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Hardware, not Services, lifted gross margin past half of sales

Gross margin rose 3.6 points to 50.1% while the Services margin held flat, so products, through mix and tariff refunds, made the gain.

Q3 FY2026, the quarter to Jun 27, 2026 · 10-Q filed Jul 31, 2026

Q3 FY2026 · revenue
$109.4B+16.4% on the year
Operating margin
32.6%
Net income
$29.8B
Free cash flow, quarter
$31.9B

Largest source of revenue: iPhone, 49.6% of the total.

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Key insights · Q3 FY2026
  1. 01

    Hardware, not Services, lifted gross margin past half of sales

    Gross margin rose 3.6 points to 50.1% while the Services margin held flat, so products, through mix and tariff refunds, made the gain.

    Why it matters

    Gross margin was 50.1% of net sales against 46.5% in the same quarter a year earlier. Cost of sales grew 8.6% while net sales grew 16.4%. Product cost rose to $47.2B from $43.6B, a far smaller increase than in product sales.1

    The filing says the Services gross margin percentage was flat on the year, so the step up sits in Products. It credits 'a different mix of products and tariff refunds, partially offset by higher costs, including memory.' iPhone sales grew 21.7%, 'primarily due to higher net sales of Pro models', and Mac grew 28.7% on laptops.1

    The margin has risen for five quarters in a row: 46.5%, 47.2%, 48.2%, 49.3% and now 50.1% of net sales.1

    AnalysisTariff refunds are a one-off by nature, so part of this quarter's step may not recur at the same size. The filing also says gross margins 'will be subject to volatility and downward pressure' and expects memory and storage cost pressure to intensify. The mix effect is the part that could persist.

  2. 02

    A wider margin is paying for a 32% research jump

    Research spending grew 32.3%, about twice the pace of sales, yet operating margin still widened to 32.6% of sales, because gross margin rose faster.

    Why it matters

    Research and development rose to $11.7B from $8.9B, 10.7% of net sales, up 1.3 points. The filing names 'higher infrastructure-related costs, including investments in artificial intelligence, and headcount-related expenses.'1

    Research took 21.4% of gross margin against 20.3% a year earlier. Total operating expenses rose 0.9 points to 17.4% of net sales while gross margin rose 3.6 points, so operating income grew 26.6% to $35.7B, faster than the 16.4% growth in sales.1

    AnalysisThe spending runs ahead of any revenue line that reports it. The quarter shows a company funding a new platform from what its current devices and services already earn, without squeezing operating margin. That holds only while the gross margin gain lasts: if component costs pull gross margin back, research growth at this pace would start to show in operating margin.

  3. 03

    AI spending shows in expenses while capital spending fell

    Capital spending fell to $2.5B from $3.5B even as research rose 32.3%, and free cash flow reached $31.9B, 29.2% of net sales, against $24.4B.

    Why it matters

    Operating cash flow was $34.4B against $27.9B a year earlier, 1.15 times net income of $29.8B. Capital spending was $2.5B, 2.2% of net sales and 7.1% of operating cash flow, against $3.5B in the same quarter a year earlier.1

    The filing says the company's artificial intelligence offerings depend 'on access to sufficient computing resources' and that, in addition to its own data center infrastructure, it 'relies on third-party cloud service providers' for compute. Research rose 'primarily due to higher infrastructure-related costs, including investments in artificial intelligence.'1

    AnalysisAnalysis: renting part of the compute rather than building all of it puts the cost in operating expenses instead of capital spending, which keeps free cash flow high for now. The filing does not explain the fall in capital spending, so this is a reading, not the company's statement. The trade-off is reliance on rented capacity that the filing calls constrained and rising in cost.

Sources

  1. 1.Apple 10-Q for the period to 2026-06-27 (the filing), Jul 31, 2026, read Nov 1, 2026

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Business performance

Growth, profit and margin

Revenue went from $24.6B in FY2007 to $416.2B in FY2025, the operating margin from 17.9% to 32.0%, over 18 years.

