Apple warns coronavirus will hit revenue as production is constrained

The tech company has closed 42 stores in China and its production supply is disrupted as a result of the epidemic

FILE - In a Feb. 14, 2020 file photo, employees wear face masks as they stand in a reopened Apple Store in Beijing. Apple Inc. is warning investors that it won't meet its second-quarter financial guidance because the viral outbreak in China has cut production of iPhones. The Cupertino, California-based company said Monday, Feb. 17, 2020 that all of its iPhone manufacturing facilities are outside Hubei province, and all have been reopened, but production is ramping up slowly. (AP Photo/Mark Schiefelbein, File)
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Apple warned investors the disruption of its supply chain and ebbing demand in China from coronavirus outbreak will impact its quarterly revenue, after it had projected positive results for the period.

In its earlier guidance for the three months to March 30, released on January 29, the company projected a revenue in the range of $63 billion (Dh231.21bn) to $67bn, a year-on-year rise of almost 15.5 per cent. However, the company said on Monday supply constraints and falling demand in China will dent growth, making it unlikely to meet second quarter revenue targets.

Apple, which has a $1.4 trillion market capitalisation, manufactures most of its iPhones and other devices in China. The country is also Apple's second-biggest market in terms of sales, after the US. The tech giant, which reported record profit in its fiscal 2020 first quarter ending December 28, 2019, was forced to close 42 stores in China because of the epidemic.

Following the end of the extended Chinese New Year holiday on February 10, work resumed but Apple said it is “experiencing a slower return to normal conditions" than it had anticipated, although all iPhone manufacturing sites are located outside the Hubei province – the most affected area in China. “As a result, we do not expect to meet the revenue guidance we provided for the March quarter,” it said in a statement on Monday.

"There is no doubt that quarterly earnings numbers are going to be feeble and this trend will be across the industry," said Naeem Aslam, chief market analyst at broker Avatrade. The coronavirus, "has spread globally and it is bound to influence the revenue numbers of other companies", he added.

Asian equities fell after Apple's statement, the Shanghai Composite dropped 0.25 per cent on Tuesday morning and the Hang Seng fell 1.45 per cent.

This is second time Apple has revised its revenue outlook downward in nearly two decades. The first was in January 2019, when the company cited China's economic slowdown and weaker demand for its newer products. Chinese economy grew at the slowest pace last year in nearly three decades.

“iPhone supply shortages will temporarily affect revenues worldwide,” Apple said. “All of our stores in China and many of our partner stores have been closed … stores that are open have been operating at reduced hours and with very low customer traffic.”

Analysts said a weaker Chinese economy was already hurting Apple's bottom line, even before the coronavirus outbreak.

China's domestic market continues to be a challenge as overall consumer spending on smartphones has fallen, according to International Data Corporation in the US.

Chinese demand for the iPhone had been tapering, according to a report released by Credit Suisse last year. Shipments of iPhones in China dropped an annual 35.4 per cent in November, despite a slight increase in the Chinese smartphone market, Credit Suisse analysts said.

Apple’s revision "is not a shock," said Neil Campling, co-head of Mirabaud Securities' Global Thematic Group. "The global iPhone supply is temporarily constrained and demand for products within China has been badly affected," he said, adding it "is the first and largest company to come out and explicitly warn while half way through the quarter".

Apple’s net profit increased 11.3 per cent annually to a record $22.24bn in the last quarter, as quarterly revenue surged to $91.82bn. This was the biggest quarterly profit for the company in history.

“China’s consumer confidence must be on the floor,” said Mr Campling.