Apple says semiconductor shortage will affect iPhone production in fourth quarter

 5G

Apple Inc said on Tuesday that a global chip shortage that has bit into its ability to sell Macs and iPads will start to affect iPhone production and forecasted slowing revenue growth, sending its shares lower.

Apple executives said revenue for the current fiscal fourth quarter will grow by double-digits but be below the 36.4 per cent growth rate in the just-ended third quarter. Growth will also slow in Apple’s closely watched services business, they said.

In a conference call with investors, Apple executives also said that while the impact of the chip shortage was less severe than feared in the third quarter, it will get worse in the fourth, extending to iPhone production.

Shares of Apple, whose valuation has more than doubled in about three years to nearly US$2.5 trillion, were down 1.7 per cent to US$144.24 in after-hours trading after the call.

Earlier in the day, Apple reported third-quarter sales and profits that beat analyst expectations as consumers bought premium versions of its 5G iPhones and signed up for its subscription services. China sales grew 58 per cent to US$14.76 billion in the quarter, which ended June 26.

Driven by the better-than-expected iPhone sales, total revenue hit US$81.43 billion, above analyst expectations of US$73.30 billion, according to IBES data from Refinitiv. Apple’s profits were US$21.74 billion, or US$1.30 per share, above estimates of US$1.01 per share, according to Refinitiv.

During the investor call, Chief Executive Tim Cook said that chips affected by the shortages are made with older technology but are still needed as supporting parts to make the company’s flagship device, the iPhone.

“We do have some shortages,” Cook said, “where the demand has been so great and so beyond our own expectation that it’s difficult to get the entire set of parts within the lead times that we try to get those.”

Cook declined to predict whether the shortages would last into Apple’s fiscal first quarter, when it typically sees its biggest iPhone sales. Angelo Zino, an analyst with research firm CFRA, said Apple could be stockpiling chips for its next generation of phones to the detriment of current models.

 5G

Apple CEO Tim Cook seen with a purple iPhone 12 during a special event at Apple Park in Cupertino, California, 20 April 2021. Photo: Apple Inc Handout via EPA-EFE

“Apple will want as many chips as it can get its hands on,” Zino said. “But when you couple that with the existing supply constraints, Apple is likely going to have a more difficult time meeting demand this year.”

Apple had told investors last quarter that the chip shortage could hold back sales by US$3 billion to US$4 billion.

In an interview on Tuesday, Cook told Reuters that the hit to overall revenue in the third quarter was “lower than the low end” of its previously forecasted range.

Apple’s strongest sales growth came from China, where Cook told Reuters that customers are buying up accessories such as the Apple Watch to pair with their iPhones.

“It wasn’t just iPhone. We set a new quarterly record for Mac, for wearables, home and accessories, and for services” in China, Cook said. “It was our strongest geography.”

Upgrading for 5G appeared to be driving a better buying cycle for iPhones than many analysts expected. Apple said iPhone sales were US$39.57 billion, up nearly 50 per cent from a year earlier and above analyst expectations of US$34 billion.

Cook told Reuters that Apple’s iPhone 12 Pro and 12 Pro Max, the premium tier of the device, were strong sellers. That helped pushed gross margins to 43.3 per cent, above estimates of 41.9 per cent, according to Refinitiv.

On the conference call, he said 5G adoption is in its early stages of deployment in many countries around the world. Some analysts wondered whether that means the boom in 5G iPhone sales won’t last – consumers may buy a phone ahead of time and keep it until the service rolls out. Other analysts believe that means Apple can keep riding the boom.

“The low 5G penetration is a reminder that the best is yet to come for the company’s 5G iPhones,” said Tom Forte, an analyst at D A Davidson & Co.

The other major driver of Apple’s results was its services business, which includes paid subscriptions for television and music as well as its App Store. Services revenue reached a record high of US$17.49 billion, up by a third from a year earlier and above analyst expectations of US$16.33 billion. Cook told Reuters that Apple now has 700 million subscribers on its various platforms, up from 660 million a quarter earlier.

Chief Financial Officer Luca Maestri told investors that services growth will slow, however.

“We expect still-significant growth in services but not to the level that we’ve seen in June,” he said on the call.

Cook said Apple set quarterly sales records in many of its first-party services, including its AppleCare hardware insurance plans, which had slowed somewhat during the pandemic when many of the company’s retail locations were closed.

Sales of iPads and Macs were US$7.37 billion and US$8.24 billion, compared with analyst expectations of US$7.15 billion and US$8.07 billion, according to Refinitiv data.

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