# How Apple makes money

CXProWealth Business Lens · Apple (AAPL) · Q3 FY2026

Read from the 10-Q for the period 2026-03-29 to 2026-06-27, filed 2026-07-31 with the SEC (accession 0000320193-26-000020): https://www.sec.gov/Archives/edgar/data/320193/000032019326000020/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $109.4B (+16.4% on the year)
- Operating income: $35.7B (operating margin 32.6%)
- Net income: $29.8B (net margin 27.2%)
- Gross margin: 50.1%
- Free cash flow: $31.9B (29.2% of revenue)
- Cash conversion (operating cash flow / net income): 1.15x
- Capital expenditure: 2.2% of revenue

## Where the money goes (Q3 FY2026)

- iPhone → Net sales: $54.3B
- Mac → Net sales: $10.4B
- iPad → Net sales: $6.2B
- Wearables, Home and Accessories → Net sales: $7.9B
- Services → Net sales: $30.7B
- Net sales → Cost of sales: $54.6B
- Net sales → Gross margin: $54.8B
- Gross margin → Total operating expenses: $19.1B
- Total operating expenses → Research and development: $11.7B
- Total operating expenses → Selling, general and administrative: $7.3B
- Gross margin → Operating income: $35.7B
- Operating income → Income before provision for income taxes: $35.7B
- Other income/(expense), net → Income before provision for income taxes: $572.0M
- Income before provision for income taxes → Provision for income taxes: $6.5B
- Income before provision for income taxes → Net income: $29.8B

## Where the revenue comes from

### Products and services (Revenue - Disaggregated Net Sales and Portion of Net Sales That Was Previously Deferred (Details))

| Member | Value | Share |
|---|---:|---:|
| iPhone | $54.3B | 49.6% |
| Services | $30.7B | 28.1% |
| Mac | $10.4B | 9.5% |
| Wearables, Home and Accessories | $7.9B | 7.2% |
| iPad | $6.2B | 5.7% |

The members sum to total revenue.

### Segments (Segment Information - Information by Reportable Segment (Details))

| Member | Value | Share |
|---|---:|---:|
| Americas | $45.8B | 41.8% |
| Europe | $29.4B | 26.9% |
| Greater China | $18.8B | 17.2% |
| Rest of Asia Pacific | $8.9B | 8.1% |
| Japan | $6.6B | 6.0% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Net sales | $109.4B | 100% |
|   Products | $78.7B | 71.9% |
|   Services | $30.7B | 28.1% |
| Cost of sales | $54.6B | 49.9% |
|   Products | $47.2B | 43.1% |
|   Services | $7.5B | 6.8% |
| **Gross margin** | $54.8B | 50.1% |
| Research and development | $11.7B | 10.7% |
| Selling, general and administrative | $7.3B | 6.7% |
| **Total operating expenses** | $19.1B | 17.4% |
| **Operating income** | $35.7B | 32.6% |
| Other income/(expense), net | $572.0M | 0.5% |
| **Income before provision for income taxes** | $36.3B | 33.1% |
| Provision for income taxes | $6.5B | 5.9% |
| **Net income** | $29.8B | 27.2% |
| Basic (in dollars per share) | $2 | 0.0% |
| Diluted (in dollars per share) | $2 | 0.0% |
| Basic (in shares) | 14,656,110,000 |  |
| Diluted (in shares) | 14,714,676,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2007 | $24.6B | $4.4B | $3.5B | $5.5B | $735.0M | $4.7B |
| FY2008 | $37.5B | $8.3B | $6.1B | $9.6B | $1.1B | $8.5B |
| FY2009 | $42.9B | $11.7B | $8.2B | $10.2B | $1.1B | $9.0B |
| FY2010 | $65.2B | $18.4B | $14.0B | $18.6B | $2.0B | $16.6B |
| FY2011 | $108.2B | $33.8B | $25.9B | $37.5B | $4.3B | $33.3B |
| FY2012 | $156.5B | $55.2B | $41.7B | $50.9B | $8.3B | $42.6B |
| FY2013 | $170.9B | $49.0B | $37.0B | $53.7B | $8.2B | $45.5B |
| FY2014 | $182.8B | $52.5B | $39.5B | $59.7B | $9.6B | $50.1B |
| FY2015 | $233.7B | $71.2B | $53.4B | $81.3B | $11.2B | $70.0B |
| FY2016 | $215.6B | $60.0B | $45.7B | $66.2B | $12.7B | $53.5B |
| FY2017 | $229.2B | $61.3B | $48.4B | $64.2B | $12.5B | $51.8B |
| FY2018 | $265.6B | $70.9B | $59.5B | $77.4B | $13.3B | $64.1B |
| FY2019 | $260.2B | $63.9B | $55.3B | $69.4B | $10.5B | $58.9B |
| FY2020 | $274.5B | $66.3B | $57.4B | $80.7B | $7.3B | $73.4B |
| FY2021 | $365.8B | $108.9B | $94.7B | $104.0B | $11.1B | $93.0B |
| FY2022 | $394.3B | $119.4B | $99.8B | $122.2B | $10.7B | $111.4B |
| FY2023 | $383.3B | $114.3B | $97.0B | $110.5B | $11.0B | $99.6B |
| FY2024 | $391.0B | $123.2B | $93.7B | $118.3B | $9.4B | $108.8B |
| FY2025 | $416.2B | $133.1B | $112.0B | $111.5B | $12.7B | $98.8B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +6.4% (year before +2.0%): accelerating
- Operating income: +8.0% (year before +7.8%): steady
- Net income: +19.5% (year before -3.4%): accelerating
- Free cash flow: -9.2% (year before +9.3%): slowing

