Apple delivered a strong earnings report, but CEO Cook issued a rare warning that shortages of advanced chips and memory are becoming a new bottleneck for Apple's growth, with the impact of the AI wave now reaching the supply chain.
Apple (AAPL.O) reported its latest quarterly earnings, with revenue and profit both exceeding market expectations. However, the company’s guidance for the upcoming quarter fell below Wall Street targets, with supply chain bottlenecks drawing investor attention. Apple stated that shortages of advanced chips and memory are limiting its ability to deliver iPhones and Macs, and will impact sales performance over the coming months.
This earnings call is also Tim Cook’s final earnings call as Apple’s CEO. Cook has led Apple for 15 years and plans to hand over the CEO role to John Ternus, head of hardware engineering, in September.
Cook stated during the earnings call that he has "never been more optimistic about Apple's future opportunities." However, he also acknowledged that Apple is currently facing significant supply challenges.
We are seeing some very serious (supply) constraints, with limited flexibility in adjusting the supply chain at present.
He further noted that Apple will face significant pressure on the supply side over the next quarter: “There will be a quarter where we will be busy managing supply.”
Apple's management emphasized that the current issue stems primarily from supply, not insufficient demand. Due to tight supplies of high-performance processors and memory chips, the company is finding it increasingly difficult to secure the advanced components needed to produce iPhones and Macs, ultimately impacting revenue growth.
Apple's Chief Financial Officer, Kevan Parekh, said the company expects revenue for the quarter ending in September to grow 9% to 11% year-over-year, below the Wall Street expectation of 12% according to data from LSEG.
The company expects iPhone revenue to grow by a "mid-double-digit" percentage this quarter, but significantly lower than the 22% year-over-year increase in the just-ended quarter.
Meanwhile, Apple expects gross margin pressure in the upcoming quarter. In the previous quarter, Apple’s gross margin was 48.1% after excluding the impact of U.S. government tariff refunds.
Demand for AI data centers is driving up memory prices, and Apple is also facing supply chain disruptions.
The current supply pressures Apple is facing are closely related to the growing demand for chips driven by the expansion of the artificial intelligence industry.
Although Apple has not invested hundreds of billions of dollars in AI infrastructure like Microsoft, Google, Amazon, and Meta, the construction of AI data centers is consuming vast amounts of high-performance memory chips, causing industry-wide supply shortages and driving up memory prices.
Cook stated that the memory market is experiencing an extreme price cycle. Due to rising memory costs, Apple has previously increased prices for its Mac and iPad products.
“We’re doing this because we’re in what I consider a once-in-a-century flood of memory prices,” Cook said during the earnings call.
Cook noted that the DRAM memory market is currently supplied primarily by three companies—Micron, SK Hynix, and Samsung Electronics—limiting Apple’s ability to adjust its sourcing channels due to the limited number of suppliers.
“It would be a good thing to have more suppliers. This would help us improve our supply side and potentially improve pricing as well,” Cook said. He added that Apple is “evaluating all options” to find additional memory chip supply solutions.
In the just-concluded third fiscal quarter, Apple's primary supply constraint stemmed from insufficient advanced chip manufacturing capabilities—technology used to produce Apple Silicon chips in Apple devices.
Cook stated that this issue particularly affected the Mac product line, but strong demand continued to drive Mac sales growth. Driven by the entry-level MacBook Neo and the premium MacBook Pro, Mac revenue increased 28.7% year-over-year to $10.35 billion, surpassing the market expectation of $8.74 billion.
Third-quarter revenue reached $109.4 billion, with iPhone sales setting a record for the same period.
Overall, Apple's third fiscal quarter results, ending June 27, exceeded market expectations.
The company's revenue increased by 16.4% year-over-year to $109.42 billion, surpassing analysts' expected growth of 15.5%.
Net profit reached $29.8 billion, with earnings per share of $2.02. Of this, U.S. government tariff refunds contributed approximately $0.11 per share. Excluding this factor, Apple’s earnings per share still amounted to $1.91, exceeding the market expectation of $1.89.
iPhone business is the primary driver of growth.
