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John Ternus’ first earnings report as Apple CEO was progressing smoothly until the company delivered its gross margin forecast. That warning turned a strong set of results into an immediate test for the executive who took control from Tim Cook on Sept. 1.

Apple reported earnings and revenue that exceeded expectations on Monday, including stronger results from its central iPhone business. The company also projected current period sales above estimates, but those gains were overshadowed when CFO Kevan Parekh addressed expected profitability during the earnings call.

Parekh said Apple expects gross margin between 45% and 46% for the December quarter, which includes the crucial holiday season. That range trails the 46.3% average analyst estimate cited by LSEG.

“This includes primarily the impact of higher memory costs, as well as some costs related to the ramp of Siri AI,” Parekh said. Apple shares slid 3% in morning trading on Tuesday as investors absorbed the weaker margin outlook.

The forecast extends a troubling pattern for Apple as it absorbs costs created by the global memory shortage. A decline in the fiscal first quarter would mark a third consecutive drop after gross margin reached 50.1% in the June period and 47.9% in September, which included 1 percentage point from tariff refunds.

At the midpoint of Apple’s forecast range, gross margin would fall to its lowest level since the fiscal fourth quarter of 2023. The company now faces rising component expenses even as its latest earnings and revenue surpassed Wall Street’s expectations.

“What we’re seeing with memory pricing right now is unprecedented,” Ternus said during the call, while noting that Apple is paying more than it did earlier this year. “Looking beyond the December quarter, we see the pricing for memory purchases continuing to increase.”

The challenge was already occupying Cook during his final months leading Apple. Cook told The Wall Street Journal in June that the memory situation was a “hundred-year flood,” and Apple subsequently raised prices across Macs, iPads and accessories.

Apple increased iPhone prices by $100 in September, a decision Ternus said the company made “reluctantly.” Even those higher prices have not prevented the memory crunch from pressuring expected margins and limiting the company’s supply flexibility.

The problem extends across computer and smartphone manufacturers. Intel suffered its worst market day since the 1970s on Friday after issuing a weak forecast tied to the softening PC market, while intense artificial intelligence demand continues to consume available memory supply.

AI server companies such as Nvidia and hyperscalers are purchasing large quantities of RAM and paying premium prices. That leaves less supply for businesses producing smartphones and tablets, including Apple, despite the company’s size and influence across the global supply chain.

Apple expects supply constraints for iPhones and Macs during the holiday quarter, primarily because of memory availability. Sabih Khan, Apple’s chief operating officer, became the first company COO to join an earnings call since Cook did so in 2010, when Steve Jobs was CEO.

“As we have said before, we’re seeing less flexibility in the supply chain than normal,” Khan told analysts. He said Apple has sharply increased its purchase obligations in an effort to secure the components it needs.

Those purchase obligations climbed by $33 billion from the June quarter to the September period, according to Khan. He declined to answer questions about whether Apple had entered “long-term agreements” with memory manufacturers, saying only, “We’re always working hard to improve supply.”

Apple’s gross margins remain substantially above levels recorded earlier in the Cook era, when they typically landed between 38% and 39%. As the company’s profitable services business expanded, gross margin reached 40% in 2021 and continued rising from there.

Some analysts see a possible advantage for Apple amid the industry disruption because it can absorb part of the higher costs. They predict Apple could gain market share from Windows PC and Android phone manufacturers that lack the same financial cushion.

Ternus cited figures from third party researcher IDC as evidence that those gains are already occurring. “According to IDC, we gained share globally for the quarter and for the full fiscal year,” he said, adding that Apple sold more Macs during the fiscal year than ever before.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.