Apple Says Covid-19 Lockdowns in China Loom Over Sales

Apple Inc.

AAPL 4.52%

warned on Thursday that the resurgence of Covid-19 in China threatens to hamper sales by as much as $8 billion in the current quarter — a setback after seeing improvements in the supply chain during the first three months of the year.

The iPhone maker’s advice came Thursday shortly after the company posted one of the best quarters in its 46-year history. The whip of news sent the company’s stock into a shockwave in aftermarket trading – first by 2% and then by more than 5%.

Many investors had anticipated a January-March quarter eclipse and were more attuned to any clues from Chief Executive Tim Cook about his outlook on the future amid high inflation, pandemic lockdowns in China and the war in Ukraine.

“I want to recognize the challenges we see, from supply chain disruptions caused by both Covid and silicon shortages to the devastation caused by the war in Ukraine,” Mr Cook told investors. “We are not immune to these challenges.”

The new pain points for the Cupertino, California-based company come as areas around Shanghai, where Apple has many suppliers, face government shutdowns to contain Covid-19 infections.

“Supply constraints caused by Covid-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products,” said Luca Maestri, Apple’s chief financial officer, during a public conference call.

Mr. Maestri said the restrictions will reduce revenue by $4 billion to $8 billion in the three months through June. The lockdowns are also expected to dampen demand in China.

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The challenges come after a blockbuster quarter. Apple’s recent revenue rose 9% to $97.3 billion, well above analyst expectations of $94 billion. Earnings per share rose to $1.52 from $1.40 a year earlier — surpassing estimates of $1.42 per share and a record fiscal second quarter for Apple.

The results reflected the company’s ability during that period to address the supply chain challenges that plagued the tech and auto industries, allowing the company to sell more iPhones than Wall Street had anticipated. “The supply constraints were significantly lower than what we had experienced in the December quarter,” Cook said in an interview on Thursday.

“Covid is difficult to predict,” Cook added during the conference call. He noted that “almost all affected final assembly plants have now been restarted.”

Apple’s outlook contributed to a turbulent afternoon as investors worried about the overall economy. Amazon.com Inc.

shares fell more than 10% after the e-commerce giant posted its first quarterly loss since 2015 on slowing sales growth.

Apple’s results were in line with January expectations, when the company forecast a record high for the period from March, although it grew at a slower pace than in the previous quarter, including the Christmas break, when the company posted record sales and profits. . thanks to the latest iPhones, Mac computers and iPad tablets.

The $97 billion quarter is the third best in Apple history for total revenue, but one of the slowest for growth since the pandemic began more than two years ago. The company has seen double-digit year-over-year quarterly growth since the launch of the first iPhone with 5G capabilities in October 2020.

Daniel Morgan, a senior technology-focused portfolio manager at Synovus Trust Co., which has Apple among its top interests, called supply chain concerns, Covid-19 and inflation “the biggest concerns on the street” for the current quarter. Bernstein Research analyst Toni Sacconaghi echoed that sentiment in a note this week, forecasting solid quarterly results and asking, “But then what?”

In January, Mr. Cook had said he expected the effects of supply chain challenges to improve in March compared to the last three months of 2021, when Apple estimated it was missing more than $6 billion in sales due to inventory constraints.

But his optimism came before the pandemic flared up again in Asia and war broke out in Europe. Apple suppliers in China have been hit this month with strict government measures to contain the spread of Covid-19. Loup Funds estimates that 85% of Apple’s products are assembled in China, while the region accounts for nearly 20% of the company’s annual sales.

In January, Mr. Maestri warned that the March quarter would have an unusual year-on-year comparison. iPhone sales were more robust than usual in the comparable period of 2021, as pandemic-related delays disrupted the typical fall launch and pushed those sales back. Total sales a year earlier increased by 54%.

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iPhone sales rose 5% in the quarter to $50.6 billion from a year earlier. Analysts had expected a growth of 1%. The company no longer discloses unit sales for its smartphone, which accounts for about half of Apple’s annual sales.

Those sales may have benefited from strong demand in China, where the latest iPhones are resonating with consumers, analysts said. They have attributed part of a projected decline in iPad sales to Apple, prioritizing iPhone production during the period. iPad sales fell 2.1% to $7.6 billion. Mac computer sales rose 15% to $10.4 billion, well ahead of analysts’ expectations for flat results.

In Thursday’s interview, Mr Cook said iPad’s results were hampered by “very significant supply constraints”.

While device sales are slowing down, digital content sales are coming back into the picture. The so-called services segment, which includes iTunes and the App Store, grew 17% in the three months to March to $19.8 billion. Analysts had expected growth of 17%.

write to Tim Higgins at Tim.Higgins@WSJ.com

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