## Key insights

### 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.

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. _(from the filing)_
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. _(from the filing)_
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. _(from the filing)_
Tariff 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. _(analysis)_

### 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.

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.' _(from the filing)_
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. _(from the filing)_
The 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. _(analysis)_

### 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.

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. _(from the filing)_
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.' _(from the filing)_
Analysis: 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. _(analysis)_

### 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.
- **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.
- **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.

### 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.
- **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.
- **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.

## Operating income by segment

- Americas: $21.7B (60.8% of operating income)
- Europe: $13.4B (37.7% of operating income)
- Greater China: $7.4B (20.7% of operating income)
- Rest of Asia Pacific: $4.2B (11.7% of operating income)
- Japan: $3.0B (8.4% of operating income)

## Investor view

**Apple's gross margin widened 3.6 points as product costs grew far slower than product sales**

### How it makes money

Apple is still a device company first. Products brought in $78.7B, 71.9% of the quarter's $109.4B of net sales. iPhone alone was $54.3B, 49.6% of the total. Mac added $10.4B, Wearables, Home and Accessories $7.9B and iPad $6.2B. _(from the filing)_
Services are the smaller and far cheaper line to deliver. Services sales were $30.7B, 28.1% of net sales, against $7.5B of direct cost, 24.4% of those sales. Products carried $47.2B of cost against $78.7B of sales, 59.9%. Services grew this quarter 'primarily due to higher net sales from advertising and cloud services.' _(from the filing)_
Sales are spread across regions. The Americas were $45.8B, 41.8% of net sales, Europe $29.4B, 26.9%, Greater China $18.8B, 17.2%, Rest of Asia Pacific $8.9B, 8.1%, and Japan $6.6B, 6.0%. _(from the filing)_
The company designs the devices but 'utilizes several outsourcing partners to manufacture subassemblies' and to do final assembly and testing. That keeps the business light on capital: capital spending was $2.5B, 2.2% of net sales, and operating cash flow of $34.4B was 1.15 times net income of $29.8B. _(from the filing)_