  • Revenue$416.2B
  • Operating income$133.1B
  • Operating margin32.0%
Period
Q3 FY2026
Revenue
$109.4B
Operating income
$35.7B
Operating margin
32.6%
Net income
$29.8B
Free cash flow
$31.9B
Business performance

Does the profit turn into cash?

Q3 FY2026: free cash flow of $31.9B against net income of $29.8B in the quarter.

  • Operating cash flow$111.5B
  • Capital expenditure$12.7B
  • Free cash flow$98.8B
  • Net income$112.0B

Capital expenditure is drawn below the axis as cash out. Cash conversion is operating cash flow over net income, shown in the tooltip for years with a profit.

Financial data and sources

How the revenue mix has shifted

Each breakdown the filing reports, as shares of revenue, for every period it restates.

Revenue - Disaggregated Net Sales and Portion of Net Sales That Was Previously Deferred (Details). The filing restates this breakdown for 1 period.

Click a member to isolate it across the years shown.

The figures

Margins, cash and growth for the period, each with what it was computed from.

Gross margin
50.1%
Source10-Q, Derived from Gross margin and Net sales in the 10-Q filed 2026-07-31
Operating margin
32.6%
Source10-Q, Derived from Operating income and Net sales in the 10-Q filed 2026-07-31
Net margin
27.2%
Source10-Q, Derived from Net income and Net sales in the 10-Q filed 2026-07-31
Free cash flow, quarter
$31.9B
Source10-Q, Derived from the prior period in the history in the 10-Q filed 2026-07-31
Free cash flow margin, quarter
29.2%
Source10-Q, Derived from the prior period in the history in the 10-Q filed 2026-07-31
Cash conversion, quarter
1.15x
Source10-Q, Derived from the prior period in the history in the 10-Q filed 2026-07-31
Capital spending, quarter
2.2%
Source10-Q, Derived from the prior period in the history in the 10-Q filed 2026-07-31
Revenue growth
+16.4%
From the record's own history, against the prior year.

Where revenue comes from

Every breakdown the filing reports for the period, with each item's share.

Revenue streams

iPhone$54.3B49.6%
Services$30.7B28.1%
Mac$10.4B9.5%
Wearables, Home and Accessories$7.9B7.2%
iPad$6.2B5.7%

Source10-Q, us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax, as reported in the 10-Q filed 2026-07-31

Segments

Americas$45.8B41.8%
Europe$29.4B26.9%
Greater China$18.8B17.2%
Rest of Asia Pacific$8.9B8.1%
Japan$6.6B6.0%

Source10-Q, us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax, as reported in the 10-Q filed 2026-07-31

What it costs

The cost lines beneath operating income, each as a share of revenue, then the operating result.

Costs are reported by function: what it cost to make what was sold, then the expenses of selling, developing and administering.

Cost lineQ3 FY2026Of revenueSource
Cost of sales$54.6B49.9%Source10-Q, us-gaap:CostOfGoodsAndServicesSold, as reported in the 10-Q filed 2026-07-31
Operating income$35.7B32.6%Source10-Q, us-gaap:OperatingIncomeLoss, as reported in the 10-Q filed 2026-07-31

Operating income by segment

Where the operating profit is earned, as the filing reports it.

Segments

Americas$21.7B60.8%
Europe$13.4B37.7%
Greater China$7.4B20.7%
Rest of Asia Pacific$4.2B11.7%
Japan$3.0B8.4%

Shares of operating income. The segments do not sum to the total; the filing states them beside it. Source10-Q, us-gaap:OperatingIncomeLoss, as reported in the 10-Q filed 2026-07-31

The statements, as filed

The income statement, cash flow statement and balance sheet in the company's own order and words. Every line links to the filing.

