Apple Q1: Services Record Masks iPhone China Miss

Apple delivered a fiscal first-quarter revenue beat and a record Services quarter. iPhone sales in China missed estimates and fell 8%, giving the stock a mixed signal after the report.

Revenue reached $124.3 billion, up 4% from a year earlier and slightly above the $124.1 billion Bloomberg consensus. Earnings per share came in at $2.40, topping the $2.35 estimate. Gross margin widened to 46.6% from 45.9%, above the 46.5% the company had guided. Net income rose 2% to $36.3 billion.

The bright spot was Services. Revenue hit a record $26.3 billion, climbing 14%. CFO Luca Maestri told analysts on the call that paid subscriptions across the platform exceeded 1 billion, led by growth in the App Store and iCloud. Services gross margin was roughly 74%, up from 70% a year ago.

The iPhone line tells a different story. Sales totaled $69.1 billion, up 3% from $69.0 billion a year earlier but below the $71.0 billion consensus. The miss was concentrated in China, where iPhone revenue fell 8% to $15.2 billion. CEO Tim Cook said the region faced “intense competition,” pointing to Huawei’s resurgence and local smartphone brands. He noted that Apple Intelligence features, rolled out in the U.S. in October, had not yet launched in China, putting the device at a feature disadvantage.

Other segments performed unevenly. The Mac line generated $8.9 billion, up 16%, boosted by the new M4 chip lineup. iPad revenue rose 15% to $8.1 billion, helped by the iPad Pro refresh. Wearables, home, and accessories brought in $11.6 billion, down 2%.

Apple stopped issuing formal revenue guidance in 2020. On the call, Maestri offered a rough framework for the March quarter. Total company revenue growth would be similar to the December quarter’s 4% pace, he said. Services growth should accelerate to “around 10%,” while iPhone revenue would likely be flattish. That language implies revenue in the range of $96 billion to $98 billion, below the $98.5 billion analysts had penciled in before the call.

Capital returns continued at a heavy pace. Apple spent $34 billion on buybacks and dividends in the first quarter, up from $31 billion a year earlier. The company ended the period with $153 billion in cash and marketable securities, net of debt.

The stock dipped 1.2% in after-hours trading after the initial results, then recovered to flat once Maestri discussed the Services margin trajectory. Morgan Stanley analyst Erik Woodring wrote that the Services margin “supports a higher aggregate multiple for the stock, even if hardware cycles are uneven.” His logic implies the stock’s valuation discount to peers depends on iPhone stabilizing in China, its weakest region last quarter.

Apple’s multiple now stands at about 29 times estimated fiscal 2025 earnings of $7.55 per share. The median forward P/E for the Magnificent Seven group is 33 times.