Apple Inc., the world’s most valuable company, saw its shares drop by more than 5% on Wednesday, after it reported lower-than-expected earnings for the fourth quarter of 2023. The tech giant blamed the disappointing results on supply chain issues, rising costs, and weak demand for its flagship iPhone.
Supply Chain Issues: A Global Challenge
Apple said that it faced severe supply chain constraints in the quarter, which affected its ability to produce and deliver its products to customers. The company said that it lost about $6 billion in revenue due to the shortages of chips, components, and materials, which have been plaguing the global economy amid the Covid pandemic and geopolitical tensions.
Apple CEO Tim Cook said that the supply chain issues were “very, very challenging” and “unprecedented” in his 10 years as CEO. He said that the company had to make “trade-offs” and “compromises” in its production plans, and that it was working hard to mitigate the impact of the shortages.
Cook also said that he expected the supply chain issues to continue in the first quarter of 2024, but that he was optimistic that they would improve over time. He said that the company had a strong relationship with its suppliers and partners, and that it was investing in expanding its capacity and diversifying its sources.
Rising Costs: A Margin Squeeze
Apple also said that it faced rising costs in the quarter, which eroded its profit margins and earnings. The company said that its gross margin, which measures how much profit it makes from each dollar of revenue, fell to 38.8% from 39.8% a year ago. The company said that its operating expenses, which include research and development, marketing, and administration, rose by 13% year-over-year to $12.9 billion.
Apple CFO Luca Maestri said that the rising costs were driven by several factors, such as higher freight and logistics costs, higher labor costs, higher commodity prices, and unfavorable currency exchange rates. He said that the company tried to offset some of these costs by increasing its prices for some of its products, such as the iPhone 13 and the Apple Watch Series 7.
Maestri also said that he expected the cost pressures to persist in the first quarter of 2024, but that he hoped that they would ease in the second half of the year. He said that the company was focused on managing its costs efficiently and delivering value to its customers.
Weak Demand: A Demand Shift
Apple also said that it faced weak demand for its iPhone in the quarter, which accounted for about half of its revenue. The company said that its iPhone revenue fell by 9% year-over-year to $42.4 billion, missing analysts’ expectations of $45.1 billion. The company said that its iPhone sales were affected by several factors, such as lower upgrade rates, longer replacement cycles, and increased competition.
Cook said that the weak demand for the iPhone was partly due to a “demand shift” from customers who preferred to buy other products from Apple’s portfolio, such as the iPad, the Mac, or the AirPods. He said that these products saw strong growth in the quarter, with revenue increasing by 21%, 16%, and 24%, respectively.
Cook also said that he was confident that the demand for the iPhone would rebound in the future, as more customers would upgrade to the latest models or switch from Android devices. He said that the iPhone 13 had received positive feedback from customers and critics alike, and that it offered innovative features such as a faster processor, a better camera system, and a longer battery life.
The Outlook: A Cautious Guidance
Apple did not provide a formal guidance for the first quarter of 2024, citing the uncertainty and volatility in the market. However, Maestri gave some indications of what to expect from the company’s performance in the next quarter.
Maestri said that he expected Apple’s revenue to grow by single digits year-over-year in the first quarter of 2024, compared to a 21% growth in the same quarter a year ago. He also said that he expected Apple’s gross margin to be between 38% and 39%, lower than the 40.8% margin in the same quarter a year ago.
Maestri said that these expectations reflected the challenges and opportunities that Apple faced in the current environment. He said that Apple was confident in its long-term growth potential and competitive advantage, and that it would continue to invest in innovation and customer satisfaction.
