Key takeaways
- Apple shares closed 7.4 per cent lower after its September-quarter revenue outlook missed Wall Street expectations.
- Fiscal third-quarter revenue rose 16 per cent to a record US$109.4 billion, while diluted earnings increased 29 per cent to US$2.02 per share.
- iPhone and Mac sales exceeded forecasts, but Services, iPad and Greater China revenue fell short of consensus estimates.
- Apple expects worsening processor shortages and higher memory costs to constrain iPhone, Mac and iPad availability.
- Tim Cook said Apple had “reluctantly” raised some prices amid a “100-year flood on memory pricing.”
Apple Inc. (NASDAQ:AAPL) shares suffered their steepest post-earnings decline in more than a decade Friday as supply-chain warnings and a weaker-than-expected forecast overshadowed record quarterly revenue.
The stock closed 7.4 per cent lower at US$308.91 after falling as much as 9.7 per cent intraday. The decline erased approximately US$359 billion from Apple’s market capitalization, according to Dow Jones Market Data, and came only days after the company briefly crossed a US$5 trillion valuation.
Investors sold the shares despite Apple reporting better-than-expected fiscal third-quarter revenue and profit, powered by strong demand for iPhones and Macs.
iPhone and Mac sales drive record quarter
Revenue for the three months ended June 27 increased 16 per cent year over year to US$109.42 billion. Net income rose 27 per cent to US$29.79 billion, while diluted earnings climbed from US$1.57 to US$2.02 per share.
Apple described the period as its strongest June quarter to date, with records for total revenue, earnings per share and operating cash flow. The company also reached new June-quarter highs across iPhone, Mac and Services revenue.
“Today, Apple is proud to report our strongest June quarter ever,” Cook said in the company’s results.
iPhone revenue jumped 21.7 per cent to US$54.25 billion, exceeding the US$53.86 billion analysts expected. The performance was particularly strong for a quarter in which customers often delay purchases ahead of Apple’s September product launches.
Mac revenue climbed 28.7 per cent to US$10.35 billion, comfortably above the US$8.74 billion consensus estimate. Wearables, Home and Accessories revenue increased 6.5 per cent to US$7.88 billion.
However, iPad sales declined 5.9 per cent to US$6.19 billion, missing expectations of approximately US$6.92 billion. Cook attributed the decline to a difficult comparison with the previous year’s product launch.
Greater China revenue increased more than 22 per cent to US$18.82 billion but fell short of the roughly US$19.58 billion analysts anticipated.
Services growth misses expectations
Apple’s Services division, which includes the App Store, Apple Music, iCloud, Apple TV and payment products, generated US$30.74 billion in revenue.
That represented growth of 12.1 per cent and a new June-quarter record, but remained below the approximately US$31.4 billion Wall Street expected.
The miss concerned investors because Services generally carries substantially higher margins than Apple’s hardware business and benefits from growth in the company’s installed device base.
Chief Financial Officer Kevan Parekh said mobile gaming faced headwinds, while changes to the App Store business model in several countries also affected performance. The U.S. court ruling allowing developers to direct users toward external payment options continued to weigh on revenue.
Apple’s active installed base nevertheless reached a record across every major product category and geographic region, preserving opportunities to sell subscriptions and other digital services over the longer term.
Tariff refund boosts earnings and margin
Apple reported a gross margin of 50.1 per cent, up from 46.5 per cent one year earlier and ahead of market expectations.
However, tariff refunds contributed approximately two percentage points to the margin and US$0.11 to diluted earnings per share. Excluding that benefit, gross margin would have been roughly 48.1 per cent.
The refunds therefore accounted for a meaningful portion of the quarterly earnings beat and will not necessarily provide the same support in future periods.
Apple declared a quarterly dividend of US$0.27 per share, payable August 13 to shareholders of record on August 10.
Memory prices force Apple to raise prices
The company is contending with two related component pressures: sharply higher memory prices and limited availability of the advanced semiconductor nodes used to manufacture Apple-designed processors.
Artificial intelligence developers and cloud-computing companies have absorbed increasing quantities of memory chips and advanced manufacturing capacity for data centres. That has reduced the supply available to makers of smartphones and personal computers.
Apple partially protected its June-quarter margins by using previously purchased memory inventory. However, that buffer is declining, and management expects to pay more for memory during the September quarter.
Apple raised prices on certain Mac and iPad models in June. Cook said the decision reflected what he characterized during the earnings call as a “100-year flood on memory pricing.”
The company has not said whether it will increase prices for its next iPhone lineup. Analysts believe higher prices are possible, although Apple must balance protecting margins against the risk of weakening consumer demand.
Supply constraints expected to worsen
Apple experienced supply limitations during the June quarter, primarily affecting Macs and, to a lesser extent, iPhones and iPads.
Management expects those constraints to intensify sequentially during the September quarter and affect all three categories. Stronger-than-anticipated demand has contributed to the shortage, but Apple also has less flexibility than usual to redirect production or secure additional components.
“We’re seeing some very significant constraints currently, with limited flexibility in the supply chain to remedy it,” Cook said.
The warning was notable because supply-chain management has historically been one of Apple’s greatest operational strengths. Investors are now questioning whether even the company’s purchasing scale is sufficient to overcome shortages created by the AI infrastructure boom.
September-quarter forecast disappoints
Apple expects revenue to grow between 9 and 11 per cent during its fiscal fourth quarter. The midpoint implies sales of approximately US$113 billion, below the roughly US$114.9 billion analysts anticipated.
Management forecast iPhone revenue growth in the mid-teens, compared with Wall Street’s expectation of approximately 17.6 per cent. Gross margin is projected between 47 and 48 per cent as higher memory expenses offset declining costs for some other components.
Foreign-exchange movements are expected to reduce revenue growth by approximately 2.5 percentage points.
The forecast suggests underlying demand remains healthy but that component availability may prevent Apple from fully converting that demand into sales during one of its most important product-launch periods.
At least four brokerages lowered their price targets following the results, while three raised them. The median Wall Street target declined to US$330, according to LSEG data.
Investor attention will now turn to Apple’s September hardware launches and its leadership transition. Cook’s appearance Thursday marked his final earnings call as chief executive before John Ternus takes over September 1, with Cook moving into the executive-chairman role.
Apple’s record quarter demonstrated continued strength in its core hardware franchise. However, with Services growth slowing and component shortages expected to worsen, investors placed greater weight on the risks facing the next quarter than on the results already delivered.