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'We Don’t Have a Tin Ear'

Apple Eyeing 'Substantially Larger' $4B-$8B Supply Chain Hit in June Quarter

After reporting record Q2 FY ’22 revenue, Apple CEO Tim Cook warned on a Thursday earnings call of continued COVID-19-related supply constraints and silicon shortages that are expected to dent June quarter revenue by $4 billion-$8 billion. That’s “substantially larger” than the company experienced in the March quarter, and the impact will be across most categories, he said. The company didn’t give June quarter revenue guidance.

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Apple is monitoring daily sales “very closely,” Cook said in response to an analyst question on the impact of inflation, market volatility and rising interest rates on product demand. “We are seeing inflation,” he said, saying it was reflected in the March quarter gross margin, which was down 10 basis points to 43.7% from the previous quarter, and in June quarter guidance. The company’s main focus now “is on the supply side,” Cook said, saying it isn’t forecasting when the silicon shortage will improve.

COVID-19 disruptions are having an impact on customer demand in China, Cook said. He noted factory lockdowns in China hadn’t started in the March quarter so supply constraints were “significantly lower” than in the December quarter, driven by silicon shortages and issues with legacy nodes. Looking ahead, COVID-related disruptions and silicon shortages will affect supply, Cook said, though almost all the affected final assembly factories have restarted.

Q2 growth was strongest in the Americas at 19%, to $40.9 billion, the company said. Apple grew sales in Europe by 5% to $23.2 billion despite pausing sales in Russia in March, which had an impact of 150 basis points, said Chief Financial Officer Luca Maestri. Sales were lower in Japan and the rest of Asia Pacific, which Maestri attributed to foreign exchange rates and timing of the newest iPhone release.

On how Apple expects to navigate supply chain issues in the future, after a period of disruptions caused by the pandemic, trade wars, power outages and shipping challenges, Cook noted Apple’s global supply chain, including the U.S., means “we’ll probably be doing even more here as more chips are produced here.”

We don’t have a tin ear,” Cook said, noting the company is learning every day and making changes. “In this business, you don’t want to hold a ton of inventory,” he said, saying the company wants to “work on cycle times” to move product quickly, taking “strategic inventory” only in places where a buffer is necessary for interruptions. “In today’s world, it’s not really possible for us to have buffer on silicon,” he said.

Tablets were the outlier as the only Apple hardware category to have declines in the March quarter. Maestri blamed supply chain constraints for a 2% decline in iPad sales to $7.6 billion. Half of iPad customers in the quarter were new to the product, Maestri said. IPhone sales grew 5% in the March quarter to $50.6 billion, despite supply chain constraints, said Maestri. Mac sales grew 15% to $10.4 billion, with nearly half of customers new to the Apple PC, he said. The wearables business grew 12% to $8.8 billion, with two-thirds of Apple Watch customers new to the product.

Cook underscored the company’s growing installed base of computer, mobile device and wearables users as support for its services business. Services grew 17% to $19.8 billion for the quarter. Paid subscriptions grew by 165 million to 825 million. Total Q2 revenue was $97.3 billion for the quarter ended March 26, a 9% year-on-year bump from the 2021 quarter. Apple shares closed 3.7% lower Friday at $157.65.