AAPL Apple Inc

By Tripp Mickle 

Apple Inc. became the first major U.S. company to say it won't meet its revenue projections for the current quarter due to the coronavirus outbreak, which it said had limited iPhone production for world-wide sales and curtailed demand for its products in China.

The tech giant had last month projected record revenue for the current quarter of between $63 billion and $67 billion, which it said was a wider than normal range due to the virus. The technology giant on Monday didn't provide an updated sales estimate, saying that the situation in China is evolving. It said it would provide more information when it holds its earnings call in April.

Apple's announcement is the most prominent example yet of the broad ripple effects of the coronavirus on global business and markets as the outbreak continues to spread, hitting smartphone sales and commodity prices and delaying production across industries.

The difficulties are extending into supply chains around the worldas assembly lines from Asia to Europe depend upon parts moving swiftly from China into their plants.

Volkswagen AG said Monday it would postpone production restarts at some Chinese plants for another week. Fiat Chrysler Automobiles NV last week said it temporarily halted production in Serbia because it could not get parts from China, which continues to deal with manufacturing delays as it seeks to contain the spread of the virus.

Oil prices have fallen 11% in recent weeks in anticipation of reduced demand from the world's most populous country, and the outbreak has also weighed on iron-ore prices. A dearth of Chinese tourists in the U.S. has also hit a number of luxury brands such as Estée Lauder Cos. and Capri Holdings Ltd. which owns the Versace and Jimmy Choo brands. The timing of an initial public offering for multibillion-dollar startup Airbnb Inc. may also be affected, according to a person close to the company.

Chinese consumers are also an increasingly important market for global brands. The coronavirus' impact on China, the world's second-largest economy, will depend on how swiftly manufacturers are able to resume production. The manufacturing sector is a core pillar of the country's economy, accounting for nearly 30% of the nation's gross domestic product in 2019.

On Monday, hundreds of Americans who had been passengers on a quarantined Japanese cruise ship arrived in the U.S, including 14 people who tested positive for the coronavirus. The World Health Organization reported 71,000 cases world-wide, with over 1,770 deaths. Only three deaths and 794 cases have occurred outside of China, according to the WHO, with the majority of those cases being on the cruise ship.

Apple's announcement is the second time in two years that the company has reset revenue projections because of problems in China. A year ago, it slashed guidance for the first time in more than 15 years because of weak iPhone demand in China and elsewhere in the world.

The back-to-back revisions underscore how China, once one of Apple's strengths, has emerged as one of its greatest challenges. The company has relied on China's manufacturing sector -- with its low-cost and abundant workforce -- to assemble the vast majority of the products it sells worldwide. It also has become one of the most successful U.S. brands in China, where it had $44 billion in sales last year, nearly a fifth of the company's total revenue.

The twin dependency on China's manufacturing and consumer sectors made Apple vulnerable as the new coronavirus paralyzed the country. The Chinese government moved swiftly to contain the virus by limiting movement across the country and locking down Wuhan, the city at the epicenter of the outbreak. Concerns over the virus led to the closure of stores across the country and caused a 10-day delay in the resumption of manufacturing following the Lunar New Year holiday.

Apple said its contract manufacturers were ramping up production "more slowly than we had anticipated." As a result, it said that there would be iPhone supply shortages that temporarily affect world-wide sales.

It also said the closure of its own stores and many partner stores across China had affected sales of its products. Many stores have been operating at reduced hours and had very low customer traffic, the company said. It added that it is gradually reopening its stores and will continue to do so as soon as possible.

The company said that outside of China demand for its products and services had been strong and in line with expectations.

The announcement Monday represented a swift reversal in Apple's expectations for the quarter. In late January, Chief Executive Tim Cook downplayed the risk of the virus, saying the company was developing plans to make up for any lost production from Wuhan, where two of Apple's top 200 suppliers are based. He said Apple expected factories elsewhere to reopen after the 10-day delay.

"We factored our best thinking in the guidance that we provided you," Mr. Cook said in January.

Apple said it is more than doubling a previously announced donation to support public health efforts in China.

The virus threatens to derail Apple's business just as the company was showing signs it had regained its momentum. After weaker iPhone sales contributed to a 2% decline in total revenue for the 2019 fiscal year ended in September, the company last month reported record revenue and profit behind strong sales of its flagship smartphone, as well as apps and AirPods wireless earbuds [LINK: https://on.wsj.com/2uL4DHQ ].

Apple's shares have rallied over the past year behind the release of its latest iPhone, enthusiasm about growing sales of subscription services and anticipation of its first 5G smartphones later this year. Its market value has more than doubled since early last year to $1.4 trillion.

Still, Apple needed a steady supply of iPhones to extend its sales growth into the current quarter. As the coronavirus spread, travel restrictions made it difficult for its largest manufacturing partner, Foxconn Technology Co., to secure workers for its factories, according to people familiar with its supply chain. Some plants have resumed limited production but are uncertain when they will return to full capacity, one of these people said.

Foxconn is aiming to resume 50% of mainland China production by the end of February, and 80% in mid-March, another person familiar with the matter said.

Manufacturers must take measures to ensure the virus won't spread within their factories, where oftentimes hundreds or thousands of workers gather for one shift. For instance, in Kunshan, a manufacturing hub near Shanghai where Foxconn has a plant, the government is requiring companies to check all workers at entrances and quarantine workers returning from regions where the virus outbreak is severe.

The city also requires that companies have enough masks, thermometers and disinfectants to last for at least three days.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

February 17, 2020 18:21 ET (23:21 GMT)

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