John Ternus' first earnings report as Apple CEO was going fine until it was time to issue a forecast for the company's gross margin, one of the key metrics followed by investors.
Apple reported better-than-expected earnings and revenue on Monday, including in the company's core iPhone unit, and even projected sales in the current period that topped estimates. But just before Ternus opened the earnings call up to analysts' questions, CFO Kevan Parekh came forward with the first real piece of bad news.
Parekh said that for the December quarter, which goes through the holiday season, Apple's gross margin will be between 45% and 46%, trailing the 46.3% average analyst estimate, according to LSEG.
"This includes primarily the impact of higher memory costs, as well as some costs related to the ramp of Siri AI," Parekh said.
Apple shares slid 4% in premarket trading on Monday.
It's part of an ongoing trend for Apple, which is absorbing some of the soaring costs from the global memory shortage. A margin drop in the fiscal first quarter would be a third straight decline for Apple, following a gross margin of 50.1% in the June period and 47.9% in the September quarter, boosted by 1 percentage point of tariff refunds.
At the midpoint of the forecasted range, it would be Apple's lowest gross margin since the fiscal fourth quarter of 2023.
"What we're seeing with memory pricing right now is unprecedented," Ternus said on the call, adding that the company is paying more than it did earlier this year. "Looking beyond the December quarter, we see the pricing for memory purchases continuing to increase."
Ternus, who took the reins from Tim Cook on Sept. 1, is grappling with a problem that his predecessor spent his final months addressing. Cook told The Wall Street Journal in June that the memory situation was a "hundred-year flood." Apple followed by raising prices across the board on Macs, iPads, and accessories.
In September, Apple increased the prices of its iPhones by $100, which Ternus said the company did "reluctantly."
'Less flexibility in the supply chain'
Computer and smartphone makers everywhere are suffering. On Friday, Intel had its worst day on the market since the 1970s due to a weak forecast tied to the softening PC market. It's all because of insatiable artificial intelligence demand.
AI server giants like Nvidia and hyperscalers are buying up all the RAM they can find, and they're willing to pay a premium for it, leaving little supply for companies that make smartphones and tablets.
Despite its size and global clout, Apple said it expects supply constraints on iPhones and Macs in the holiday quarter, primarily driven by memory.
On the call, Ternus had some top lieutenants field component-related questions. Sabih Khan, chief operating officer, became the first Apple COO to appear on an earnings call since Cook in 2010, when Steve Jobs was CEO.
"As we have said before, we're seeing less flexibility in the supply chain than normal," Khan told analysts on the call.
In response, Apple has drastically increased its purchase obligations to secure supply, Khan said. Those obligations rose by $33 billion from the June quarter to the September period, Khan said, though he declined to answer questions about whether Apple had signed "long-term agreements" with memory makers.
"We're always working hard to improve supply," Khan said.
Even with the recent margin slide, Apple's gross margins are still well above where they sat earlier in the Cook era, when the number would predictably come in between 38% and 39%. As Apple's profitable services business grew, its gross margin expanded, hitting 40% in 2021 and growing from there.
Analysts see a potential silver lining for Apple in the current market turmoil. Because Apple is more capable of eating a portion of the increased costs, some experts predict the company will take market share from makers of Windows PC and Android phones that don't have such a cushion.
Citing data from a third-party researcher, Ternus said gains are already happening.
"According to IDC, we gained share globally for the quarter and for the full fiscal year," Ternus said. "And we have never sold more Macs in a fiscal year than we did this time, which is a truly remarkable testament to these incredible products."
