Apple Says Global Chip Shortage Will Start to Affect iPhone Production, Growth Forecast Slows

Apple executives 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.

By Reuters | Updated: 28 July 2021 13:53 IST

Apple Says Global Chip Shortage Will Start to Affect iPhone Production, Growth Forecast Slows

Apple executives said revenue for the current fiscal fourth quarter will grow by double-digits

Highlights

Shares of Apple were down 1.7 percent to $144.24
Growth will also slow in Apple's closely watched services business
Apple told investors chip shortage could hold back sales by $3 billion

Apple 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 percent 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.

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Shares of Apple, whose valuation has more than doubled in about three years to nearly $2.5 trillion (roughly Rs. 1,85,89,882 crores), were down 1.7 percent to $144.24 (roughly Rs. 10,725) 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 percent to $14.76 billion (roughly Rs. 1,09,754 crores) in the quarter, which ended June 26.

Driven by the better-than-expected iPhone sales, total revenue hit $81.43 billion (roughly Rs. 6,05,478 crores), above analyst expectations of $73.30 billion (roughly Rs. 5,45,085 crores), according to IBES data from Refinitiv. Apple's profits were $21.74 billion (roughly Rs. 1,61,666 crores), or $1.30 (roughly Rs. 97) per share, above estimates of $1.01 (roughly Rs. 75) per share, according to Refinitiv.

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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.

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"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 $3 billion (roughly Rs 22,309 crores) to $4 billion (roughly Rs. 29,748 crores).

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.

China, 5G

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 $39.57 billion (roughly Rs. 2,95,295 crores), up nearly 50 percent from a year earlier and above analyst expectations of $34 billion (roughly Rs. 2,52,885 crores).

Cook told Reuters that Apple's iPhone 12 Pro and iPhone 12 Pro Max, the premium tier of the device, were strong sellers. That helped pushed gross margins to 43.3 percent, above estimates of 41.9 percent, 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 $17.49 billion (roughly Rs. 1,30,073 crores), up by a third from a year earlier and above analyst expectations of $16.33 billion (roughly Rs. 1,21,446 crores). 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 $7.37 billion (roughly Rs. 54,812 crores) and $8.24 billion (roughly Rs. 61,288 crores), compared with analyst expectations of $7.15 billion (roughly Rs. 53,181 crores) and $8.07 billion (roughly Rs. 60,024 crores), according to Refinitiv data.

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