Apple disappoints with forecast dogged by supply chain struggles

Expectations are high for Apple, which recently regained the title of world's most valuable company, retaking the top spot from AI chip leader Nvidia NVDA.O. Its shares have risen more than 22% this year. Earlier Thursday, it posted results that broadly beat market expectations, but relatively soft sales of services spooked some investors, who also were uncertain whether bumper demand would continue if Apple hiked iPhone prices. Apple said sales for its fiscal third quarter ended June 27 rose 16.4% to $109.42 billion, compared with analyst estimates of a 15.5% rise, according to LSEG data. Customers snapped up iPhones and MacBooks while prices increased across the consumer electronics sector. Third-quarter profits were $2.02 per share, with 11 cents attributable to tariff refunds from the U.S. government. Excluding the refunds, profits still beat Wall Street estimates of $1.89 per share. Driving results was a 21.7% increase in iPhone sales to $54.25 billion, above estimates of $53.86 billion. Those were Apple's best-ever iPhone sales for a third quarter, when phone sales typically begin to slow as customers anticipate fall models. This year, customers raced to buy iPhones after a global memory-chip crunch prompted Apple to raise prices of Macs and iPads. Apple has so far spared its signature product, with Wall Street analysts increasingly expecting an iPhone price hike around the September launch event. Bob O'Donnell, chief analyst at TECHnalysis Research, said investors may worry the quarter reflected a buying flurry that may not carry through. "I do think it's possible people are going to continue to buy the existing phones, because of the price increases," he said. "The big question is, what's going to happen on Macs in this quarter, when the new prices are fully there?" Gross margins, which Apple had warned would come under pressure from memory costs, were 50.1%. Tariff refunds contributed two points; excluding them, margins were 48.1%, near the midpoint of guidance and above estimates of 47.92%. Apple forecast sales for the current quarter ending in September would grow more slowly than Wall Street targeted as the iPhone maker struggled to get the parts it needed to deliver products, and shares fell 5.5% in after-hours trade. Apple and the technology industry generally have been scrambling to meet demand for new products, especially those with high-end processors and memory, and executives described the weaker forecast in terms of supply, not demand. "We're seeing some very significant (supply) constraints currently with limited flexibility in the supply chain to remedy it," Chief Executive Tim Cook said during the call, adding that Apple was "evaluating all options" for alternative suppliers of memory chips. Chief Financial Officer Kevan Parekh told analysts on a call that Apple expects revenue growth of 9% to 11% in the quarter compared with a year earlier. That was less than the 12% rise predicted by Wall Street, according to LSEG data. He forecast iPhone revenue would grow at a mid-teens rate, compared with Wall Street's target of 17.6%, and that gross profit margins would be between 47% and 48%. In an interview with Reuters, Cook said the main supply constraint in the just-ended fiscal third quarter was an industry shortage of advanced chipmaking technology used to produce the Apple silicon chips at the heart of its devices. That was particularly true for the Mac lineup, whose sales grew 29% on the strength of the entry-level MacBook Neo and the high-end MacBook Pro despite price increases. "If you look at the root causes behind those, it's that we're having an incredibly strong product cycle beyond our expectations, and the (advanced chipmaking) supply chain just fundamentally has less flexibility in it to meet the high levels of demand," Cook told Reuters. Mac sales were up 28.7% to $10.35 billion, beating estimates of $8.74 billion. iPad sales fell 5.9% to $6.19 billion, below expectations of $6.92 billion, which Cook attributed to a "tough compare" against last year's launch of the budget A16 iPad. Greater China revenue rose 22.4% to $18.82 billion but missed the $19.67 billion target of six analysts polled by Visible Alpha. Apple's second-biggest revenue area, its services business, rose 12.1% to $30.74 billion, missing estimates of $31.22 billion. D.A. Davidson analyst Gil Luria said services growth was slowing. "Investors are concerned that if services are decelerating while iPhone is growing more than 20%, it may slow down even more as iPhone sales come back down to earth," he said. Parekh said App Store revenue from mobile games was under pressure. The European Union has required Apple to open iPhones to alternative app stores, and a U.S. battle with "Fortnite" maker Epic Games now lets users pay outside Apple's in-app system. "We did see some headwinds in mobile gaming, and then keep in mind we also made some changes to the App Store business model in certain countries," Parekh said, adding the Epic Games U.S. link-out ruling continues to weigh. With help from Alphabet's Google GOOGL.O, Apple earlier this year unveiled a revamped Siri with new AI features. Cook said heavy users could pay extra: "We will have some kind of upgrade possibilities on iCloud Plus, where people can buy up the stack," he said.

Apple disappoints with forecast dogged by supply chain struggles

Third-quarter results beat expectations

Apple's September-quarter forecast falls short

Mac, iPad and China sales show mixed performance

Services growth slows as App Store headwinds persist

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