Chip Crunch to Persist Across Apple Product Lines for Holiday Quarter

Conflicting projections of the impact of COVID-19 were one of the factors behind the supply-demand mismatch that continues to plague the global supply chain, said Apple CEO Tim Cook on a Thursday earnings call. Some within and outside the industry “thought that the pandemic would reduce demand” so they “pulled their orders down” and “things reset,” Cook said: “What really happened was demand went up.” Yields also came into play, he said.

For the holiday season, Apple faces chip shortages across product lines, amid high demand, Cook said. The company is working with its manufacturing partners to make sure they can supply Apple needs and that the company’s demand statements are accurate, said the executive. The company is also reducing lead times and cycle times “so that when you get a chip off a fab, that as quickly as possible it’s in a product and shipping.” Apple is getting “a lot more supply in Q1 than we had in Q4" that ended Sept. 25, he said.

Though COVID-related manufacturing disruptions in Southeast Asia are easing, chip shortages continue. Components shortages and pandemic disruptions cost Apple $6 billion in fiscal Q4 revenue, and Cook expects a larger hit in the December quarter. Shortages are happening on legacy nodes, “primarily with bottom supply,” Cook said. He wouldn’t predict when shortages will ease.

On the ability to recover lost holiday sales resulting from product shortages, Cook said there are some products people buy as gifts “that if it's not there … it's perishable.” Others are items people will wait for that will be sold “in a different time period.”

In the December quarter, Apple expects revenue growth for all categories except iPad, which is expected to decline due to supply constraints, said Chief Financial Officer Luca Maestri. Management expects Services’ growth rate to “decelerate” from the September quarter “but remain strong.” All categories grew in the September quarter, with products up 30% from the year-ago quarter.

Despite the challenges, Apple posted record September revenue of $83.4 billion, a 29% gain from the year-ago quarter. It set quarterly records for iPhone, iPad, wearables, home and accessories products and an all-time record for Macs. Services grew 26% year on year to $18.3 billion, above expectations. Maestri cited record performance in Apple Care, the music and video businesses, advertising, payments and services. The App Store set a September quarter record, he said.

Apple is “very, very focused" on discussing the privacy and security elements of the App Store with regulators and legislators, said Cook, responding to a question from Morgan Stanley analyst Katy Huberty on how Apple will balance consumer preference for App Store transactions with legislators’ push for more choice. Huberty cited a Morgan Stanley survey of 4,000 consumers showing most customers don’t want to pay for apps directly to developers because they value the security and privacy of transactions within the App Store. Apple is working “to explain the decisions that we've made that are key to keeping the privacy and security there, which is to not have sideloading" or to open the iPhone to unreviewed apps, which would sidestep privacy restrictions Apple has put on the App Store, Cook said.

Apple expects the subsidy model of the iPhone to extend to other products, Cook said. Buying products outright is still the most popular way to buy Apple products, but the company is seeing more demand for monthly payment models, he said. The company intends to offer customers products “in a way that they want to pay for it.”

After numerous store closings to address COVID-19 concerns, all Apple Stores are now open, said Cook, “and have been for seven weeks.” Among recent Apple Store openings are one in Changsha, Apple’s first in China’s Hunan province; a third in Istanbul, Turkey; and one in the Bronx, New York, giving Apple retail store coverage in all five New York City boroughs.