Apple's sales rose 12% in John Ternus's first report, but memory costs are squeezing its margins

On Monday afternoon, John Ternus took his first earnings call as Apple's chief executive, and he had a record to report. Sales in the three months to September rose 12% to $114.5 billion, the most Apple has ever made in a September quarter. It was, he said in the earnings release, a quarter "capping off our best fiscal year ever."

Then his finance chief, Kevan Parekh, gave the forecast for the holidays. Gross margin, the share of each sales dollar left after the cost of making what Apple sells, was 47.9% last quarter. Apple expects 45% to 46% this quarter. The main cause is the price of the memory chips that go into nearly everything it makes. "What we’re seeing with memory pricing right now is unprecedented," Ternus told analysts.

Apple's shares fell 1.9% on Tuesday, the first trading day after the results, while the S&P 500 fund rose 0.3%. This story is about the question the call left open: how much of a memory shortage Apple can absorb without its customers noticing.

A record, with a tariff refund in it

Ternus took over from Tim Cook on September 1, SiliconANGLE noted, so these are results he mostly inherited. Net income was $30.7 billion. Diluted earnings were $2.10 a share, up 14%, and that "included a favorable impact of $0.05 from tariff refunds," the release says. The same refunds added about one percentage point to gross margin. Parekh said Apple has now received the vast majority of them. Revenue also beat the $113.39 billion that analysts had forecast, SiliconANGLE reported.

For the full fiscal year, revenue was $478.8 billion, up 15%, and earnings were $8.98 a share, up 20%. A year earlier, Apple's 10-K shows revenue of $416.2 billion and net income of $112.0 billion. Apple ended the quarter with $137 billion in cash and marketable securities and $80 billion of debt, and handed shareholders $28 billion: $24 billion in buybacks and $3.9 billion in dividends.

The iPhone carried it

iPhone revenue was $57.6 billion, up 17%, "despite supply constraints," Parekh said. SiliconANGLE pointed out that the quarter held "only eight days of new iPhone 18 Pro sales" and none of the iPhone Duo, the foldable phone Apple introduced in September. Fortune reported that the Duo is short of supply, "with new orders for the phone not arriving until the end of January," and that "Some units dealt with cracked screens, which Apple acknowledged and said it was replacing."

The Mac also grew quickly, with revenue of $10.8 billion, up 24%. Apple's Greater China business grew 21%, CNBC reported. The weak spots were the iPad, down 10% to $6.2 billion, and wearables, home and accessories, down 8% to $8.3 billion. Parekh blamed supply limits and a hard comparison for the iPad, and a hard comparison for wearables.

The price of memory

CNBC described "a global memory crunch and a rush for computer components." On the call, Ternus laid out where that leaves Apple. Memory costs rose last quarter, and Apple expects them to rise again this quarter. "And looking beyond the December quarter, we see the pricing for memory purchases continuing to increase," he said.

Apple has been softening the blow in two ways. It bought memory earlier at lower prices, though Ternus said that benefit will shrink over time. And it has raised its own prices: "we changed the price on many of our products, including Mac and iPad at the end of June, and iPhone in September," he said. To secure parts, it has also committed more money. Apple's "manufacturing purchase obligations have increased by $33 billion from June to the September quarter," Ternus said, a figure he said will appear in the annual filing due on Tuesday.

Parekh said the margin forecast "includes primarily the impact of higher memory costs, as well as some costs related to the ramp of Siri AI," the company's rebuilt voice assistant. Spending is rising too: operating expenses were $19.2 billion, up 21%, "as we continue to make investments in R&D."

Services and Siri

Services, the business of App Store fees, iCloud storage, subscriptions and payments, had a gross margin of 76%, against 37.2% for products. Revenue reached $31.6 billion, up 10%, which SiliconANGLE called "its slowest rate of growth since September 2022." Parekh said "Foreign exchange was the main driver" of the slowdown from the previous quarter. Apple expects growth of "between 8 and 9 percent" this quarter, with pressure "primarily driven by third-party licensing and foreign exchange."

Asked where new services growth could come from, the executives pointed to AI and to what Parekh called an "installed base of over 2.5 billion active devices." Ternus said "There are going to be some usage limits on features that rely on server-side models, which include Siri AI and intelligent photo editing," and that "anyone who needs greater capacity will be able to purchase expanded access in the future." That is one way Siri could earn money directly.

Analysts pressed him on AI agents, the software that carries out whole tasks for a user. Siri is "primarily request-based today," Ternus said. Gene Munster, an Apple investor, wrote on X after the results: "It’s clear they don’t want to talk about personalized agents. They’re the biggest risk to the Apple ecosystem," Fortune reported. Wamsi Mohan, an analyst at Bank of America, put the same question more gently to Fortune: "Siri AI is much more capable and functional today, but how do you take it to the next level?"

What the holidays look like

Apple expects revenue to grow "between 7% and 10% year-over-year, which reflects our best view of constrained supply," and "We expect this to be the best quarter for revenue in the history of the company," Parekh said. Those words matter: Apple is saying that supply, not only demand, sets the number.

News reports disagree on how that compares with what Wall Street expected. CNBC put the average analyst estimate at 6.1% growth, according to LSEG, while SiliconANGLE reported that analysts were looking for 11.4%. CNBC put the average estimate for gross margin at 46.3%, above the top of Apple's range.

What it adds up to

This is analysis, not advice. For years Apple's story was that it could charge more and pay less, helped by its buying power. A global memory shortage tests the second half of that.

The first half is holding so far. Apple raised prices and iPhone revenue still grew by double digits. But memory is set to cost more again this quarter, and Apple is guiding to a lower margin. If iPhone demand holds and margins come in at the top of the range, Apple's reach in the supply chain will have done its job. If memory keeps rising into next year, as Ternus expects, and Apple has to choose between raising prices again and giving up margin, we'd read that as a sign the shortage has reached even the strongest buyer.

These figures come from the earnings release and the call. Apple's company page will add them once the 10-K is filed. Ternus started the call by calling Apple "the greatest company in the world." His first real test is how long it can make that true while paying more for every memory chip. Updated November 5: added how the shares closed on Tuesday.