Income statement19 lines, as presented in the 10-Q
LineQ3 FY2026A year earlierChangeOf revenueSource
Income Statement
Net sales$109.42B$94.04B+16%100%Source10-Q, us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax, as reported in the 10-Q filed 2026-07-31
Products$78.68B$66.61B+18%71.9%Source10-Q, us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax [us-gaap:ProductMember], as reported in the 10-Q filed 2026-07-31
Services$30.74B$27.42B+12%28.1%Source10-Q, us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax [us-gaap:ServiceMember], as reported in the 10-Q filed 2026-07-31
Cost of sales$54.65B$50.32B+8.6%49.9%Source10-Q, us-gaap:CostOfGoodsAndServicesSold, as reported in the 10-Q filed 2026-07-31
Products$47.15B$43.62B+8.1%43.1%Source10-Q, us-gaap:CostOfGoodsAndServicesSold [us-gaap:ProductMember], as reported in the 10-Q filed 2026-07-31
Services$7.49B$6.70B+12%6.8%Source10-Q, us-gaap:CostOfGoodsAndServicesSold [us-gaap:ServiceMember], as reported in the 10-Q filed 2026-07-31
Gross margin$54.77B$43.72B+25%50.1%Source10-Q, us-gaap:GrossProfit, as reported in the 10-Q filed 2026-07-31
Operating expenses:
Research and development$11.73B$8.87B+32%10.7%Source10-Q, us-gaap:ResearchAndDevelopmentExpense, as reported in the 10-Q filed 2026-07-31
Selling, general and administrative$7.35B$6.65B+10%6.7%Source10-Q, us-gaap:SellingGeneralAndAdministrativeExpense, as reported in the 10-Q filed 2026-07-31
Total operating expenses$19.08B$15.52B+23%17.4%Source10-Q, us-gaap:OperatingExpenses, as reported in the 10-Q filed 2026-07-31
Income Statement
Operating income$35.70B$28.20B+27%32.6%Source10-Q, us-gaap:OperatingIncomeLoss, as reported in the 10-Q filed 2026-07-31
Other income/(expense), net$572.0M-$171.0M0.5%Source10-Q, us-gaap:NonoperatingIncomeExpense, as reported in the 10-Q filed 2026-07-31
Income before provision for income taxes$36.27B$28.03B+29%33.1%Source10-Q, us-gaap:IncomeLossFromContinuingOperationsBeforeIncomeTaxesExtraordinaryItemsNoncontrollingInterest, as reported in the 10-Q filed 2026-07-31
Provision for income taxes$6.48B$4.60B+41%5.9%Source10-Q, us-gaap:IncomeTaxExpenseBenefit, as reported in the 10-Q filed 2026-07-31
Net income$29.79B$23.43B+27%27.2%Source10-Q, us-gaap:NetIncomeLoss, as reported in the 10-Q filed 2026-07-31
Earnings per share:
Basic (in dollars per share)$2$2+29%0.0%Source10-Q, us-gaap:EarningsPerShareBasic, as reported in the 10-Q filed 2026-07-31
Diluted (in dollars per share)$2$2+29%0.0%Source10-Q, us-gaap:EarningsPerShareDiluted, as reported in the 10-Q filed 2026-07-31
Shares used in computing earnings per share:
Basic (in shares)14,656,110,00014,902,886,000-1.7%Source10-Q, us-gaap:WeightedAverageNumberOfSharesOutstandingBasic, as reported in the 10-Q filed 2026-07-31
Diluted (in shares)14,714,676,00014,948,179,000-1.6%Source10-Q, us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding, as reported in the 10-Q filed 2026-07-31
Cash flow statement2 lines, as presented in the 10-Q

Year to date, as a quarterly filing reports it.

