Apple Sales Warning on China Draws Tariff Concern as Stock, Market Fall

Citing a slowing China economy in the second half of 2018 and the nation’s second-lowest September quarter in 25 years, Cook noted “rising trade tensions” between China and the U.S.: “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.” Cook called the China market contraction “particularly sharp.” The Office of the U.S. Trade Representative didn't comment Thursday.

Tariffs are a “direct threat to American workers and companies, hindering economic growth and slowing hiring,” said Executive Vice President-Policy Josh Kallmer of the Information Technology Industry Council, which includes Apple: “Companies of all sizes and their customers will continue to be hit with negative impacts.” Kallmer urged the Trump administration to continue “critical negotiations” with the Chinese government and work toward a long-term solution that “rolls back tariffs, changes China’s unfair trade policies, and ends this mutually damaging trade war.”

An analyst noted that in China, the business "environment sounds very bad." It's "obviously not being helped by the ongoing trade war or the rising prices of Apple’s products," BTIG Research's Walter Piecyk wrote investors Wednesday night. Lack of carrier subsidies in developed markets that Cook also cited isn't "a new trend," the analyst wrote: "Operators have been offering trade-in promotions for years, albeit at lower levels in the past two years."

In an investor note titled "Bitten by the Apple," an analyst noted Lumentum stock fell in after-hours trading Wednesday after the warning. Raymond James' Simon Leopold called "the incremental Apple weakness ... bad news." However, executives at the maker of optical networking products have "indicated that shipments continued into Apple," he noted. Leopold still likes its 3D sensing prospects.

Lumentum closed down 8.4 percent at $39.01. Skyworks Solutions fell 10.5 percent to $60.72. Corning fell 6.2 percent to $28.03. Also down more than 5 percent each: Broadcom, Intel and Micron Technology.

Demand for iPhone upgrades was lower than expected in the quarter, said Cook. Outside of iPhone troubles in China, iPhone upgrades fell short of projections in developed markets, he said, citing “macroeconomic challenges in some markets.” Other factors limiting iPhone sales: fewer carrier subsidies, U.S. dollar-strength-related price increases and iPhone owners “taking advantage of significantly reduced pricing for iPhone battery replacements.”

Display Supply Chain Consultants (DSCC) President Bob O’Brien called holiday season iPhone sales an “awfully big miss.” He noted Apple’s “other” products category was up 19 percent year on year, meaning the iPhone was down 15 percent in revenue. O’Brien has seen no evidence of an “anti-Apple bias” in China but “can’t escape [the] feeling that the trade tensions have hurt the sales of the most prominent US brand.”

The iPhone XR, launched in October, a month after the higher priced XS and XS Max, was the “biggest source of weakness,” DSCC CEO Ross Young emailed us. While “not aware of any particular anti-Apple programs in China in response” to the tariffs, Young said, “it seems to be an outcome nonetheless.”

In other news​, Apple trumpeted Thursday that its App Store customers set records over the holidays, spending $1.2 billion between Christmas Eve and New Year’s Eve and more than $322 million on Tuesday. Apple said its services unit set records in multiple categories: the App Store, Apple Music, Cloud Services, Apple Pay and the App Store’s ad search business. Gaming and self-care were the most popular categories of app downloads and subscriptions during the holidays.