In the third fiscal quarter, iPhone sales increased by 21.7% year-over-year to $54.25 billion, surpassing analysts' expectations of $53.86 billion and reaching the highest level for Apple's third fiscal quarter in history.
Typically, consumers reduce purchases before the fall product launch, but this year, due to global memory chip supply constraints, Apple raised prices for Mac and iPad, prompting some consumers to purchase iPhones earlier.
Apple has not yet raised the price of its flagship iPhones, but Wall Street analysts are increasingly expecting the company to adjust iPhone prices during its September product launch event.
Bob O'Donnell, Chief Analyst at TECHnalysis Research, said investors may be concerned that current growth is partly driven by consumers making early purchases. "I do think people will continue to buy existing phones because price increases are happening."
He also noted that the market is more focused on the performance of the Mac business after the new pricing structure is fully implemented.
Apple's gross margin for the third fiscal quarter reached 50.1%. Of this, approximately 2 percentage points were attributable to U.S. government tariff refunds; excluding this factor, the gross margin was 48.1%, near the midpoint of the company's prior guidance and above the market expectation of 47.92%.
iPad performance was relatively weak. In the third fiscal quarter, iPad sales declined 5.9% year-over-year to $6.19 billion, below the market expectation of $6.92 billion. Cook attributed part of this to the high base effect from last year’s release of the lower-priced A16 iPad.
Revenue in Greater China increased 22.4% year-over-year to $18.82 billion, but fell short of the average expectation of $19.67 billion among six analysts surveyed by Visible Alpha.
Apple has recently regained its position as the world's most valuable company, surpassing NVIDIA (NVDA.O), the leader in AI chips. This year, Apple's stock has risen more than 22%, making it one of the top-performing large-cap tech stocks.
After the earnings report, Apple's stock dropped by approximately 8% in after-hours trading, then narrowed its losses, ending down about 6% from the closing price of $333.85.
Service business growth has slowed, prompting Apple to bet on on-device AI for new growth opportunities.
Apple's second-largest business segment, Services, generated $30.74 billion in revenue for the third fiscal quarter, a 12.1% year-over-year growth, but fell short of the market expectation of $31.22 billion.
Gil Luria, an analyst at D.A. Davidson, said that service business growth is slowing, "investors are concerned that if the service business is decelerating while iPhone growth exceeds 20%, the service business could slow further as iPhone sales return to normal levels."
Apple stated that its mobile gaming business on the App Store is under pressure.
The European Union requires Apple to allow iPhones to access alternative app stores, and the U.S. legal dispute involving Epic Games, the developer of Fortnite, also permits users to bypass Apple’s in-app payment system to complete transactions.
Parek said: "We have indeed observed some resistance in the mobile gaming space, and it's important to note that we have also adjusted the App Store business model in several countries."
Apple is seeking new service growth opportunities in the AI era. Earlier this year, with support from Google’s parent company Alphabet (GOOGL.O), Apple launched an upgraded version of Siri with enhanced AI capabilities.
Cook stated that Apple sees strategic value—and a competitive advantage—in running a portion of AI tasks directly on devices.
Apple believes that on-device AI enhances privacy protection and serves as a competitive differentiator from other technology companies.
Cook also noted that AI features could drive more users to upgrade to iCloud Plus. “We will offer an upgrade option within iCloud Plus that allows users to purchase higher-tier services,” Cook said.
John Tennus, who is set to assume the role of CEO, participated in this earnings call but did not deliver a prepared opening statement or take part in the analyst Q&A session.
When asked by analysts how it plans to face new competition, including AI hardware devices, Tenus stated that Apple will continue to focus on its own roadmap.
“I want to reiterate what Tim said. Amid everything happening in this space, we have tremendous opportunities. We’re focused on our roadmap and are very excited about it,” Tenus said.