LineQ3 FY2026A year earlierChangeSource
Operating activities:
Net income$29.79B$23.43B+27%Source10-Q, us-gaap:NetIncomeLoss, as reported in the 10-Q filed 2026-07-31
Statement of Cash Flows
Cash, cash equivalents, and restricted cash and cash equivalents, ending balances$39.54B$36.27B+9.0%Source10-Q, us-gaap:CashCashEquivalentsRestrictedCashAndRestrictedCashEquivalents, as reported in the 10-Q filed 2026-07-31
Balance sheet28 lines, as presented in the 10-Q
LineQ3 FY2026A year earlierChangeSource
Current assets:
Cash and cash equivalents$39.54BSource10-Q, us-gaap:CashAndCashEquivalentsAtCarryingValue, as reported in the 10-Q filed 2026-07-31
Marketable securities$22.86BSource10-Q, us-gaap:MarketableSecuritiesCurrent, as reported in the 10-Q filed 2026-07-31
Accounts receivable, net$31.40BSource10-Q, us-gaap:AccountsReceivableNetCurrent, as reported in the 10-Q filed 2026-07-31
Vendor non-trade receivables$27.51BSource10-Q, us-gaap:NontradeReceivablesCurrent, as reported in the 10-Q filed 2026-07-31
Inventories$11.09BSource10-Q, us-gaap:InventoryNet, as reported in the 10-Q filed 2026-07-31
Other current assets$17.42BSource10-Q, us-gaap:OtherAssetsCurrent, as reported in the 10-Q filed 2026-07-31
Total current assets$149.82BSource10-Q, us-gaap:AssetsCurrent, as reported in the 10-Q filed 2026-07-31
Non-current assets:
Marketable securities$84.12BSource10-Q, us-gaap:MarketableSecuritiesNoncurrent, as reported in the 10-Q filed 2026-07-31
Property, plant and equipment, net$51.43BSource10-Q, us-gaap:PropertyPlantAndEquipmentNet, as reported in the 10-Q filed 2026-07-31
Intangible assets, net$20.34BSource10-Q, aapl:IntangibleAssetsNetExcludingGoodwillNoncurrent, as reported in the 10-Q filed 2026-07-31
Other non-current assets$77.56BSource10-Q, us-gaap:OtherAssetsNoncurrent, as reported in the 10-Q filed 2026-07-31
Total non-current assets$233.45BSource10-Q, us-gaap:AssetsNoncurrent, as reported in the 10-Q filed 2026-07-31
Assets:
Total assets$383.27BSource10-Q, us-gaap:Assets, as reported in the 10-Q filed 2026-07-31
Current liabilities:
Accounts payable$64.53BSource10-Q, us-gaap:AccountsPayableCurrent, as reported in the 10-Q filed 2026-07-31
Other current liabilities$62.26BSource10-Q, us-gaap:OtherLiabilitiesCurrent, as reported in the 10-Q filed 2026-07-31
Deferred revenue$9.54BSource10-Q, us-gaap:ContractWithCustomerLiabilityCurrent, as reported in the 10-Q filed 2026-07-31
Commercial paper$2.00BSource10-Q, us-gaap:CommercialPaper, as reported in the 10-Q filed 2026-07-31
Term debt$11.01BSource10-Q, us-gaap:LongTermDebtCurrent, as reported in the 10-Q filed 2026-07-31
Total current liabilities$149.33BSource10-Q, us-gaap:LiabilitiesCurrent, as reported in the 10-Q filed 2026-07-31
Non-current liabilities:
Term debt$71.34BSource10-Q, us-gaap:LongTermDebtNoncurrent, as reported in the 10-Q filed 2026-07-31
Other non-current liabilities$55.08BSource10-Q, us-gaap:OtherLiabilitiesNoncurrent, as reported in the 10-Q filed 2026-07-31
Total non-current liabilities$126.42BSource10-Q, us-gaap:LiabilitiesNoncurrent, as reported in the 10-Q filed 2026-07-31
Liabilities and shareholders’ equity:
Total liabilities$275.75BSource10-Q, us-gaap:Liabilities, as reported in the 10-Q filed 2026-07-31
Shareholders’ equity:
Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 14,608,963 and 14,773,260 shares issued and outstanding, respectively$100.70BSource10-Q, us-gaap:CommonStocksIncludingAdditionalPaidInCapital, as reported in the 10-Q filed 2026-07-31
Retained earnings/(Accumulated deficit)$11.33BSource10-Q, us-gaap:RetainedEarningsAccumulatedDeficit, as reported in the 10-Q filed 2026-07-31
Accumulated other comprehensive loss-$4.51BSource10-Q, us-gaap:AccumulatedOtherComprehensiveIncomeLossNetOfTax, as reported in the 10-Q filed 2026-07-31
Total shareholders’ equity$107.52B$65.83B+63%Source10-Q, us-gaap:StockholdersEquity, as reported in the 10-Q filed 2026-07-31
Liabilities and shareholders’ equity:
Total liabilities and shareholders’ equity$383.27BSource10-Q, us-gaap:LiabilitiesAndStockholdersEquity, as reported in the 10-Q filed 2026-07-31

