Citi: Apple’s September quarter results beat expectations, but December quarter gross margin and services growth face pressure

What stood out in the September quarter results?

Apple’s September quarter revenue was 114.5 billion dollars, up 11.7% year over year, above both the company’s previous forecast of 9%–11% and market expectations of 113.4 billion dollars. Earnings per share were 2.10 dollars, above the FactSet market estimate of 1.99 dollars, including a 0.05 dollar benefit from tariff refunds.
iPhone revenue rose 17.5% year over year to 57.6 billion dollars and Mac revenue rose 23.7% to 10.8 billion dollars, both exceeding market expectations; iPad revenue fell 10.4% to 6.2 billion dollars and revenue from wearables and related businesses fell 7.9% to 8.3 billion dollars, both below market expectations.
Total gross margin was 47.9%, above market expectations of 47.5%; excluding a benefit of about 1 percentage point from tariff refunds, both total and product gross margins fell by about 1 percentage point quarter over quarter, mainly due to higher memory costs.

Apple management expects total revenue to grow 7%–10% year over year in the December quarter. Citi views the outlook as mixed relative to market expectations: higher product revenue, but lower services growth and overall gross margin.
Management expects overall gross margin of 45%–46%, below the 46.9% recorded in the September quarter excluding tariff refunds. The sequential decline is mainly due to higher memory costs, while cloud inference costs for Siri AI and the deferral of hardware revenue from bundling more advanced features will also create pressure.
Price increases for Mac, iPad and iPhone, carryover inventory and lower costs for non-memory components can partly offset higher memory prices, but the buffer from carryover inventory is expected to weaken over time. Citi expects memory cost pressure to continue beyond the December quarter.

Services revenue in the September quarter was 31.6 billion dollars, up 9.8% year over year and in line with market expectations, but growth slowed from 12% in the June quarter. Management expects services revenue to grow 8%–9% year over year in the December quarter.
Factors behind the slowdown include foreign-exchange headwinds, lower third-party licensing revenue, weakness in mobile games, and the continuing impact of changes to the App Store business model and transactions through external links in the United States. Management expects the foreign-exchange drag in the December quarter to increase by about 0.5 percentage points from the September quarter.
Citi lowered its fiscal 2027 services revenue forecast from 138.7 billion dollars to 135.9 billion dollars, implying year-over-year growth of 10.2%; it raised its total revenue forecast for the same period to 537 billion dollars, but lowered its gross margin forecast from 47.6% to 46.7%.

Tight supplies of advanced-node chips and memory constrained iPhone, Mac and iPad production in the September quarter. Management said a shift by more products to the 2-nanometer process would help ease advanced-node constraints, but memory supply continues to constrain mainly Mac and iPad; Apple’s manufacturing purchase commitments increased by 33 billion dollars quarter over quarter as it sought to secure supply.
Citi is optimistic about Apple’s ability to increase user engagement and monetization through its device user base, third-party apps and partners, and its own services. Management also expects localized AI features to help drive upgrades and create opportunities for adoption of services such as iCloud+.
Citi lowered its fiscal 2027 earnings-per-share forecast from 9.73 dollars to 9.67 dollars, while maintaining its Buy rating and 365 dollar price target; the target is based on a price-to-earnings multiple of 33 times its fiscal 2028 earnings-per-share forecast.