Apple sees bigger supply problems after strong start to year

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Apple Inc on Thursday forecast bigger problems as COVID-19 lockdowns snarl production and demand in China, the conflict in Ukraine dents sales and growth slows in services, which the iPhone maker sees as its engine for expansion.

Shares were down 2.1 percent after executives laid out their glum outlook on a conference call. The news outweighed strong results, including record profit and sales, for Apple's fiscal second quarter, which ended in March.

Chief Financial Officer Luca Maestri warned in an interview that the conflict in Ukraine, which led Apple to stop sales in Russia, would leave a bigger dent on sales in the fiscal third quarter.

He told analysts on the call that supply-chain issues would hurt sales in the quarter by US$4 billion to US$8 billion, "substantially larger" than the hit in the second quarter.

Supply problems were focused on a corridor in Shanghai and reflected COVID disruptions and silicon shortages, he added. The pandemic was also affecting demand in China, he said.

Chief Executive Officer Tim Cook said that almost all of the Chinese factories doing final assembly of Apple products had restarted after COVID shutdowns, but the company is not forecasting when a silicon shortage would end.

Cook said he hoped COVID issues would be "transitory" and "get better over time."

Kim Caughey Forrest, Chief Investment Officer at Bokeh Capital Partners, said that ongoing demand remained a big question, despite Apple's management of supply chain in the March quarter.

Indeed, other high-profile tech companies also raised concerns. Amazon on Thursday posted a disappointing outlook as it was swamped by higher costs, sending its shares down 9 percent after the close, and Intel Corp forecast a gloomy quarter based on supply chain issues, and its stock fell 4 percent.

Both companies, along with Apple, are part of the broader Nasdaq index, which has fallen nearly 19 percent this year as rising inflation drives investors elsewhere.

March quarter strength

Apple's overall fiscal second-quarter revenue was US$97.3 billion, up 8.6 percent from last year and higher than analysts' average estimate of US$93.89 billion, according to Refinitiv data.

Worldwide phone sales revenue was US$50.6 billion, a 5.5 percent increase from a year ago, and services sales rose 17 percent to US$19.8 billion, both ahead of analyst average forecasts.

However, Maestri said that services growth would decelerate from the March quarter, while remaining in double-digits. He cited several factors, including more unfavorable currency exchange rates.

Total profit was US$25 billion, or US$1.52 per share, and easily topped analysts' expectations of US$23.2 billion and US$1.43.

Apple also raised its dividend 5 percent to US$0.23 per share and the board approved a buyback for an added US$90 billion in shares.

Investors have been bracing for drops in consumer spending on tech gadgets and services as other factors drive up the cost of oil, food and other staples.

Cook shrugged off an analyst question on inflation and consumers.

"We're monitoring that closely. But right now, our main focus, frankly speaking, is on the supply side," he said.

Asked about rising inflation, Maestri said demand, particularly for iPhones, had been higher than the company had anticipated at the start of the quarter. But he noted inflation was affecting expenses.

The pandemic, including the shift to hybrid work, has benefited other businesses.

Apple said iPad sales fell 2 percent to US$7.65 billion due to supply-chain constraints, while revenue from Mac computers, also facing supply-chain issues, rose 14.7 percent to US$10.4 billion.

Sales of wearables, home speakers and accessories rose 12 percent to US$8.8 billion and were the only unit to miss Wall Street targets. Maestri said Watch and AirPods sold well, and attributed the miss to seasonal variability in demand for other accessories.

Apple said it now has 825 million paying subscribers across its at least seven subscription offerings, up by 40 million from 785 million last quarter.