Apple Earnings: China Roars Back as Margin Guidance Defies Rising Memory Costs
Global consumer electronics titan $Apple (AAPL.US)$ dropped its FY26Q1 earnings after the bell. Explosive iPhone sales finally drove Greater China to beat expectations after years of underperformance, while gross margin hit a record high and net profit breached the $40 billion mark for the first time.
Three Things to Watch
Greater China Revenue Finally Beats Expectations
Greater China has always been a critical market for Apple, historically accounting for over 20% of total revenue. Previously, revenue growth in this region lagged behind the corporate average for nine consecutive quarters, keeping the market laser-focused on its recovery.
In our previous article, "Apple FY26Q1 Earnings: iPhone Rebound in China vs. Memory Price Shock," we noted that thanks to extended Chinese state subsidies and according to CAICT 2025 data, foreign brand shipments in mainland China jumped 13% and 128% year-over-year in October and November respectively. Most of these were iPhones, significantly outperforming domestic mobile brands.
Fueled by this surge in iPhone shipments, Greater China revenue hit $25.5 billion this quarter, up 38% year-over-year. This marks the fastest growth since 2021, smashing the consensus estimate of $21.8 billion and finally outpacing the company's average growth rate.
iPhone Frenzy Lifts Hardware Margins; Memory Price Impact Manageable in Short Term
As the MVP of this quarter, iPhone revenue reached $85.3 billion, a 23% year-over-year increase and a high not seen since 2021. Even management marveled at the robust demand. Since the iPhone commands one of the highest margins in Apple's hardware lineup, its strong sales pushed the hardware gross margin to a record 40.7%.
Since the second half of last year, surging AI demand has squeezed consumer electronics capacity, causing storage and memory prices to skyrocket. This has been painful for downstream device makers. Recent rumors suggest some Chinese smartphone manufacturers slashed 2026 shipment targets by nearly 20% due to these soaring costs.
However, Apple reigns supreme in consumer electronics and wields immense power over the supply chain. Japanese NAND giant $Kioxia Holdings (285A.JP)$ 's recent poor performance was partly due to the constraints of Apple's long-term orders. While management indicated that rising memory costs will start to show next quarter, the guidance for continued sequential gross margin growth suggests the impact is manageable in the short term, though the long-term outlook remains to be seen.
Services Revenue Misses Expectations; Growth Remains Tepid
As the key driver of the iPhone ecosystem flywheel, Services revenue came in at $30.013 billion, up 14% year-over-year, slightly missing the consensus of $30.038 billion. Both transacting and paid accounts hit all-time highs, with record revenue in advertising, cloud services, music, and payment services. Apple is also introducing new ad slots in the App Store.
The Services gross margin hit a record 76.5%, contributing significantly more profit relative to the hardware margin of 40.7%. However, Services revenue growth has remained below 20% for nearly 16 consecutive quarters. With next quarter's growth guidance remaining flat, the market continues to worry whether the Services business has hit a growth ceiling.
FY26Q1 Key Financial Highlights
– Revenue: $143.8 billion, up 16% YoY, beating the consensus of $138.4 billion. Previous guidance was 10% to 12% growth.
– Gross Margin: 48.2%, up 1.3 percentage points YoY, beating the consensus of 47.5%. Previous guidance was 47% to 48%.
– Net Profit: $42.1 billion, up 16% YoY, beating the consensus of $39.4 billion.
FY26Q1 Revenue Breakdown by Platform
– iPhone: $85.3 billion, up 23% YoY (Record High), beating the consensus of $78.2 billion.
– Mac: $8.4 billion, down 7% YoY, missing the consensus of $9.1 billion.
– iPad: $8.6 billion, up 6% YoY, beating the consensus of $8.2 billion.
– Wearables, Home and Accessories: $11.5 billion, down 2% YoY, missing the consensus of $12.1 billion.
– Services: $30.0 billion, up 14% YoY, slightly missing consensus.
FY26Q2 Outlook
Apple expects revenue to grow 13% to 16% year-over-year next quarter, implying a revenue ceiling of $110.6 billion. However, iPhone production capacity is constrained, and Services revenue growth is expected to remain flat at 14% compared to the previous quarter. Gross margin is projected at 48% to 49%, Opex at $18.4 billion to $18.7 billion, OI&E at $100 million, and the tax rate at 17.5%.
Based on this guidance, the implied upper limit for next quarter's net profit is $29.6 billion, a 20% year-over-year increase, representing the fastest growth since FY22Q1.
Summary
Overall, Apple delivered a stellar report card this quarter, particularly regarding Greater China and gross margins. The strong guidance for revenue and margins next quarter has temporarily quelled market fears that skyrocketing memory prices would drag down profitability.
Additionally, the constraints on $Taiwan Semiconductor (TSM.US)$ 's capacity reflect the current reality where AI demand continues to squeeze the supply of consumer electronics capacity.
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