By Stephen Nellis
SAN FRANCISCO, Nov 2 (Reuters) – Apple warned on Monday that the cost of memory chips would continue to rise, pressuring gross margin for the crucial holiday quarter, but said it had taken steps to lock in supplies.
Shares, little changed in after-hours trading after fiscal fourth-quarter results beat expectations, fell 4% during a conference call after executives outlined the weaker outlook, but later pared losses to a 2% decline. Early demand for the iPhone 18 Pro lineup and higher prices boosted the quarter.
Apple said it expects gross margin of 45% to 46% in the quarter ending in December, down from 47.9% in the fourth quarter. It forecast services revenue growth of 8% to 9%, below analysts’ expectations of 10.7%.
The results come as Apple experiments with a string of firsts under new CEO John Ternus, who took over in September. After nearly two decades of launching most new iPhones each autumn, Apple this year is spacing them out, with iPhone Pro and Duo models shipping this year and other models expected next year.
Apple also released a bevy of new non-iPhone products this quarter, including its first touchscreen laptops and first smart-home hub. The steady drumbeat of releases, analysts said, is meant to smooth out Apple’s yearly revenue cycle, which for decades showed a huge holiday-quarter boom that petered out by late summer.
Apple in recent weeks has grappled with customer reports of cracked screens on the iPhone Duo, its first foldable phone, which sold out within hours online and spurred lines at stores last month.
Fiscal fourth-quarter sales were $114.48 billion, above analyst estimates of $113.39 billion, according to LSEG data. Profit was $2.10 per share, above estimates of $1.99 even when excluding 5 cents from tariff refunds.
IPHONE DUO SUPPLY CONSTRAINTS
In an interview with Reuters, Ternus said “a very small percentage” of iPhone Duo units had been returned for display issues and that Apple is replacing them. He said the company is overall unable to meet demand, with no timeline for catching up.
“Duo is constrained as of today,” Ternus said. “The ramp is going well… but at this point, we’re not able to predict when supply and demand will be in balance.”
Fourth-quarter iPhone sales, which included iPhone 18 Pro models but not Duo, were $57.58 billion, above estimates of $56.54 billion, according to LSEG data.
The staggered launch strategy comes as Apple faces headwinds from an AI-driven memory-chip price spike that could dampen the margin boost Apple derives from storage upgrades.
“The big question for Apple moving forward will be how well they can weather the significant component price increases that have slowed their PC and smartphone competitors,” said Bob O’Donnell, chief analyst at TECHnalysis Research. “The new iPhone Duo looks to be a big hit, but the company has to solve the screen glitches and ramp up its manufacturing output.”
PRICE RISES OFFSET CHIP COSTS
As it launched the iPhone 18 Pro, Apple also raised iPhone 17 prices by $100 and increased some MacBook prices, softening the blow of rising memory costs.
“We did see higher memory costs as compared to the June quarter, which was partially offset by the benefit of carrying inventory and lower costs on certain non-memory components,” Ternus said. “These price increases provided some offset.”
Fourth-quarter gross margins were 47.9%, above estimates of 47.5%, according to LSEG data.
On the investor call, Chief Financial Officer Kevan Parekh said Apple expects memory costs to keep rising into next year. Asked whether Apple had signed a long-term supply agreement, Chief Operating Officer Sabih Khan did not directly confirm a deal but said Apple is working closely with memory suppliers and that its purchasing commitments increased by $33 billion during the quarter.
Shares of memory-chip maker Micron rose more than 1% in after-hours trading on Monday, and shares of chip-manufacturing equipment makers KLA Corp and Applied Materials also rose.
Apple also pointed to Siri AI, which runs partially in Google’s cloud, as a factor impacting margins. The company plans to charge more for iCloud+ subscriptions to offset AI costs, though it has not rolled out specific pricing.
“There are going to be some usage limits on features that rely on server-side models, which include Siri AI and intelligent photo editing,” Ternus said during the call.
Mac sales were $10.79 billion, above estimates of $9.61 billion. Services revenue was $31.57 billion, in line with estimates of $31.58 billion. iPad and wearables sales were $6.23 billion and $8.30 billion, both below estimates. Chinese sales were $17.54 billion, below the $18.58 billion analysts estimated, according to Visible Alpha data.
(Reporting by Stephen Nellis in San Francisco; Additional reporting by Prathik Jayaprakash and Aatrayee Chatterjee in Bengaluru; Editing by Sayantani Ghosh and Matthew Lewis)
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