Apple’s earnings beat Wall Street under new CEO John Ternus. So why did its shares fall?

Apple reported better-than-expected quarterly revenue and profits, with strong iPhone sales helping the company deliver a record performance. Yet investors were less impressed by what lies ahead. The technology giant warned of rising memory-chip costs and slower growth in its services business, sending its shares lower in extended trading after its first earnings report under new CEO John Ternus.

The iPhone maker forecast a gross margin of 45 per cent to 46 per cent for the December quarter, below the 46.3 per cent analysts had expected. The projection also marks a decline from the 47.9 per cent margin reported for the September quarter.

Apple also expects services revenue to grow by 8 per cent to 9 per cent in the December quarter, falling short of Wall Street’s expectation of 10.7 per cent.

The outlook overshadowed a strong set of quarterly numbers. Apple’s shares fell about 4 per cent during the earnings call after executives outlined the company’s projections for the holiday shopping period.

Why are rising memory-chip costs a concern for Apple?

A major concern for investors is the rising cost of memory chips and other components used in smartphones, computers and consumer electronics.

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The surge in demand for memory chips, fuelled in part by the global artificial intelligence infrastructure boom, has pushed up component costs across the technology industry. Apple is not immune to the pressure, despite its scale and bargaining power with suppliers.

Chief Executive Officer John Ternus said that Apple had faced higher memory costs compared with the June quarter. The company partly offset the increase through inventory carried over from earlier periods and lower costs for certain non-memory components.

Apple has also raised prices across several products, including its iPhone and MacBook ranges, to cushion the impact of higher component expenses.

The challenge is that higher selling prices cannot necessarily offset rising input costs indefinitely. If component prices continue climbing, Apple could face pressure on profitability even as demand for its products remains strong.

Strong iPhone sales help Apple beat estimates

Apple reported fiscal fourth-quarter revenue of $114.48 billion, beating analysts’ estimate of $113.39 billion, according to LSEG data, as reported by Reuters.

Earnings per share came in at $2.10, compared with the Wall Street estimate of $1.99. The figure included a benefit of 5 cents per share from tariff refunds.

Revenue increased 12 per cent from $102.5 billion in the year-ago quarter.

The iPhone remained Apple’s biggest source of revenue, generating $57.58 billion in sales, ahead of analysts’ expectations of $56.54 billion. The figure included sales of the iPhone 18 Pro models, which went on sale in September, but did not include the iPhone Duo, Apple’s first foldable smartphone, which reached stores after the quarter ended.

Mac revenue also performed strongly, rising to $10.79 billion against estimates of $9.61 billion.

The company’s gross margin stood at 47.9 per cent, beating the 47.5 per cent expected by analysts.

However, not every product category delivered the same performance. iPad revenue was $6.23 billion, below the $6.70 billion expected, while sales of wearables, home products and accessories came in at $8.30 billion against estimates of $9.06 billion.

Apple’s services business shows signs of slowing

Another concern for investors is the pace of growth in Apple’s services business.

The segment includes the App Store, iCloud storage, Apple Music, Apple TV+, AppleCare, payment services and advertising, among other offerings. It has become an important source of recurring revenue for Apple and generally carries higher margins than hardware sales.

Services revenue stood at $31.57 billion in the September quarter, broadly in line with analysts’ estimate of $31.58 billion.

But the company’s forecast of 8 per cent to 9 per cent growth for the December quarter fell well short of market expectations.

Services recorded its slowest growth since 2022 during the September quarter.

The slowdown matters because investors have increasingly looked to services to reduce Apple’s dependence on iPhone sales and provide a more predictable stream of revenue.

While Ternus said that Apple had recorded all-time highs in several services categories, including video, cloud services, payments and advertising, the broader growth outlook remains a concern.

John Ternus faces his first earnings test

The results mark Apple’s first quarterly earnings report since Ternus took over as CEO in September, succeeding Tim Cook.

Ternus is overseeing a period of changes in Apple’s product strategy. The company has begun spreading its iPhone launches across different periods rather than concentrating most new models in the autumn.

It has also expanded its product portfolio with new devices, including its first touchscreen laptops and a smart-home hub featuring an upgraded Siri assistant.

The strategy is aimed partly at smoothing Apple’s revenue cycle and reducing its dependence on the seasonal surge in iPhone sales during the holiday quarter.

The new iPhone Duo has attracted strong initial demand, but Apple is struggling to meet orders. Ternus told Reuters that supply remained constrained and that the company could not yet predict when supply and demand would reach a balance.

He also acknowledged reports of display problems affecting a small percentage of the foldable devices, saying Apple was replacing the affected units.

For the December quarter, Apple expects revenue to increase between 7 per cent and 10 per cent year-on-year. That is above analysts’ average forecast of 6.1 per cent, suggesting demand remains relatively resilient.