Apple's record quarter comes with a memory-cost squeeze ahead

What happened

Apple said on Monday 2 November that sales for its fiscal fourth quarter, which ended Saturday 26 September, were $114.5 billion, up 12 percent from a year earlier. ^{[1, 2]}

Gross margin, the share of sales left after the cost of making the products, was 47.9 percent, including about 1 percentage point from tariff refunds. Net income was $30.7 billion, and diluted earnings per share were $2.10, up 14 percent. Apple called Services revenue an all-time high. ^[1]

iPhone sales were $57.6 billion, up from $49.0 billion a year earlier. Mac sales were $10.8 billion, up from $8.7 billion, and Greater China sales were $17.5 billion, up from $14.5 billion. ^[1]

iPad sales were $6.2 billion, down from $7.0 billion. Wearables, Home and Accessories were $8.3 billion, down from $9.0 billion. ^[1]

Why it matters

Chief Financial Officer Kevan Parekh said on the call that Apple expects December-quarter gross margin of 45 percent to 46 percent, mostly because of higher memory costs, meaning the chips that store data. ^{[3, 4]}

Without the tariff refunds, company margin was down about 1 point from the June quarter, Parekh said, and Chief Executive John Ternus called current memory pricing 'unprecedented'. ^[3]

How the cost shows up

Apple's annual report says the company 'expects these trends to intensify for memory and storage components'. Inventories on the balance sheet were $14.5 billion, up from $5.7 billion a year earlier. ^{[1, 2]}

Ternus said price increases on Mac and iPad at the end of June and on iPhone in September gave some offset, as did inventory carried in and lower costs on some other parts. He said Apple sees memory pricing continuing to increase beyond December. ^{[3, 4]}

Ternus said Apple's manufacturing purchase obligations, its commitments to buy parts, grew by $33 billion from June to September. The annual report puts them at $89.7 billion as of 26 September, with $82.7 billion payable within 12 months. ^{[2, 3]}

Supply and the new phone

Apple expects December-quarter revenue growth of 7 percent to 10 percent, which it said reflects 'our best view of constrained supply', and Services growth of 8 percent to 9 percent. Chief Operating Officer Sabih Khan said Mac and iPad supply will be constrained mainly by memory, and that Apple gives no outlook past December. ^{[3, 4]}

Ternus told Reuters that the new iPhone Duo is 'constrained as of today', according to Yahoo Finance, and that Apple cannot yet say when supply and demand will match. He also said a 'very small percentage' of units were returned for display problems. The Duo went on sale after the quarter closed. ^{[4, 5]}

What settles it next

Apple has given no outlook past the December quarter, so the next filed record on margin is that quarter's own report. MacRumors listed the new MacBook Pro, iPad mini and iMac as on sale Friday 6 November and the HomeView hub Friday 13 November. ^{[3, 4]}

Who it reaches

Apple (AAPL) is direct: the results and the outlook are its own. Micron (MU) is adjacent: it makes memory chips, the part Apple's report names as the main source of rising cost, and Yahoo Finance named it in its account of the results. ^{[2, 5]}