Apple Sees Growing Supply Problems, Says Demand In China Affected

Apple Inc forecast growing problems as COVID-19 lockdowns snarl production and demand in China, the war in Ukraine dents sales and growth slows in services, which the company sees as its engine for expansion.

Shares were down 3.5% after executives laid out their glum outlook on a conference call. The news outweighed strong results for Apple's quarter ended in March, including record profit and sales.

Chief Financial Officer Luca Maestri warned in an interview that the war in Ukraine would leave a bigger dent on sales in the current quarter.

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

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

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, Apple's fiscal second.

Indeed, other high-profile tech companies also raised concerns. Amazon posted a disappointing outlook as it was swamped by higher costs, sending its shares down 10% after the close, and Intel Corp forecast a gloomy quarter based on supply chain issues, and its stock fell 4%.

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

Overall quarterly worldwide phone sales revenue was $50.6 billion, a 5.5% increase from a year ago, and ahead of the average estimate of $47.88 billion. Services, Apple's second-biggest segment after iPhones, increased sales 17% to $19.8 billion, just beating the average estimate of $19.71 billion.

But Maestri said that services growth would decelerate from the March quarter, while remaining in double-digits.

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

Apple also announced a 5% rise in its dividend to $0.23 per share and board approval to buy back an additional $90 billion in shares.

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

Some consumers also have put more money into travel and entertainment outside their homes as COVID-19 outbreaks become less deadly, eating into home technology budgets.

Maestri said in an interview that the war in Ukraine affected revenue as Apple withdrew from Russia, but he declined to specify an amount. He said the hit to sales would be greater in the current quarter.

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

Maestri noted that the app store, music, cloud and Apple Care services each set all-time records for sales.

Remote work also has cut the need for pricey, high-end phones and upgrades as people commute less.

But remote work has benefited other businesses.

Apple said iPad sales fell 2% to $7.65 billion due to supply-chain constraints. They were still above analysts' average estimate of $7.14 billion.

Revenue from Mac computers, also facing supply-chain issues, rose 14.7% to $10.4 billion, compared with estimates of $9.25 billion.

Sales of wearables, home speakers and accessories rose 12% to $8.8 billion, compared with estimates of $9.05 billion.

Maestri said Apple's watch and AirPods sold well, and attributed the miss to seasonal variability in demand for other accessories.

The services business is vulnerable to antitrust sanctions in the United States, Netherlands, South Korea, South Africa and many other countries that are weighing whether the company's fees are too high.

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. Its growth comes as rivals such as Netflix Inc report subscriber losses.

Labor unrest could newly affect Apple, too. More than 70% of the over 100 eligible workers at an Apple store in Atlanta last week backed a filing for an election to become the company's first U.S. shop to unionize.