Apple Inc. reported its strongest June quarter ever on July 31, with revenue of $109.4 billion, up 16.4% year-over-year, and gross margin of 50.1%, surpassing the 50% mark for the first time. Revenue, EPS, and operating cash flow all set records for the period. However, the stock fell 6% in after-hours trading, wiping out over $300 billion in market value.
The market focused on the Q4 guidance, which called for gross margin to decline from 50.1% to between 47% and 48%, a drop of 2 to 3 percentage points. The headline number is modest, but the forces driving those few percentage points are buried deep in Apple's supply chain. The four major cloud providers are investing a combined $725 billion in capital expenditures this year, squeezing Apple's manufacturing costs from the supply side. TSMC's advanced process capacity is being heavily taken by AI chips, while DRAM capacity is consumed by AI servers, causing storage chip prices to surge. Apple's capital expenditure over the past nine months was less than $6.8 billion, a fraction of the cloud providers' spending. Apple does not build AI data centers, but the cost of AI data centers is being transmitted through two channels, chips and storage, into every iPhone and Mac.
This marks the final earnings call for Tim Cook as CEO. On September 1, John Ternus, Senior Vice President of Hardware Engineering, will take over. On his first day, he will face a squeeze spreading from the supply side.
Gross margin's 50% milestone has hidden elements
The 50.1% gross margin is Apple's first time exceeding 50%, but it includes about 2 percentage points from a one-time tariff refund adjustment. Excluding that, the actual gross margin is about 48.1%, still up 1.6 percentage points year-over-year, driven by a higher mix of iPhone Pro models and an increased share of services revenue. The real signal is in the next quarter. CFO Luca Maestri provided a Q4 gross margin guidance midpoint of 47.5%, down 2.6 percentage points from the current quarter's 50.1%. Even on an adjusted basis, the decline from 48.1% to 47.5% represents a drop of 0.6 percentage points. Apple is passing rising supply chain costs onto its profit margins.
R&D spending is another notable figure. Quarterly R&D expenses were $11.7 billion, up 32.3% year-over-year, twice the rate of revenue growth. Cumulative R&D spending over the past nine months was $34 billion, an increase of $8.3 billion year-over-year. Cook stated on the call that "Apple is investing more in AI overall." This money is flowing into self-developed AI chips, Siri AI, and software platform AI integration. However, AI-related paid services have not yet generated significant revenue, so the cost base is rising without a corresponding revenue stream. EPS of $2.02 included $0.11 from the tariff refund. Excluding that, it was about $1.91, beating market expectations by about $0.04, but the beat came from one-time factors, not operational improvements.
AI data centers are consuming Apple's supply chain
The deepest signal in this report lies here. Microsoft, Meta, Google, and Amazon are collectively spending $725 billion on capital expenditures this year, up 77% year-over-year. Apple, which does not build AI data centers, spent only $6.8 billion in capital expenditures over the past nine months, down 28% year-over-year. However, Apple cannot escape the cost transmission of the AI infrastructure boom. Cloud providers need training and inference chips, while Apple needs terminal processors and memory. Though the products differ, they both compete for capacity from the same set of suppliers.
The first pipeline is TSMC's advanced process. Apple's self-developed SoCs depend on N3 and other advanced processes. N3 capacity is 100% sold out in 2026, with about 60% taken by AI chip customers. This share is expected to rise to 86% by 2027. AI chips are crowding out consumer electronics. Cook confirmed on the call that supply constraints in the June quarter were mainly on Macs, expanding to iPhones and iPads in the September quarter. He attributed this to "demand growing too fast," without naming AI directly, but the industry knows where the capacity is going.
The second pipeline is DRAM. Storage chip contract prices surged over 90% in the first quarter of this year, with Goldman Sachs expecting a full-year increase of 250% to 280%. The reason is straightforward: AI servers are driving a boom in demand for high-bandwidth memory (HBM). Samsung, SK Hynix, and Micron are prioritizing HBM capacity because HBM profit margins are 3 to 5 times higher than consumer-grade DRAM. Consumer DRAM capacity is squeezed, leading to price increases. Cook described the storage price surge as a "once-in-a-century flood." Storage costs were higher in the March quarter than in the December quarter, and higher again in the June quarter, with further increases expected in the September quarter. Apple has already "reluctantly" raised prices on several Mac, iPad, and home device models in June.
