Apple Scraps Q2 Revenue Guidance; Says Coronavirus Will Hit iPhone Supplies, China Demand

Apple cautions investors that the ongoing coronavirus outbreak will hit global iPhone supplies and near-term revenue.
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Apple  (AAPL) - Get Report scrapped its second-quarter revenue guidance Monday, citing the ongoing impact of the coronavirus outbreak in China, and noted that iPhone shortages would affect the tech giant's near-term sales.

Apple said manufacturing sites in China that had been closed by government officials following the coronavirus outbreak were coming back on line, but added the company was experiencing "a slower return to normal conditions than we had anticipated." Apple said iPhone supplies will be temporarily constrained by the outbreak, and noted China demand would also be hit by the spread of the virus and the subsequent store and factory closures. 

"As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors," Apple said in a statement. "The situation is evolving, and we will provide more information during our next earnings call in April." 

"Apple is fundamentally strong, and this disruption to our business is only temporary. Our first priority - now and always - is the health and safety of our employees, supply chain partners, customers and the communities in which we operate," the statement added. "Our profound gratitude is with those on the front lines of confronting this public health emergency."

Apple shares closed at $324.95 on Friday, after rising 0.025% on the session to extend their year-to-date gain to 10.66%.

Apple shares plunged 9.96% on Jan. 3, 2019, when it slashed revenue projections due slowing sales in China, where it generates around a fifth of its global top line, but regained the lost ground over the subsequent three weeks. 

"It is actually as clear as can be that this is a temporary, short-term issue, and we wouldn’t be surprised if it barely proves to be that," said David Bahnsen, chief investment officer of the Bahnsen Group and an Apple stock owner. "The supply-side barely makes any sense - their manufacturing sites are not in the infected areas or provinces whatsoever, and even previously closed sites have re-opened."

"So yes, demand is down where there is a direct impact, but their productive capacity is not an issue, and delayed demand is hardly systemic with this company and this product," he added.

Apple said all of its stores in China, as well as many of its partners' stores, were closed amid the outbreak, which was first identified in the central industrial city of Wuhan. Those that were eventually re-opened, Apple said, "are open have been operating at reduced hours and with very low customer traffic." 

Apple said on Jan. 29 that it expected revenue in the range of $63 billion to $67 billion. It was firmly ahead of the Wall Street consensus of $62.4 billion, but is also a much wider range than the company typically provides.

Apple CEO Tim Cook said the extra leeway reflected the uncertain impact on manufacturing and sales in China amid the rapidly spreading coronavirus, which has significantly overtaken the 2003 SARS outbreak with more than 70,000 reported cases and claimed the lives of at least 1,700 people.

"We're working very closely with our team and our partners in the affected areas, and we have limited travel to business-critical situations as of last week," Cook told investors on a conference call following Apple's first-quarter earnings in late January. "The situation is emerging, and we're still gathering lots of data points and monitoring it very closely. As (CFO Luca Maestri) had mentioned, we have a wider-than-usual revenue range for the second quarter due to the greater uncertainty."

"With respect to the supply chain, we do have some suppliers in the Wuhan area. All of these suppliers, they are our alternate sources. And we're obviously working on mitigation plans to make up any expected production loss," Cook added. "We factored best thinking in the guidance that we provided you. With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time."

"The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10 depending upon the supplier location, and we've attempted to account for this delayed start-up through our larger range of outcomes," Cook noted.