Apple Earnings Beat Expectations: Services Business Becomes New Engine, iPhone Sales Decline Raises Concerns

On July 26, 2026, Apple (AAPL) reported its Q3 earnings for the period ending June 2026, with revenue of $94.5 billion, up 4% YoY, beating the $92.5 billion consensus; net profit of $21.5 billion, up 6% YoY. However, iPhone sales, the core product, declined, prompting investors to reassess Apple's growth drivers.

iPhone Sales Under Pressure, High-End Market Competition Intensifies

Q3 iPhone revenue was $42 billion, down 3% YoY, below the $43 billion forecast. CEO Tim Cook said on the call that the decline was mainly due to the global economic slowdown and fiercer competition in the high-end smartphone market. In Southeast Asia, Apple faced tough competition from Samsung and OPPO, leading to a slight market share loss.

However, the average selling price (ASP) of iPhones remained around $850, indicating strong demand for the Pro series high-end models. Apple also announced it will launch the new iPhone 17 series in September, expected to feature a foldable design, potentially spurring an upgrade cycle.

Services Revenue Up 18%, Becoming New Profit Pillar

Services was the standout segment, with revenue of $24.5 billion, up 18% YoY, exceeding the $23 billion forecast. App Store in-app purchase revenue grew 12%, and Apple Music and iCloud paid subscribers hit a record 950 million. Apple TV+ content investment continued to increase, with original series "Tomorrow's Legend" gaining global popularity, driving streaming revenue up 25%.

Cook emphasized that services gross margin is 72%, far above hardware's ~36%, and Apple will continue to expand software and content ecosystem. Analysts noted services now account for 26% of total revenue, becoming a core profit driver.

Wearables and Mac Show Mixed Results

Wearables, home, and accessories revenue was $8.5 billion, up 2% YoY, driven by strong Apple Watch Series 10 sales, but AirPods sales declined due to competition. Mac revenue was $7.8 billion, down 4% YoY, mainly as the M4 chip upgrade cycle ended and consumers await the M5 chip later this year. iPad revenue was $7 billion, up 9% YoY, benefiting from replacement demand for the new iPad Pro with OLED display.

Greater China Sales Dip Slightly, Southeast Asia Emerges as New Growth Driver

By region, Americas revenue grew 3%, Europe 5%, and Greater China revenue was $15 billion, down 2.7% YoY, the third consecutive quarterly decline. Cook attributed this to slow China economic recovery and Huawei's return to the high-end market. However, Southeast Asia performed well, with combined revenue from India, Indonesia, and Thailand up 22%. Apple is accelerating retail store openings in Vietnam and the Philippines and plans to shift some production to Thailand to mitigate geopolitical risks.

Capital Returns and Outlook

Apple's board raised the quarterly dividend by 5% to $0.25 per share and authorized an additional $90 billion share buyback, signaling confidence. For Q4, Apple guides revenue between $97 billion and $100 billion, with gross margin around 46%, slightly below consensus. The stock edged flat at $228 in after-hours trading after initial gains and losses.

Industry Insight: Tech Stock Divergence Deepens, Service Transformation Key

Wall Street analysts had mixed views on Apple's earnings. Morgan Stanley sees higher premium for services valuation, maintaining overweight. Goldman Sachs warned that sustained iPhone sales decline could affect profit growth, lowering its target to $240. Overall, US tech stocks face dual pressures from slowing hardware demand and uncertain AI investment returns. Apple's shift to services to boost margins sets a model for other hardware companies.

For investors, Apple remains a stock with a strong moat, but near-term attention should be on new product launch cadence and FX risks. Rapid expansion in Southeast Asia could be an additional growth catalyst.