Apple postQ: iPhone strength drives beat; supply and memory costs cloud outlook

Apple Inc. (NASDAQ: AAPL) delivered a strong fiscal third quarter, with revenue, operating income and earnings coming in ahead of Visible Alpha consensus expectations as stronger-than-expected iPhone and Mac demand more than offset weakness in Services and iPad.

The beat was broad-based across revenue and margins, but the outlook points to increasing near-term constraints. Management expects supply limitations to intensify across iPhone, Mac and iPad, while higher memory costs are set to pressure gross margins.

Looking at earnings summaries compiled by S&P Global Pronto NLP, together with Visible Alpha pre-quarter consensus expectations and revised outlook, here are the key takeaways.

Key takeaways

Revenue and earnings beat expectations. Q3 revenue rose 16.4% year-on-year to $109.4 billion, 1.1% above Visible Alpha consensus expectations. Diluted EPS of $2.02 exceeded expectations by 8%, while operating income of $35.7 billion came in 8.1% above consensus, pointing to stronger-than-expected operating leverage.

iPhone continued to be the main growth engine. iPhone revenue rose 21.7% to $54.3 billion, 2.2% ahead of consensus. Unit shipments of 56 million came in 4.6% above expectations, while the $977 ASP was 1.3% below consensus, indicating that the volume upside was partly offset by a less favorable mix.

Mac delivered the largest upside surprise. Mac revenue increased 28.7% to $10.4 billion, beating consensus by 18.2%. By contrast, iPad revenue fell 5.9% to $6.2 billion and missed consensus expectations by 10.3%. Wearables, Home & Accessories revenue of $7.9 billion was broadly in line.

Services growth remains healthy but is losing momentum relative to expectations. Services revenue rose 12.1% to $30.7 billion, but came in 2.1% below consensus. The miss is notable given Services' higher margins and its importance to Apple's longer-term earnings mix.

Gross margin reached 50.1%, 209 basis points above consensus. Product gross margin was ~380 basis points ahead of expectations, more than offsetting a 73-basis-point shortfall in Services gross margin.

Europe led geographically, while Asia remained a weak spot. Europe revenue increased 22.4% to $29.4 billion, 6.7% above consensus, while Americas revenue of $45.8 billion modestly exceeded expectations. Greater China, Japan and Rest of Asia Pacific all fell short of consensus.

Investment remained focused on R&D rather than capital intensity. R&D expense rose 32.3% to $11.7 billion, 2.2% above expectations. Capital expenditure declined 29.1% to $2.5 billion, 25.5% below consensus. Free cash flow increased 30.8% to $31.9 billion, although it was 1.6% below expectations.

Guidance 

Management expects Q4 revenue growth of 9%–11% year-on-year, including mid-teens iPhone revenue growth, despite an approximately 2.5 percentage-point foreign-exchange headwind.

The more important signal for investors is the supply outlook. Apple expects significantly higher supply constraints across iPhone, Mac and iPad because of limited availability of advanced-node chips.

Services growth is expected to remain broadly in line with Q3 at approximately 12%.

Q4 gross margin is expected at 47%–48%, including an approximately one percentage-point benefit from tariff refunds. The sequential margin decline reflects, in part, rising memory costs, which management expects to remain a significant headwind into the September quarter and beyond.

Consensus revisions

Analysts have cut Q4 revenue projections by 1.2% to $113.2 billion, while the FY2026 revenue forecast remained broadly unchanged at $477.5 billion. Within the product mix, iPhone and Mac estimates have been raised following the stronger quarter, while forecasts for iPad, Services, Wearables, and Asia have been lowered.

Profit expectations moved in the opposite direction. FY2026 consensus operating income, net income and diluted EPS estimates are now up 1.2%, 1.4% and 1.3%, respectively. Higher full year gross margin expectations and lower capital expenditure estimates are expected to support earnings forecasts despite weaker expectations for several revenue streams.

Share price reaction 

Apple shares fell following the earnings release as investors focused on weaker forward revenue growth, tighter supply availability and rising memory costs despite the quarterly earnings beat.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.