Apple Details Supply Constraints, Memory Costs, and Siri AI Plans During Q3 Earnings Call
Posted 17 hours ago by
Shalom Levytam
Apple used its fiscal third-quarter earnings call to warn of worsening supply constraints and rising memory costs, while sharing new details on Siri AI during Tim Cook's final earnings call as CEO. The call followed Apple's quarterly results, which included $109.4 billion in revenue and $29.8 billion in net income.
Apple expects total company revenue to grow between 9 percent and 11 percent year over year in the September quarter. CFO Kevan Parekh said foreign exchange will be a sequential headwind of about 2.5 percentage points to the year-over-year growth rate compared with the June quarter. He also said supply constraints are expected to increase significantly.
During the June quarter, Apple experienced constraints primarily on Mac and, to a lesser extent, on iPhone and iPad. The September-quarter constraints will affect all three product lines. Cook said the constraints do not stem from a partner or supplier problem. They are primarily tied to the availability of advanced process nodes used for Apple's system-on-chips, after demand for iPhone and Mac exceeded the company's expectations.
Apple expects iPhone revenue growth in the mid-teens for the September quarter. Services growth is expected to be largely similar to the June-quarter result after adjusting for an additional sequential foreign exchange headwind of about 2.5 percentage points.
Cook said Apple reluctantly raised prices on iPad and Mac because of what he called a "100-year flood" in memory pricing. He said memory costs rose in the March and June quarters and are expected to climb again in the September quarter.
Parekh said the increase in memory costs was greater than the entire sequential decline in adjusted gross margin from the June quarter to the midpoint of Apple's September-quarter guidance, with other factors providing partial offsets. Apple expects gross margin of 47 percent to 48 percent in the September quarter, including an approximately one percentage point benefit from tariff refunds.
Carry-in inventory, lower costs for some non-memory components, and favorable mix are expected to provide partial offsets, although Apple expects the inventory benefit to decline beyond September as memory prices continue to rise.
Cook said feedback on the developer and public betas of Siri AI has been strongly positive. Cook said Apple has not yet outlined a complete plan for the added compute costs, but people who use Siri AI heavily may have options to move to higher iCloud+ tiers.
Apple said it will use a mix of its own data centers and third-party cloud capacity for AI workloads, while continuing to invest more broadly in AI across research and development, cost of goods sold, and other parts of the business.
On availability, Cook said Apple is working with the European Commission on bringing Siri AI to iPhone and iPad in the EU; the Mac version can be offered there because it is not covered by the same regulations. In China, Apple recently received approval to ship the original Apple Intelligence features and is still working through their rollout, with additional work needed for Siri AI.
Services revenue rose 12 percent to $30.7 billion in the June quarter. Parekh cited foreign exchange, softer mobile gaming in the App Store, and a tougher comparison with the prior year, when the theatrical release of F1 contributed to Services revenue in both the June and September quarters.
Apple's installed base has surpassed 2.5 billion active devices, while paid subscriptions have exceeded 1.5 billion. Parekh said foreign exchange is expected to create about a five percentage point headwind to Services growth between the March and September quarters.
Cook said this was his final earnings call as Apple CEO and that John Ternus will lead future earnings calls. He described the transition as "going seamlessly."
Supply Constraints
Apple expects total company revenue to grow between 9 percent and 11 percent year over year in the September quarter. CFO Kevan Parekh said foreign exchange will be a sequential headwind of about 2.5 percentage points to the year-over-year growth rate compared with the June quarter. He also said supply constraints are expected to increase significantly.
During the June quarter, Apple experienced constraints primarily on Mac and, to a lesser extent, on iPhone and iPad. The September-quarter constraints will affect all three product lines. Cook said the constraints do not stem from a partner or supplier problem. They are primarily tied to the availability of advanced process nodes used for Apple's system-on-chips, after demand for iPhone and Mac exceeded the company's expectations.
Apple expects iPhone revenue growth in the mid-teens for the September quarter. Services growth is expected to be largely similar to the June-quarter result after adjusting for an additional sequential foreign exchange headwind of about 2.5 percentage points.
Memory Costs and Margins
Cook said Apple reluctantly raised prices on iPad and Mac because of what he called a "100-year flood" in memory pricing. He said memory costs rose in the March and June quarters and are expected to climb again in the September quarter.
Parekh said the increase in memory costs was greater than the entire sequential decline in adjusted gross margin from the June quarter to the midpoint of Apple's September-quarter guidance, with other factors providing partial offsets. Apple expects gross margin of 47 percent to 48 percent in the September quarter, including an approximately one percentage point benefit from tariff refunds.
Carry-in inventory, lower costs for some non-memory components, and favorable mix are expected to provide partial offsets, although Apple expects the inventory benefit to decline beyond September as memory prices continue to rise.
Siri AI and Global Rollout
Cook said feedback on the developer and public betas of Siri AI has been strongly positive. Cook said Apple has not yet outlined a complete plan for the added compute costs, but people who use Siri AI heavily may have options to move to higher iCloud+ tiers.
Apple said it will use a mix of its own data centers and third-party cloud capacity for AI workloads, while continuing to invest more broadly in AI across research and development, cost of goods sold, and other parts of the business.
On availability, Cook said Apple is working with the European Commission on bringing Siri AI to iPhone and iPad in the EU; the Mac version can be offered there because it is not covered by the same regulations. In China, Apple recently received approval to ship the original Apple Intelligence features and is still working through their rollout, with additional work needed for Siri AI.
Services and Leadership
Services revenue rose 12 percent to $30.7 billion in the June quarter. Parekh cited foreign exchange, softer mobile gaming in the App Store, and a tougher comparison with the prior year, when the theatrical release of F1 contributed to Services revenue in both the June and September quarters.
Apple's installed base has surpassed 2.5 billion active devices, while paid subscriptions have exceeded 1.5 billion. Parekh said foreign exchange is expected to create about a five percentage point headwind to Services growth between the March and September quarters.
Cook said this was his final earnings call as Apple CEO and that John Ternus will lead future earnings calls. He described the transition as "going seamlessly."
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