About this data

Source
Apple 10-Q, accession 0000320193-26-000020, filed Jul 31, 2026, read on Nov 1, 2026.
History
From the SEC's XBRL company facts, the value from the latest filing that stated each period.
Reading
Paragraphs marked Analysis are CXProWealth's reading; everything else is the filing's own numbers and words, or a cited source.
Version
methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-01
Edge and risks

What holds Apple's model up, and what could bend it

Competitive edge

  • Services are 28.1% of sales but 13.7% of costs

    Services cost $7.5B to deliver against $30.7B of sales, 24.4%, so each added services dollar carries far more gross profit than a device dollar.

    The detail

    Services sales were $30.7B, 28.1% of net sales, against $7.5B of direct cost, 13.7% of the $54.6B total cost of sales. Services grew 12.1%, 'primarily due to higher net sales from advertising and cloud services.'1

    Over the last eight fiscal years, annual gross profit nearly doubled, from $101.8B in the earliest year to $195.2B in the latest, while revenue rose from $265.6B to $416.2B, so gross profit grew faster than sales.1

    AnalysisThe device base is the channel, and services sold through it cost little to add. This quarter Services grew slower than net sales, so its share of sales slipped, which is why the margin gain came from hardware rather than from the usual shift toward Services.

  • Partners build the devices, so most cash stays free

    Capital spending was 2.2% of net sales, so $31.9B of $34.4B operating cash flow was left as free cash flow, with assembly run by outsourcing partners.

    The detail

    The company 'utilizes several outsourcing partners to manufacture subassemblies' and to perform final assembly and testing, and buys many components directly. Capital spending was $2.5B against operating cash flow of $34.4B, leaving free cash flow of $31.9B.1

    Annual capital spending was 5.0% of revenue in the earliest of the last eight fiscal years, $13.3B on $265.6B, and 3.1% in the latest, $12.7B on $416.2B.1

    AnalysisThe factories sit on partners' balance sheets, so growth needs little new capital. The cost is dependence: the filing says new products often use custom components from a single source, and capacity the company does not own may not be available on its terms.

  • Region margins range from 39.4% to 47.4% before central costs

    Before research and central costs, the Americas earned 47.4% of its sales as operating income and Europe 45.7%, so pricing holds well beyond the home market.

    The detail

    Segment operating income as a share of segment net sales: Americas $21.7B on $45.8B, 47.4%; Rest of Asia Pacific 47.1%; Japan 45.8%; Europe $13.4B on $29.4B, 45.7%; Greater China $7.4B on $18.8B, 39.4%.1

    The segments carry cost of sales and selling and marketing only. Research and development and general and administrative costs sit at corporate level, which is why the segments' shares of the $35.7B operating income, Americas 60.8% and Europe 37.7%, add up to more than the whole.1

    AnalysisSimilar margins across very different markets point to pricing that travels. Greater China sits at the low end; the filing notes iPhone is a moderately higher share of sales there and that the renminbi helped sales this quarter, but it does not explain the margin gap.

