On his last earnings call as Apple (AAPL +2.61%) CEO, Tim Cook said his company is facing a unique challenge due to a shortage of memory chips for its devices.
Data centers are gobbling up available memory, leaving Apple and its peers paying more for memory than in the past, and causing shortages. Cook said he anticipates "market pricing for memory continuing to increase, which could drive an increasing impact on our business."
Importantly, management said rising memory costs could affect iPhone sales and reduce the company's margins beyond the current quarter.
Cook's warning came as new Apple CEO John Ternus just took the helm at the company. Here's what Apple shareholders need to know about the memory shortage's impact on Apple's margins.
Incoming Apple CEO John Ternus. Image source: Apple.
Cook's last warning was that memory shortages will persist
Cook said on the third-quarter earnings call that Apple has consistently anticipated paying more for memory in each subsequent quarter. And that's exactly what's happened. Cook noted:
"As I alluded to last quarter, we expected to pay significantly more in the June quarter than the March quarter, and that is what happened.... For September, we expect to pay even higher memory costs..."
While Apple has the benefit of pre-purchasing memory at a lower cost, Cook said this benefit is declining over time and will continue to do so beyond the September quarter because prices keep rising.
Apple raised prices on its Macs in June and is widely expected to increase the prices of some of its new iPhones when they debut on Sept. 9. Price hikes help offset some of the rising memory costs, but they're not enough to erase the damage.
And Apple's management was clear that its device margins would fall.
NASDAQ: AAPL
Key Data Points
Apple's margins will drop (at least temporarily) under Ternus
Apple CFO Kevan Parekh said on the call that the company's margins will be 46.5% for the September quarter, down from 48.1% in the June quarter (excluding tariff benefits). And he specifically cited memory as the reason for the decline, noting that the decrease is "really driven by memory."
This decline comes just as John Ternus is taking over for Cook. So what might Ternus do about the falling margins?
Apple has reportedly already tested DRAM memory chips from the Chinese company CXMT. The idea behind the move is that Apple could use memory from this supplier for Apple devices sold in China. The Financial Times has also reported that Apple is lobbying the U.S. government to allow broader use of CXMT's memory processors outside of China.
But that likely won't be the fix Apple needs. CXMT has already reached its annual memory production capacity, according to the Wall Street Journal.
For now, it looks as if Apple's margins will decline slightly under Ternus, and the company doesn't have a permanent fix -- even with raising device prices.
Samsung, SK Hynix, and Micron Technology are the world's three largest memory companies -- accounting for about 94% of the DRAM memory market -- and all are all Apple suppliers. And management at SK Hynix and Micron have said the current memory crunch could last through 2027 or even 2030.
All of which means that Apple will likely be battling to regain its margins early in Ternus' tenure -- at least until the company can find the right mix of price increases and memory supply.
