Apple Says Covid-19 Lockdowns in China Loom Over Sales

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Company posts upbeat results, but CEO Tim Cook warns of a range of supply-chain challenges

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Many investors had expected a blowout January-through-March quarter and were more attuned to any indications from Chief Executive Tim Cook on his view of the future amid high inflation, pandemic lockdowns in China and the war in Ukraine.

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

The new pain points for the Cupertino, Calif.-based company come as areas around Shanghai, where Apple has many suppliers, face government lockdowns aimed at curbing Covid-19 infections.

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

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

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

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

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

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

Dropped 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 guidance from January, when the company predicted a record for the March period, though growing at a slower rate compared with the previous quarter—which included the Christmas holiday—when the company marked all-time revenue and profit highs thanks to the latest iPhones, Mac computers and iPad tablets.

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

Daniel Morgan, a senior portfolio manager who focuses on technology at Synovus Trust Co., which counts Apple among its largest holdings, called supply-chain concerns, Covid-19 and inflation “the Street’s biggest worries” about the current quarter. Bernstein Research analyst Toni Sacconaghi echoed that sentiment in a note this week, predicting 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 the March period compared with the final three months of 2021, when Apple estimated it lost out on more than $6 billion in sales because of inventory constraints.

But his optimization came before the pandemic flared again in Asia and war erupted in Europe. Apple suppliers in China have been hit this month by stringent government lockdowns aimed at containing the spread of Covid-19. Loup Funds estimates that 85% of Apple’s products are assembled in China while the region accounts for almost 20% of the company’s annual sales.

In January, Mr. Maestri cautioned the March quarter would face an unusual year-earlier comparison. iPhone sales were more robust than normal in the 2021 comparable period because pandemic-related delays disrupted the typical fall launch and pushed back those sales. Overall sales a year earlier rose 54%.

Sales of the iPhone rose 5% to $50.6 billion in the past quarter compared with a year earlier. Analysts had expected 1% growth. The company no longer discloses unit sales for the smartphone, which makes up about half of Apple’s annual revenue.

Those sales may have benefited from strong demand in China, where the latest iPhones have been resonating with consumers, analysts said. They have attributed some of an expected falloff in iPad sales to Apple giving priority to iPhone production during the period. Sales of the iPad dropped 2.1% to $7.6 billion. Mac computer sales rose 15% to $10.4 billion, far exceeding analysts’ expectations for flat results.

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

Amid slowing device sales, digital content sales come back into focus. The so-called services segment, which includes iTunes and the App Store, grew 17% to $19.8 billion in the three months through March. Analysts had expected 17% growth.

Write to Tim Higgins at [email protected]

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Credit: www.wsj.com /

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