Apple’s strength lies in our resilience
We innovate like no other company on earth, and we are not taking our foot off the gas
Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on December 29. We now expect the following:
> Revenue of approximately $84 billion
> Gross margin of approximately 38 per cent
> Operating expenses of approximately $8.7 billion
> Other income/(expense) of approximately $550 million
> Tax rate of approximately 16.5 per cent before discrete items
We expect the number of shares used in computing diluted EPS to be approximately $4.77 billion. Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance. While it will be a number of weeks before we complete and report our final results, we wanted to get some preliminary information to you now. Our final results may differ somewhat from these preliminary estimates.
While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 per cent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.
China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States. 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. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp. Despite these challenges, we believe that our business in China has a bright future. The iOS developer community in China is among the most innovative. Our products enjoy a strong following among customers, with a very high level of engagement and satisfaction. Our results in China include a new record for Services revenue, and our installed base of devices grew over the last year. We are proud to participate in the Chinese marketplace.
Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 per cent year-over-year.
While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be. While it’s disappointing to revise our guidance, our performance in many areas showed remarkable strength in spite of these challenges.
Our installed base of active devices hit a new all-time high—growing by more than 100 million units in 12 months. There are more Apple devices being used than ever before, and it’s a testament to the ongoing loyalty, satisfaction and engagement of our customers.
Revenue outside of our iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from Services, Wearables and Mac. Our non-iPhone businesses have less exposure to emerging markets, and the vast majority of Services revenue is related to the size of the installed base, not current period sales. Wearables grew by almost 50 per cent year-over-year, as Apple Watch and AirPods were wildly popular among holiday shoppers; launches of MacBook Air and Mac mini powered the Mac to year-over-year revenue growth.
We also expect to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea. And, while we saw challenges in some emerging markets, others set records, including Mexico, Poland, Malaysia and Vietnam. Finally, we also expect to report a new all-time record for Apple’s earnings per share.
Our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. We manage Apple for the long term, and Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result.
Most importantly, we are confident about our pipeline of future products and services. Apple innovates like no other company on earth, and we are not taking our foot off the gas. We can’t change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results. One such initiative is making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone. This is not only great for the environment, it is great for the customer, and it is great for developers.
This is one of a number of steps we are taking to respond. We can make these adjustments because Apple’s strength is in our resilience, the talent and creativity of our team, and the deeply held passion for the work we do every day. Expectations are high for Apple because they should be. We are committed to exceeding those expectations every day.
That has always been the Apple way, and it always will be. Tim
Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity