Apple warns memory costs will squeeze holiday margins

Apple says the price of memory chips is now its biggest drag on profitability. The company forecast that gross margin will fall to between 45% and 46% in the December quarter, down from 47.9% in its fiscal fourth quarter, and said the cost pressure will continue into next year. "What we're seeing with memory pricing right now is unprecedented," Chief Executive John Ternus told analysts on the company's November 2 earnings call, his first since succeeding Tim Cook (The New York Times; Fortune).rte.ie+2

The warning took attention away from a quarter that beat expectations. Revenue rose nearly 12% to $114.48 billion, profit climbed to $30.71 billion, and iPhone sales grew 17% to $57.58 billion.nytimes.com

Margin pressure deepens

Ternus said Apple expects "even higher memory costs" in the December quarter, with costs "continuing to increase" after that. Price increases on Macs and iPads in late June and on iPhones in September will offset part of the pressure. Chief Financial Officer Kevan Parekh said tariff refunds added about one percentage point to the September margin. Without them, company gross margin would have fallen about one point from the June quarter, "primarily driven by higher memory costs" (Fortune; Yahoo Finance). He said costs from the rollout of Siri AI are also part of the lower December guidance.uk.finance.yahoo.com+3

The margin forecast came in below the 46.3% analysts had expected. The company's 7% to 10% revenue growth outlook beat the average estimate but fell short of some brokers' hopes. Shares fell as much as 4% after hours on Monday and were still lower in overnight trading ahead of Tuesday's session.finance.yahoo.com+2

Locking in supply

Asked whether Apple had signed long-term memory contracts, Chief Operating Officer Sabih Khan did not confirm a deal. He said the company is working closely with its suppliers and that manufacturing purchase obligations rose by $33 billion during the quarter. Inventory grew 31.1% from the prior quarter to $14.54 billion, up 154.3% from a year earlier, as Apple stockpiled components. Ternus said the benefit from that cheaper inventory will shrink over time.en.sedaily.com+2

An AI-driven shortage

The squeeze comes from a global shortage of memory and storage chips. Data centers building artificial intelligence systems are taking up much of the supply. Khan did not rule out further price increases on Apple devices. He also said supply of the new foldable iPhone Duo is constrained, adding that "it is really hard to predict when supply and demand will be in balance".finance.yahoo.com+2