Apple Q2 better than expected, but supply chain constraints, memory costs loom

Apple reported better-than-expected fiscal second quarter results due to services growth. Apple's various product categories excluding the iPhone were also ahead of Wall Street estimates.

The company, which will see a CEO transition from Tim Cook later this year, delivered earnings of $2.01 a share in the second quarter on revenue of $111.2 billion, up 17% from a year ago. Wall Street was expecting earnings of $1.95 a share.

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Cook said Apple delivered a record March quarter. Apple also launched the iPhone 17e, new iPad Air and budget MacBook Neo to its product lineup.

By the numbers for the second quarter:

• iPhone revenue was $56.99 billion in the second quarter, up from $46.84 billion a year ago.
• Mac revenue was $8.4 billion, up from $9.75 billion a year ago.
• iPad revenue was $6.9 billion, up from $6.4 billion a year ago.
• Wearables were $7.9 billion, up from $7.52 billion a year ago.
• Services revenue was $30.97 billion, up from $26.6 billion a year ago.
• China revenue was $20.5 billion, up from $16 billion a year ago.
• Americas revenue was $45.09 billion, up from $40.3 billion a year ago.

During the conference call, Cook handed off to incoming CEO John Ternus for initial comments. "Over the coming months, John and I will be working closely together to make sure this transition is perfectly smooth. I very much look forward to stepping into the role of executive chairman on September 1. I am incredibly optimistic about Apple's future, and I know we have the right team in place to deliver on the promise of this company," said Cook.

Ternus added:

"We have an incredible roadmap ahead. And while you're not going to get me to talk about the details of that roadmap, suffice it to say this is the most exciting time in my 25 year career at Apple to be building products and services."

On the conference call, Cook said:

• "We achieved March quarter revenue records in both developed and emerging markets, and saw double digit growth in nearly every emerging market we track, including India."
• "iPhone had an excellent quarter, with $57 billion in revenue, a March quarter record despite supply constraints."
• "Mac revenue was $8.4 billion for the March quarter, up 6% from a year ago, despite supply constraints driven by higher than expected levels of demand. We're delighted with the reception of what is the most advanced Mac lineup in our history. We set March quarter records for upgraders and customers new to Mac."
• "At WWDC 26 we can't wait to share what we've been working on, from AI advancements to exciting new software and developer tools. It's going to be an incredible week."

Apple CFO Kevan Parekh said Apple saw supply constraints on the iPhone and Mac. Parekh also touted Mac and iPhone traction in the enterprise as well as Google Chromebook displacements in education. As for the June quarter, Parekh said Apple's revenue growth will be in the 14% to 17% range.

Cook said supply chain issues remain and will likely impact the Mac. He said:

"We were constrained during the March quarter, and this was primarily on iPhone and to a lesser extent, on the Mac. And as we talked about in the last call, the constraints were primarily driven by the availability of the advanced nodes our SOCs are produced on. You look forward to the June quarter, the majority of our supply constraints will be on several Mac models, given the continued high levels of demand that we're seeing, and we have less flexibility in the supply chain than we normally would for Mac in the June quarter."

Cook added that the Mac Mini and Mac Studio are being gobbled up to build AI tools. He added that it may take several months for the Mac Mini and Mac Studio to balance supply and demand. Memory costs will be an ongoing issue.

"In the December quarter, we really had a minimal impact due to memory. And you kind of see that in the gross margin results. We said it would be a bit more in the March quarter. And we did see higher memory costs in the March quarter, and they were partially offset from carrying inventory we had," said Cook. "For the June quarter, and what's embedded in the guidance, we expect significantly higher memory costs. We don't give color beyond June, but I can tell you that beyond the June quarter we believe memory costs will drive an increasing impact on our business, and we'll continue to evaluate this. We'll look at a range of options."