the macroeconomic conditions, but we will initiate or accelerate other activities to improve our results. One of these initiatives is to simplify the return of a cell phone in our stores, to enable a financing or installment purchase and to receive help with the transfer of data from the current to the new cell phone. This is not only good for the environment, but also for the customer, as their existing mobile phone serves as a subsidy for their new phone. Additionally, it's good for developers as it can help expand our installed base.
This is just one of several steps we will take in this regard. We can make these changes because Apple's strength lies in our resilience, the talent and creativity of our team, and the heartfelt passion for the work we do every day.
The expectations of Apple are high and they should be. We strive to exceed these expectations every day.
That has always been Apple's way, and it will always be Apple's way.
The information contained in this letter is preliminary and our actual results may differ. Apple plans to discuss the final results in a conference call for the first quarter on Tuesday, January 29, 2019 at 11:00 p.m. CET.
This letter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, those about estimated company revenues, gross profit margin, operating expenses, other income / (expenses) and the tax rate. These statements involve risks and uncertainties and actual results could differ. For more information on possible factors affecting the company's financial results, see the Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in the company's most recently filed periodic reports on Forms 10-K and 10 -Q as well as the subsequent submissions. The company assumes no obligation to update any forward-looking statements or information that speak for themselves as of their respective dates.
Apple introduced the Macintosh in 1984 - revolutionizing personal technology. Today, Apple leads the world in innovation with the iPhone, iPad, Mac, Apple Watch and Apple TV. The four Apple software platforms - iOS, macOS, watchOS and tvOS - deliver a seamless experience across all Apple devices. And they give people more options with pioneering services like the App Store, Apple Music, Apple Pay and iCloud. Apple has over 100,000 employees - and they all strive to make the best products in the world. And to leave the world behind better than we found it.
© 2019 Apple Inc. All rights reserved. Apple and the Apple logo are trademarks of Apple Inc. All other company and product names may be trademarks of the respective companies with which they are associated.
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