So iPhone buyers aren’t waiting around for better artificial-intelligence features. For Apple that is both good and bad news.
The good news was readily apparent in the company’s fiscal first-quarter results late Thursday. iPhone revenue surged 23% year over year to more than $85 billion. That was well ahead of Wall Street’s expectations and the best December-quarter growth for Apple’s largest business segment in more than a decade.
Growth was so good, in fact, that Apple is struggling to keep up. During its conference call, Apple Chief Executive Tim Cook said the company depleted much of its inventory during the quarter and is now in “supply chase mode” to get more produced. And that is proving to be a challenge—even given Apple’s well-known prowess at wrangling its supply chain. The company admitted, for instance, that it is having trouble getting enough production capacity for the most advanced processing chips that power its latest products.
Taiwanese chip-making titan TSMC is Apple’s main producer of those chips. But TSMC is also the main producer of AI chips for companies such as Nvidia and Advanced Micro Devices. And the red-hot demand and high prices those chips command are leaving little spare room for other product segments in a finite number of production lines. Smartphone chips fell from 38% of TSMC’s revenue in 2023 to 29% last year, according to the company’s latest earnings report this month.
Apple still managed to project total revenue growth of 13% to 16% for the March-ending quarter, which beat the 10% analysts had been expecting, according to FactSet estimates. But the stock rose only slightly in after-hours trading Thursday. Investors remain worried about the durability of the latest iPhone sales surge and Apple’s ability to deal with sharply rising costs for memory chips, which are also facing a severe supply shortage because of booming demand for AI systems.
Sandisk drove that point home with its own report Thursday afternoon. The flash-memory maker reported a 61% jump in revenue for the December quarter and projected a near-tripling in the March-ending period. Flash and DRAM chips are important components in any computing device, which has industry analysts projecting that some makers of smartphones and personal computers will have to either start downgrading the memory specs in their product lines or jacking up prices to manage demand and save their profit margins.
Apple gave little hint of its own plans to manage the memory crunch. But the company did project gross profit margins picking up slightly to 48.5% in the current quarter, suggesting confidence that it can keep sales and profit up in the near term. It needs to. Apple’s profit margins are closely watched by investors and remain a crucial part of the company’s appeal as its overall growth has slowed over the past few years. Investors expect Apple’s gross margins to rise steadily over the next three years, according to estimates from Visible Alpha.
The iPhone will be key to hitting that goal. But Apple’s flagship product is now a mature business that has averaged 1% sales growth per quarter over the past three years. Rising prices have compelled users to hang on to their phones longer, putting a greater distance between replacement “supercycles” that investors like to see. So the current iPhone 17 family proving to be a hit raises the possibility that the next lineup won’t sell as well, even if it packs in significant AI enhancements that Apple users have been waiting for.
Investors and consumers likely won’t get a clear picture of what those enhancements will be for a while, as Apple typically holds major software announcements for its June developers conference. At least dealing with the supply crunch of memory and other key inputs will keep the company plenty busy until then.
Write to Dan Gallagher at dan.gallagher@wsj.com