### What shifted

Gross margin rose 3.6 points to 50.1% of net sales. Cost of sales grew 8.6% while net sales grew 16.4%. On the product side, cost rose to $47.2B from $43.6B while product sales grew 18.1%. The filing credits 'a different mix of products and tariff refunds, partially offset by higher costs, including memory.' _(from the filing)_
The mix tilted back toward hardware. Products grew 18.1% and Services 12.1%, so the Services share of net sales slipped to 28.1%. iPhone grew 'primarily due to higher net sales of Pro models' and Mac on laptops. iPad declined on lower sales of iPad mini and iPad Air. _(from the filing)_
Research and development rose 32.3% 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.' Operating income still rose 26.6% to $35.7B, and operating margin widened to 32.6% of net sales. _(from the filing)_
Below operating income, other income was $572M against an expense of $171M a year earlier. Tax rose 40.9% to $6.5B, an effective rate of 17.9% against 16.4%. Net income rose 27.1% to $29.8B. Diluted earnings per share were $2.02 against $1.57, on 14.71 billion diluted shares against 14.95 billion. _(from the filing)_
Free cash flow was $31.9B, 29.2% of net sales, against $24.4B in the same quarter a year earlier. Operating cash flow rose to $34.4B from $27.9B while capital spending fell to $2.5B from $3.5B. _(from the filing)_

### Risks in the filing

Components and computing capacity. The company says it is in a period of supply constraints and rising costs for advanced chips, storage and memory, and 'expects these trends to intensify.' Price increases may not offset this and may reduce demand. Its AI features also need computing capacity, partly rented from cloud providers, which is scarce and rising in cost. _(from the filing)_
Platform income that depends on others. If developers sell through other channels and payment methods, Apple may earn a lower commission or none, and a U.S. court order currently bars a commission on certain purchases. Apple also earns licensing revenue from Google for search placement; remedies in Google's antitrust case could, if changed on appeal, stop Google offering Apple commercial terms. _(from the filing)_
Competition law. In the EU, the Digital Markets Act forced changes to fees, distribution and payments, and requires some technologies to be opened to others for free. Apple says such rules have led it not to launch features, such as Siri AI, in some places. It also faces U.S. antitrust suits over smartphones and investigations of App Store terms in Europe and elsewhere. _(from the filing)_
Personal data and online safety. A growing set of privacy and data-transfer laws, including China's data localization rules, can force product changes and raise costs. New rules on protecting minors and mandatory age verification add compliance work and privacy risk, with penalties for failure. _(from the filing)_
Two of these risks already show in the quarter. Component costs: the filing lists memory among the costs offsetting the product margin gain, and the component stockpile on the balance sheet fits buying ahead of shortages. Compute: AI infrastructure is the main reason research spending jumped. The commission and search-licensing risks do not show yet, since Services still grew on advertising and cloud. _(analysis)_

## Founder view: mechanisms

### A high-margin services layer on the device base

Every device sold opens a channel for recurring purchases: apps, storage, advertising, payments and the fee for default search placement. The device is expensive to make; each extra dollar of services sold through it costs little. As services grow as a share of sales, the company's gross margin rises even if device margins stand still. _(analysis)_

### Design in-house, build through partners

Apple keeps design, chips, software and the customer, and rents assembly from partners. It buys many components directly and sells some to its assemblers. The factories sit on others' balance sheets, so most operating cash stays free. The trade-off is dependence: custom parts from single sources and capacity the company does not own. _(analysis)_

### Premium mix carries the product margin

When more buyers choose the top of the range, the same factories, stores and logistics produce more gross profit per unit. A tiered range lets customers sort themselves into the higher-margin model. This quarter shows the effect: product sales grew far faster than product cost, and the filing names mix first among the reasons. _(analysis)_

### Today's margin funds the next platform

A wide gross margin gives room to raise research spending sharply without shrinking operating margin. Apple is spending on AI infrastructure and engineers ahead of any revenue line that reports it, funded from what the current devices and services already earn rather than from new capital. _(analysis)_

## Member research

Signed-in members read, on the page: what Apple's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Apple 10-Q for the period to 2026-06-27: https://www.sec.gov/Archives/edgar/data/320193/000032019326000020/ (2026-07-31)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-01 · as of 2026-11-01