What to watch

  • The company expects component cost pressure to intensify

    Memory already offset part of this quarter's product margin gain, and the filing expects shortages and rising costs for chips, storage and memory to intensify.

    The detail

    The filing describes 'supply constraints and increasing costs for components', including advanced semiconductors, storage and memory, and 'expects these trends to intensify.' It warns that price increases 'may not effectively mitigate these negative impacts' and may reduce demand.1

    Higher costs, 'including memory', partly offset the product margin gain this quarter. Inventories nearly doubled since the fiscal year end, the increase all in components, while finished goods fell.1

    AnalysisAnalysis: the component build reads as buying ahead of scarcity. It protects supply if devices sell at planned prices, and becomes a cost if demand softens or component prices fall back. The 3.6-point margin gain gives a cushion, but the filing itself expects 'volatility and downward pressure'.

  • App Store and search income face court rulings

    Services is 28.1% of sales and only 13.7% of costs, and the commission and Google search licensing behind part of it are under legal challenge.

    The detail

    A U.S. court order currently prevents a commission on certain purchases, though the Ninth Circuit has told the district court to allow one. If developers move to other payment and distribution methods, the company 'may earn a lower commission on such sales, or may not earn a commission at all.'1

    The company earns licensing revenue from Google for search placement. The remedies in Google's antitrust case are on appeal, and a reversal could bring remedies 'prohibiting Google from offering the Company commercial terms for search distribution.' In the EU, the Digital Markets Act has already changed fees, distribution and payments.1

    AnalysisThese risks fall on the line with the lowest cost per dollar of sales, so a cut there would weigh on profit more than the same cut in device sales. None shows in this quarter yet: Services still grew 12.1% on advertising and cloud.

  • New tariffs could reverse this quarter's tariff help

    Tariff refunds reduced product cost this quarter, but new U.S. tariffs have been imposed and further measures on semiconductors remain possible, the filing says.

    The detail

    After the Supreme Court struck down certain earlier tariffs, the company applied for refunds and records them 'as a reduction of products cost of sales.' The filing names tariff refunds, alongside product mix, as a reason product gross margin rose.1

    The filing also lists recently imposed U.S. tariffs, a semiconductor import investigation that could add measures, and retaliatory tariffs by other countries. It says tariffs can affect its supply chain, the availability of rare earths and components, pricing and gross margin.1

    AnalysisRefunds lower cost while they arrive and then stop, so this quarter's product margin may look stronger than quarters without them. New tariffs would push in the other direction.

Sources

  1. 1.Apple 10-Q for the period to 2026-06-27 (the filing), Jul 31, 2026, read Nov 1, 2026
Go deeper

Apple, further in

Member research, then your own questions on ChatGPT.

What could change the outlook

What Apple's numbers depend on from here, read from the filing: the conditions behind this period's margins and growth, and where a change would show first.

  • What Apple's gross margin depends on from here

    Which parts of the margin gain are mix and which are one-offs, and how component costs, tariffs and the Services pace each bear on where the margin goes next.

  • How much of the profit rests on court rulings

    Where the App Store commission and search licensing sit in the Services line, and what each legal path would change in the economics of the business.

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Questions to start with
  • How much of Apple's 3.6-point gross margin gain came from tariff refunds that will not repeat?
  • Is Apple's 32.3% rise in research spending showing up yet in iPhone demand or Services growth?
  • How exposed is Apple's Services profit to the App Store commission ruling and the Google search remedies?

Business Lens describes Apple from its own filings with the SEC. It is not a view on its shares, a target, or advice to buy, sell or hold anything; figures are as filed and may be restated by the company later. The filing, the dates and the version are under the financial data above.