Inventory data confirms the rising costs. The balance sheet shows inventory surging from $5.7 billion to $11.1 billion, an increase of 94%. Part of this is due to pre-stocking to address supply constraints, but rising component prices, especially for storage, directly increase the inventory value. If the storage cost of an iPhone rises by 15%, the inventory value will jump even if the number of units remains the same. The two numbers, $725 billion and $6.8 billion, placed on the same financial statement, clearly illustrate Apple's position: the cost of AI infrastructure is inevitable, just paid in a different way, through chips and storage, into the gross margin.
Cross signals from inventory doubling and R&D surge
Two other data points on the balance sheet are worth examining. Intangible assets jumped from $11.1 billion to $20.3 billion, an increase of $9.3 billion in a single quarter, or 83%. The company did not disclose the corresponding transaction, but such a large increase in intangible assets typically indicates a significant acquisition or intellectual property deal. Combined with the 32% growth in R&D spending, Apple may have completed a technology or team acquisition in the AI field. Services revenue, a key cash cow with nearly 75% gross margin, grew 12.1% year-over-year to $30.7 billion, below the previous quarter's $31 billion and below market expectations of $31.4 billion. The slowdown in services growth directly weighs on long-term profitability expectations. Paid subscribers exceeded 1.5 billion, and Siri AI beta testing received positive feedback, but AI-related paid services have not yet generated significant revenue.
Products sell well, but capacity cannot keep up
Apple's core contradiction lies here. iPhone and Mac performed strongly this quarter. iPhone revenue of $54.3 billion contributed nearly half of total revenue, up 21.7% year-over-year, setting a June quarter record. Mac revenue of $10.4 billion was up 28.7% year-over-year, significantly exceeding market expectations of about 20%. The M5 chip MacBook series, launched in March, continues to be in short supply, partly due to insufficient advanced process capacity. Mac sales in Greater China and emerging markets like Southeast Asia hit new highs for the period. iPad was the only product category to decline, with revenue of $6.19 billion, down 5.9% year-over-year and about 10% below market expectations, primarily due to lengthening upgrade cycles.
Cook's final push
Cook mentioned on the call that Apple is "evaluating all options" to increase DRAM supply sources. Market rumors point to Chinese memory maker ChangXin Memory Technologies (CXMT). Cook responded indirectly, saying, "The DRAM market mainly has three suppliers. If there are more suppliers, that would be a good thing." This statement suggests a potential fundamental shift in Apple's supply chain strategy, from a highly concentrated base of Samsung, SK Hynix, and Micron to include more sources, including Chinese manufacturers. CXMT currently holds about 7.67% of the global DRAM market share and is the only Chinese company with large-scale DRAM production capacity. Cook did not directly confirm whether Apple is testing CXMT's products, but the phrase "evaluating all options" and the urgency of the "once-in-a-century flood" in storage prices send a clear signal.
Ternus' first test is supply
On September 1, Cook will become Chairman of the Board, and John Ternus will take over as CEO. Cook's farewell at the end of the call was calm and composed: "Thank you to our shareholders, especially long-term shareholders, for their trust over the years. This is my last earnings call. The transition is going very smoothly, and I'm very much looking forward to John Ternus stepping into his new role." Ternus' first test is very specific: the September product cycle, including how many new iPhones to stock, pricing strategy, and whether lead times for Macs and iPads can be shortened. The ability to sell products has been proven. The September quarter will prove another thing: whether these products can reach consumers on schedule. Apple's Q4 guidance calls for iPhone growth of about 15%, below market expectations of 17.6%. Macs and iPads will also face "increasing supply constraints." Foreign exchange headwinds are expected to drag Q4 growth by about 2.5 percentage points, and services growth continues to slow, presenting Ternus with a challenging set of circumstances.
Three variables to track next quarter
The core contradiction in Apple's Q3 report lies on the supply side. Demand for iPhones and Macs is rising, but the $725 billion in cloud provider capital expenditures is squeezing Apple's gross margin and delivery capacity through TSMC's advanced process and DRAM. The Q4 gross margin guidance of 47% to 48% is just the first visible sign. Three variables to track next quarter are: DRAM contract price trends, the shift in TSMC's advanced process capacity allocation between AI and consumer electronics, and whether CXMT can enter Apple's DRAM supply chain. A change in any of these variables would alter Apple's cost curve.
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