Apple sees major supply problems after a strong start to the year

OAKLAND, Calif., April 28 (Reuters) – Apple Inc (AAPL.O) on Thursday predicted major problems as COVID-19 slows production and demand in China, war in Ukraine hampers sales and slows growth in services that iPhone maker sees as its engine for expansion.

Shares fell 2.1% after executives gave their bleak outlook at a conference call. The news offset strong results, including record profits and sales, for Apple’s second-quarter financials, which ended in March.

Chief Financial Officer Luca Maestri warned in an interview that the war in Ukraine, which caused Apple to stop sales in Russia, would leave a major slump in sales in the third quarter.

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He told analysts during the call that supply chain problems would hurt sales in the quarter by $ 4-8 billion, “significantly greater” than hits 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 also affected demand in China, he said.

CEO Tim Cook said almost all of the Chinese factories making final assembly of Apple products were restarted after COVID shutdowns, but the company does not predict when a silicon shortage would end.

Cook said he hoped COVID issues would be “transient” and “get better over time.”

At least one analyst said the outlook lacked clarity.

“We were all looking for better guidance on what’s really going on over there (China) … and it did not come out,” said Louis Navellier, chief investment officer at Navellier & Associates.

Kim Caughey Forrest, Chief Investment Officer at Bokeh Capital Partners, said ongoing demand remains a major issue despite Apple’s supply chain management in the March quarter.

In fact, other high-profile technology companies also raised concerns. Amazon (AMZN.O) announced a disappointing outlook on Thursday as it was flooded with higher costs, sending its shares down 9% after closing, and Intel Corp (INTC.O) predicted a gloomy quarter based on supply chain problems, and its stock fell 4 pct.

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

Apple’s total tax revenue in the second quarter was $ 97.3 billion, up 8.6% from last year and higher than analysts’ average estimate of $ 93.89 billion, according to Refinitiv data.

Worldwide telephone sales revenue was $ 50.6 billion, up 5.5% from a year ago, and service sales up 17% to $ 19.8 billion, both ahead of analysts’ average forecasts.

Maestri said, however, that growth in services would slow from the March quarter, while remaining in double digits. He mentioned several factors, including more unfavorable exchange rates.

The total profit was $ 25 billion or $ 1.52 per share. share and easily exceeded analysts’ expectations of $ 23.2 billion and $ 1.43.

Apple also raised its dividend by 5% to $ 0.23 per share. share, and the board of directors approved a repurchase for an additional $ 90 billion in shares.

Investors have been preparing for declining consumer spending on technological gadgets and services as the war in Ukraine and other factors drive up the cost of oil, food and other basic commodities.

Cook drew on an analyst question on inflation and consumers.

“We are monitoring it closely. But right now, our main focus is, frankly, on the supply side,” he said.

Asked about rising inflation, Maestri said demand, especially for iPhones, had been higher than the company had expected at the beginning of the quarter. But he noted that inflation affected spending.

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

Apple said iPad sales fell 2% to $ 7.65 billion due to supply chain constraints, while revenue from Macs also facing supply chain problems rose 14.7% to $ 10.4 billion.

Sales of wearables, home speakers and accessories rose 12% to $ 8.8 billion, and were the only device to miss the Wall Street targets. Maestri said the Watch and AirPods sold well, attributing the lack to seasonal variation in demand for other accessories.

Apple said it now has 825 million paying subscribers across its at least seven subscription offerings, an increase of 40 million from 785 million last quarter. Its growth comes as rivals as Netflix Inc (NFLX.O) reports loss of subscribers.

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Reporting by Paresh Dave in Oakland, California and Nivedita Balu in Bengaluru; Edited by Peter Henderson and Bernard Orr

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