Apple’s gross margin hits record as services business keeps growing

Apple is struggling to squeeze growth out of its flagship iPhone unit, but its profit margin keeps going up thanks to a flourishing services business.

In its fiscal first-quarter earnings report on Thursday, Apple reported a gross margin — the profit left after accounting for the cost of goods sold — of 46.9%. That’s the highest on record, surpassing the 46.6% margin the company record in the period ending March 2024.

For Apple, services includes App Store purchases, advertising, payments, AppleCare support and other subscription offerings. The growth in those products has offset a slowdown in sales of the iPhone and a saturation in the global smartphone market.

The “services business in general in aggregate is accretive to the overall company margin,” Apple CFO Kevan Parekh said on the earnings call after the report.

In the current quarter, Apple said its gross margin will be between 46.5% and 47.5%.

IPhone sales slipped almost 1% in the latest quarter from a year earlier, as the company reported weakness in Greater China. Total revenue rose almost 4% to $124.3 billion.

Services revenue rose about 4% to $26.34 billion, beating analysts’ estimates. The business now accounts for roughly 21% of Apple’s overall revenue. Last quarter, Apple announced that its services unit had turned into a $100 billion a year business.

“We were thrilled to bring customers our best-ever lineup of products and services during the holiday season,” CEO Tim Cook said in the press release.

Cook’s emphasis on services has transformed Wall Street’s view of a company that’s been defined over the decades by its iconic devices. For many years in the iPhone era, Apple’s gross margin would predictably come in at between 38% and 39%, reflecting the company’s tight grip over its supply chain and its pricing power in the market.

But with iPhone growth slowing in recent years, Apple’s move into services has changed the equation. The company hit a 40% gross margin in 2021 and has continued to expand it.

Because of Wall Street’s love of profit, Apple’s been able to keep delivering for investors. The stock rose 31% last year, outperforming the Nasdaq, and the company’s market cap has climbed to $3.6 trillion.

“We believe Apple deserves to trade at premiums to its historical comparable valuation, as it sets itself further apart as a provider of premium electronic consumer devices and high-margined digital services, and notably as the age of on-device generative AI gets underway,” analysts at Argus wrote in a report earlier this month. They recommend buying the stock.

Apple shares rose more than 3% in extended trading after Thursday’s report.

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