My Shopify & Palantir earnings reviews from this week have already been published.

Product GPM and overall GPM both included an expected 1 point boost from receiving its remaining tariff refunds. Without this help, these margins would have been down 1 point sequentially and overall GPM would have been down about 30 bps Y/Y. Higher memory pricing is the main culprit for the decline. Operating expenses (OpEx) rose 21% Y/Y to $19.2B as Apple keeps leaning hard into research & development (R&D). R&D alone rose 32% Y/Y to $11.7B, while selling, general & administrative (SG&A) expenses rose just 6% Y/Y. Apple is spending aggressively to build out its AI roadmap, as shown by OpEx growth doubling revenue growth, which drove the 50 bps of Y/Y margin contraction.

Apple guided to 8.5% Y/Y revenue growth for next quarter at the midpoint to roughly $156B. This beat 6.5% Y/Y growth estimates and revenue estimates by 1.9%. This includes 8.5% Y/Y services growth, representing another quarter of sequential Y/Y growth slowing for the segment. That outlook includes sequential headwinds from third-party licensing and another 0.5 points of FX pressure. More on both of those in the call section below.

Gross margin is expected to be 45.5% compared to 46.3% expected and down an expected 270 bps Y/Y. The main source of Y/Y pressure is worsening memory inflation, with costs tied to the Siri AI ramp modestly contributing as well. Leadership called current memory pricing “unprecedented.” September memory costs were higher than June’s and more price increases are expected for next quarter and beyond as well. They’re doing their best to ease the burden with some cost relief elsewhere in the component supply chain and memory inventory on hand from previous quarters, but it’s an issue for them and a lot of companies right now.

Next, AAPL guided to $20.6B in operating expenses (OpEx), representing 12% Y/Y growth compared to 20%+ growth in each of the last two quarters. Taken together, EBIT guidance was 1% lower than expected. Using the midpoint of all guidance and assuming share count slightly falls Q/Q, roughly $2.89 in EPS guidance slightly beat estimates by $0.01.

Apple trades for 37x forward EPS. EPS is expected to grow by 6.8% next year and by 12.9% the year after. 

Siri AI:

This is arguably the most exciting thing happening at Apple right now. Apple (finally) launched Siri AI in beta for U.S. English users in September, and expanded to French, Japanese, Korean, Portuguese and Spanish in October. Per new CEO John Ternus, “it's the Siri we've always wanted.” It can talk with users in a much more conversational tone than its predecessor and understands user context, screen patterns and more. All of this is done with tight data privacy in mind just like it always is at Apple. Leadership is “very pleased” with early reviews and customer feedback, which sounds miles better than the way they talked about the early attempts at infusing AI into this consumer assistant.

There are rising concerns over highly popular consumer agents like Muse and Gemini beginning to pull some of the consumer habits away from Apple. And while that’s true, this team is confident that its devices are the “best places to use all forms of AI” (Ternus). They are optimistic that the new Siri is going to win a lot of quickly proliferating consumer AI use cases and are determined to go slowly with feature rollout to make sure things are done thoughtfully. They’re not interested in rushing and not worried about lack of first-mover advantage. Instead, they have the “intelligent personal hub” (as they call it) sitting in the pockets of about 1.5B people, with access to data that nobody/nothing else besides Siri AI can touch. That kind of differentiator isn’t short-lived and gone in the blink of an eye like a first-mover advantage so often is. It’s structural, durable and hard to rival. The built-in routine that comes from being a person’s default hardware tool is such a luxury. It gives Apple many more touchpoints and reasons to convince customers to buy margin-rich services.

As Siri AI rolls out to more customers, the associated cloud computing costs will be recognized through Services cost of sales. That means some pressure on Services margins as usage scales. On the other side of the ledger, Apple sees plenty of ways for AI to contribute to revenue over time. This includes Siri AI subscriptions, along with AI giving customers a compelling reason to upgrade or switch to Apple devices for the newest capabilities. It also sees opportunities across third-party apps and partnerships, as well as first-party ones like expanded access to server-side Siri AI and Apple Intelligence features, as highlighted by CEO John Ternus.

More on Services:

Apple again disclosed a 2.5B+ installed base like it has in each of the previous 2 quarters, while paid accounts grew by 10%+ Y/Y. They’ve done that for several consecutive years, providing a foundation to power 9.8% Y/Y services growth (and 11%+ CC growth) at high gross margins. For specific service updates, AAPL introduced ad placements into Apple Maps, brought Apple Pay to India via a launch with Axis Bank and infused Apple TV and Apple Arcade into newly packaged iCloud+ plans too. 

