Apple Services Margin Hits 74%, Shifting the Investment Case

Apple reported June-quarter revenue of $85.8 billion, up 5% from a year earlier, with earnings per share of $1.40. The headline number landed inside the company's own guidance range of $84.3 billion to $86.3 billion. The stock slipped 1.5% in after-hours trading as investors parsed the details.

The Services segment delivered $24.2 billion in revenue, a record for the June quarter and up 14% year over year. Services gross margin came in at 74%, up from 70.5% in the same period last year. That margin expansion is the number that changes the investment case. Apple has been pushing higher-margin subscription revenue for years. The pace of improvement accelerated this quarter. The App Store, Apple Music, iCloud, and the AppleCare warranty business all contributed, CFO Luca Maestri said on the call.

Hardware revenue was $61.6 billion, up 2% from a year ago. iPhone sales of $39.3 billion were roughly flat, better than the 2% decline some analysts had modeled. Mac revenue of $7.0 billion and iPad revenue of $7.2 billion both beat the company's own subdued expectations. Wearables, home, and accessories revenue of $8.1 billion fell 2%, a weaker result Maestri attributed to "uneven demand" in the category.

The product mix shift toward Services is the structural story. Apple now generates 28% of its revenue from Services, up from 26% a year ago. At a 74% margin versus hardware's roughly 36% margin, every percentage point of revenue mix that moves to Services adds about 38 basis points to Apple's consolidated gross margin. That math is why the stock trades at 31 times forward earnings despite single-digit revenue growth.

China revenue of $14.7 billion was down 1% from a year earlier, a smaller decline than the 3% drop some analysts had expected. Maestri said iPhone sales in China grew on a constant-currency basis, suggesting the competitive pressure from Huawei and local Android brands may be easing. Greater China still accounts for 17% of Apple's total revenue.

The company declared a quarterly dividend of $0.25 per share, up from $0.24 a year ago. Apple spent $26 billion on share repurchases and dividends during the quarter, continuing its pattern of returning most free cash flow to shareholders. Free cash flow for the quarter was $24.5 billion.

For the September quarter, Apple guided revenue to grow at a similar rate to the June quarter, which implies roughly $89 billion to $91 billion. Maestri said foreign exchange would be a 1.5 percentage point headwind. The September quarter includes the first full month of iPhone 16 sales, which will be the real test of demand. Apple typically launches new iPhones in September.

The Services margin story is durable. Apple has 1.0 billion paid subscriptions across its platform, up from 975 million a year ago. Each new subscription adds high-margin revenue with little incremental cost. The question for the stock is whether hardware revenue can hold flat while Services grows. A hardware downturn would pull Services growth down with it. That tension is the reason Apple trades at a discount to high-growth software companies despite having similar margins on its Services business.