Apple posted its strongest June quarter on record, but surging memory prices and tightening supply of advanced process chips are emerging as major operational risks, casting doubt over the crucial holiday sales season ahead.

As reported, Apple's third fiscal quarter results on Thursday showed total revenue and iPhone sales slightly exceeded estimates, but Services and Greater China performance fell short of expectations.

On the earnings call, Apple executives projected revenue growth of 9% to 11% for the fiscal fourth quarter, a range below the 12.1% growth analysts had anticipated. Apple cited two primary headwinds: currency exchange and supply constraints.

Apple CFO Kevan Parekh said iPhone revenue in the fourth fiscal quarter would be hampered by supply constraints, limiting growth to the mid-teens. Services revenue, excluding a 2.5% foreign exchange headwind, is expected to grow at roughly the same 12% pace as the third quarter.

Addressing questions about Apple's product price increases, CEO Tim Cook explained: "We are in a storage pricing environment that I would call a 'once-in-a-century flood.' Storage prices are rising exponentially, and that's why we raised prices."

To manage this crisis, Cook said Apple is evaluating all sourcing options. The call also marked the end of an era, with Cook announcing it was his last time hosting the earnings conference call. Apple's Senior Vice President of Hardware Engineering, John Ternus, who attended as CEO-elect, will lead these calls from next quarter. Cook expressed "unprecedented confidence" in the company's future.

Demand Far Exceeds Forecasts, "We Are Scrambling for Supply"

Market attention was focused on the reasons for Apple's slowing growth in the fourth fiscal quarter. CFO Kevan Parekh clearly stated that the next quarter's revenue would be dragged down by two factors: foreign exchange and supply constraints. He estimated that currency would create a sequential headwind of roughly 2.5 percentage points on overall growth, while the negative impact of supply constraints would "increase significantly" and affect iPhone, Mac, and iPad.

When asked by an analyst if this indicated a decline in demand, Cook offered a direct rebuttal, stating the core issue was the capacity for advanced process node SoCs. He emphasized, "Frankly, this is not a conventional supply issue at all; it's a demand forecasting problem," adding that both iPhone and Mac performed well above expectations. "We already had high expectations, but as you can see, iPhone grew 22% this quarter and 22% year-to-date. These are extraordinary numbers. The supply chain has much less flexibility than usual. We have been pulling supply forward, but at some point, there is a limit. So, we are heading into a quarter where we will be scrambling on the supply side."

For the next quarter, CFO Kevan expects iPhone's reported growth rate to be in the "mid-teens." Services revenue, after excluding the 2.5% FX headwind, is expected to be roughly in line with the 12% growth seen in the third fiscal quarter.

"Once-in-a-Century Flood": Soaring Storage Costs Pressure Gross Margins

Beyond capacity bottlenecks, the market keenly noted recent Apple product price increases. When asked about the link between pricing strategy and memory chip inflation, Cook explained, "We raised prices reluctantly. We did so because we are in a storage pricing environment that I would call a 'once-in-a-century flood.' Storage prices are rising exponentially, and that's why we raised prices."

CFO Kevan provided specific data, noting that gross margin for the third fiscal quarter, excluding tariff refunds, was 48.1%. Regarding the projected guidance for the fourth fiscal quarter's gross margin of 46.5%, also excluding tariff refunds, Kevan stated, "More than 100% of the change can be explained by storage cost movements."

To address this crisis, Cook said Apple is evaluating all options. "The DRAM market is primarily dominated by three suppliers. Obviously, having more suppliers would benefit us on the supply side and even the pricing side... We are evaluating all sourcing options."

Apple AI's Potential and Global Rollout Challenges

As the biggest potential growth driver, Apple Intelligence, especially the new Siri AI, has garnered significant attention since its WWDC announcement. Management confirmed that feedback from early developers and the public beta has been "phenomenal."

Regarding whether AI will change Apple's capital intensity, Cook acknowledged that the company is increasing overall R&D and AI spending, adopting a "hybrid model" combining on-device processing, its own cloud, and third-party cloud services. He hinted at a future monetization path, stating, "We do believe many people will want to use it heavily. So, we will offer some kind of upgrade option within iCloud+, where people can purchase a more premium iCloud+ service."

On the progress of AI rollout in the EU and China, Cook provided the latest update. "We want to launch everything simultaneously everywhere, but we were unable to in the EU. We are working closely with the European Commission, hoping to find a solution. As for China, we received approval last week to launch the initial features of Apple Intelligence, and we are moving forward with their rollout. For Siri AI, more work needs to be done in the future."