The main services worries on the call were based on two separate things: Regulatory changes and search headwinds. Starting with evolving regulation, for review the EU’s Digital Markets Act (DMA) forced Apple to let consumers install apps from third-party stores and websites in a process called “sideloading.” This paved the way for developers inserting links into the onboarding flows to pull people away from Apple and prevent it from pocketing a hefty 15%-30% take rate. This has since expanded to Japan and Brazil, and is a lingering threat for their most profitable business. Next, there’s some fear over chatbots sucking traffic away from Apple’s Search business and the App Store. That comes as Apple tweaks its App Store business model in some places and experiences ongoing weakness in the mobile gaming market. Taking all of this together, analysts were concerned about segment growth and what it could look like going forward – especially with Apple guiding to another quarter of sequential slowing for next period.

Apple pushed back with a reminder that most of the slowdown was related to FX headwinds worsening from the June quarter. That’s expected to get another 50 bps worse, but even without that services growth will again slow due to a combination of all these small headwinds in aggregate. They assured investors that they feel great about the opportunity ahead, but some understandably want to see more evidence of that.

iPhone:

iPhone growth was held back by supply constraints as expected, which are expected to ease as Apple moves to TSM’s latest manufacturing node. For now, the top-line still grew by 10%+ in almost every market and iPhone was again the top-seller in Urban China alongside India, the UK, Germany, Australia and Japan. Upgrade momentum remained strong too, as the company set a new September-quarter record for this metric. The iPhone 18 family led the way, with a new A20 Pro chip and neural engine helping augment on-device AI processing capacity. 

For review, the “A” series chips are Apple’s in-house systems-on-a-chip (SoCs) for iPhone. An SoC puts all major components in one piece of silicon. The “M” series chips do the same thing for Mac and iPad. Over the years, designing its own silicon has let Apple replace Samsung, Intel, Qualcomm and Broadcom for certain uses. This is vertical integration at its finest. Apple no longer pays a supplier’s profit margin on its most important components, which helps its own margins. It also gets to build each chip around exactly what its hardware and software need, and it controls its own product roadmap instead of waiting on someone else’s.

And while all of this is encouraging, all eyes right now are on the iPhone Duo – its foldable phone. They see this as enabling brand-new hardware use cases that will “redefine what a foldable phone can be.” Developers are flocking to the product to build new applications around it, and leadership has been “thrilled” with early responses from reviewers and customers. Like the iPhone 18 lineup, this is materially supply constrained and Apple is working hard to fix that.

More on Hardware:

The Wearables, Home and Accessories (WHA) revenue decline was blamed on tough comps as they lapped strong Watch and AirPods launches. Importantly, 50%+ of the buyers this quarter were new to the Watch, pointing to the runway remaining long despite large scale. Apple debuted a new Health Sensing System that helps deliver more accurate heart-rate sensing and tools like reading biometrics data to tell you when to push vs. maybe slow it down a bit. That could literally be a life-saver in certain situations. Next for the watch, Audio Intelligence will soon be launched in an upcoming software release. Apple hasn’t shared many details yet, but the idea seems to be that the device’s microphones (with permission) record important audio moments, like a reminder, and then use on-device AI to summarize them for later. Amazon built some hardware that has similar applications but I’d imagine Apple will have more success with it given the tie into the popular watch.

Memory Inflation:

Apple was asked whether it's rethinking which memory vendors it works with, and if it's willing to entertain adding more amid historic inflation and competition for supply. They were very careful to say the right things here, as they don't want to upset companies that currently have all of the bargaining power in this AI infrastructure cycle. They did hint at the idea of pursuing all options to ensure optimal availability of supply, but they also gave a nod to current vendors, and how important they are to making that happen. As a reminder, Apple has been trying to gain permission to accept supply from Chinese memory manufacturers, which hasn't gotten much support on Capitol Hill.

They're working hard to offset some of this pressure by flexing their bargaining power in other non-memory component pieces of the supply chain. And they've also ordered ahead, so they can use inventory to avoid the most recent price hikes for a short while.

Other: 

Fine quarter. They continue to compound revenue at a steady clip despite absolutely humongous scale. And product momentum, when eliminating year-over-year comp noise and big product debuts, all looks good. While they're dealing with some near-term margin issues, there's every reason to believe that layering on more high-margin services can easily deliver more operating leverage alongside their giant buyback program. This is especially true as Siri AI enters prime time. Memory inflation will not persist forever, but this structural services optionality formula will be far less fleeting.

I do not worry at all about Apple being a great company with effective financials in the years to come. I don't think any potential threats to their consumer hardware moat are remotely close to being real quite yet. At the same time, they are coming. Meta is making rapid progress in smart glasses, beyond what Apple has notched thus far. Those will begin to emulate more and more of the features that make the iPhone special. Not in the near future, but eventually. And for Apple, they're not interested in simply dominating for a few more years, and then watching their kingdom wither away. They are interested in dominating for generations to come, and I do think they have a bit of work to do in fortifying their consumer hardware moat if that's going to happen. They're more than capable. As long as they do that, I am personally not overly concerned about services segment growth potential. I think once we lap the current regulatory issues, this will go back to impressive top-line compounding once more. 

Certainly not my absolute favorite large-cap investment, but an iconic company. I would say my stance on the stock is pretty neutral.

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