Apple forecasts rising costs, lower services; shares slip

SAN FRANCISCO, Nov 2 : Apple on Monday forecast lower gross margins for the crucial holiday quarter, citing rising memory-chip costs, and projected services revenue growth that fell well short of Wall Street expectations.

Shares of the iPhone maker, which were little changed in after-hours trading after it reported fiscal fourth-quarter results that beat expectations, fell 4 per cent during a conference call after executives outlined the weaker outlook. The quarter was boosted by early demand for the iPhone 18 Pro lineup and higher prices.

Apple said it expects gross margin of 45 per cent to 46 per cent in the quarter ending in December, down from 47.9 per cent in the fourth quarter. It forecast services revenue growth of 8 per cent to 9 per cent, below analysts' expectations of 10.7 per cent.

The results and forecast 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 of its new iPhones each autumn, Apple this year is spacing those out, with iPhone Pro and Duo models shipping this year and other iPhone models expected next year. 

Apple also released a bevy of new non-iPhone products in the current holiday shopping quarter, including its first touchscreen laptops and its 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 boom in holiday-quarter sales of new iPhones that petered out by late summer as consumers came to anticipate new models.

Apple in recent weeks has grappled with customer reports of cracked screens on the iPhone Duo, the company's first foldable phone, which sold out within hours online and spurred lines at Apple's stores last month. Apple said fiscal fourth-quarter sales were $114.48 billion, above analyst estimates of $113.39 billion, according to LSEG data. Profit  for the fourth quarter was $2.10 per share, above analyst estimates of $1.99 per share even when excluding 5 cents per share from tariff refunds.

IPHONE DUO SUPPLY CONSTRAINTS

In an interview with Reuters, Ternus said that "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 for the devices, with no timeline for when Apple will catch up.

"Duo is constrained as of today," Ternus said. "The ramp is going well, and we're working hard to get it to as many customers as quickly as possible, but at this point, we're not able to predict when supply and demand will be in balance." 

Apple said that fourth-quarter iPhone sales, which included iPhone 18 Pro models but not Duo sales, were $57.58 billion, above analyst estimates of $56.54 billion, according to LSEG data.

The strategy change comes as Apple faces headwinds from an AI-driven memory-chip price spike that previous CEO Tim Cook likened to a 100-year flood that could dampen the margin boost that Apple derives from selling 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 before it can make a significant impact on the bottom line.”

PRICE RISES OFFSET CHIP COSTS

As it launched its new iPhone 18 Pro models, Apple also increased the price of iPhone 17 models by $100 and increased some MacBook prices, helping soften the blow of memory-chip prices that continued to rise.

"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 told Reuters. "These price increases provided some offset."

Apple said that gross margins were 47.9 per cent, above analyst estimates of 47.5 per cent, according to LSEG data.

Another key question for Apple's margins is the costs of its new AI-infused Siri, which Ternus said is now fielding 2.5 billion requests per day.

"Now we have the Siri that we always wanted, which we really built from the ground up," Ternus said.

Apple said that sales of its Mac computers, which have gained popularity among tech enthusiasts as a platform for hosting AI agents, were $10.79 billion, above estimates of $9.61 billion.

Services revenue was $31.57 billion, in line with analyst estimates of $31.58 billion, according to LSEG data. Sales of iPads and wearables were $6.23 billion and $8.30 billion, respectively, both below estimates of $6.70 billion and $9.06 billion, respectively.