Apple just reported its fourth quarter earnings, with revenue exceeding market expectations at $114.48 billion. But the good news was quickly overshadowed by the executives’ expectations for a rough go in the next quarter.
Apple executives shared in the company’s earnings call that they are expecting narrower profit margins driven largely by memory chip prices that continue to soar.
“What we’re seeing with memory pricing right now is unprecedented,” Apple’s freshly minted chief executive officer John Ternus said in what was his first earnings call as CEO. “Now, for the December quarter, we expect even higher memory costs, partly offset by a few factors.”
The global tech industry has been in the midst of a major supply crunch for high-bandwidth memory chips since last year. Faced by soaring demand from AI data centers, chipmakers have largely shifted their finite chipmaking capacity to address the needs of the AI industry, causing a lopsided supply crunch that has hit consumer electronics manufacturers. South Korean semiconductor giant SK Hynix recently shared that it expects the crisis to persist into the next decade.
Many consumer electronics manufacturers have had to pass these pressures onto consumers, particularly in the form of price hikes. In Apple’s case, the price hikes hit Macs and iPads earlier in the summer and iPhones back in September. On the call, Ternus said that those price hikes, as well as some carry-in inventory and lower costs of other non-memory components, would help offset some of the pressure from memory pricing increases, but won’t be enough to cover the full hit.
“Looking beyond the December quarter, we see the pricing for memory purchases continuing to increase,” Ternus also warned.
Apple executives have been warning of an intensifying memory supply crunch for months. Back in the company’s third quarter earnings call in July, outgoing CEO Tim Cook said that they expected memory prices to increase in the near term, calling the crisis a “100-year flood.”
But beyond just the memory supply crisis, Apple said that its profit margins will also be impacted by the company’s ongoing effort to catch up to its tech titan peers in the so-called AI race, particularly through Siri AI.
After a botched launch timeline and legal troubles, Apple finally debuted the AI-infused Siri in July and has been slowly scaling the product. The “associated cloud costs” that come with rolling out Siri AI to more customers will “have an impact to the gross margin” as well, Apple chief financial officer Kevan Parekh said on the call.
Apple has largely stood back as its peers, like Meta or Google, invested so heavily in the AI hype that it sent their free cash flow cratering. Apple’s more tempered approach has received a mixed reaction, depending on what the market seems to think about AI and the possibility of a bubble in any given week. Right now, investors seem jittery about the AI hype cycle’s future and somewhat worried that the heavy spending on AI infrastructure is still not seeing enough of a return, a position that could have helped Apple overtake Nvidia last week to reclaim its title as the most valuable company in the world. Either way, Apple executives still sound pretty enthusiastic about AI and are promising more AI features.
“We look to continue to make the investments necessary to support the business, and we also see a wide range of ways that AI can contribute to revenue growth over time,” Parekh said. “So on the product side, we feel AI offers a compelling reason for customers to upgrade and switch in order to get the latest capabilities, and we also feel there’s opportunities across third-party apps and partnerships.”
