Apple's Greater China market surges, high gross margin guidance remains unfazed by memory price hikes

Author | Eric

Global Consumer Electronics Leader $Apple (AAPL.US)$ After-hours release of FY26Q1 earnings report shows explosive iPhone sales driving Greater China to deliver an above-expectations performance after many years. Gross margin hit a new high, and net profit exceeded the $40 billion mark for the first time.

Key highlights of the earnings report:

Greater China revenue finally exceeds expectations after many years

Greater China has always been a key market for Apple, historically accounting for over 20% of total revenue. Previously, Apple’s revenue growth in Greater China lagged behind the company average for nine consecutive quarters, with the market closely watching the recovery progress in this region. In our previous article,《Apple Earnings Preview: Government Subsidies Boost iPhone Sales, Surge in Memory Prices Targets 'Supply Chain Master'》we noted that thanks to the continuation of China’s subsidy policies, according to data from the China Academy of Information and Communications Technology (CAICT) on 2025 smartphone shipments, overseas brand smartphones saw year-on-year growth of 13% in October and 128% in November in mainland China. Most of these were iPhones, showing stronger shipment performance compared to domestic brands.

This quarter, driven by robust iPhone shipment growth, revenue in Greater China reached $25.5 billion, up 38% year-on-year, marking the highest growth rate since 2021 and far exceeding market consensus of $21.8 billion. After many years, it finally outpaced the company’s average growth rate.

Strong iPhone sales boost hardware gross margins; impact of memory price increases on gross margins remains manageable in the short term

As the star performer this quarter, iPhone business revenue reached $85.3 billion, growing 23% year-over-year and hitting a new high since 2021. Even management expressed surprise at the overwhelming demand for the iPhone. Given the iPhone's high gross margin within Apple’s hardware portfolio, its strong sales pushed Apple’s hardware gross margin to a record 40.7% this quarter.

From the second half of last year until now, surging AI demand has squeezed consumer electronics demand, causing memory and storage prices to soar, putting pressure on downstream consumer electronics manufacturers. Recent reports suggest that due to skyrocketing memory and storage costs, some Chinese smartphone makers have cut their 2026 shipment targets by nearly 20%.

As the long-time leader in consumer electronics, Apple maintains strong bargaining power over its supply chain. Last quarter, Japan’s major NAND manufacturer $Kioxia Holdings (285A.JP)$ The earnings shock was due to the constraints of Apple's long-term contracts. Management indicated that the impact of memory price hikes on gross margins will start to be reflected from next quarter. However, combined with the guidance for continued sequential growth in gross margins next quarter, it appears that the impact of memory price increases on Apple’s gross margin is short-term manageable, but still requires long-term observation.

Services revenue fell short of expectations, with continued weak growth

As a key business driving iPhone’s growth flywheel, the Services segment generated revenue of $30.13 billion this quarter, up 14% year-on-year, slightly below market consensus expectations of $30.38 billion. Both transaction accounts and paid accounts hit record highs this quarter, achieving historic revenue records in advertising, cloud services, music, and payment services, while introducing new ad placements in the App Store.

This quarter, the Services business achieved a gross margin of 76.5%, setting another record high. Compared to the also record-breaking hardware gross margin (40.7%), it contributed more to overall profits. However, Services revenue has seen year-on-year growth of less than 20% for nearly 16 quarters, and the guidance for next quarter remains consistent with this quarter, raising concerns about whether the Services business is hitting a growth bottleneck.

FY26 Q1 Core Financial Metrics:

– Revenue of $143.8 billion, up 16% year-on-year, surpassing market consensus expectations of $138.4 billion; previous guidance was for 10%-12% year-on-year growth.

– Gross margin of 48.2%, up 1.3 percentage points year-on-year, exceeding market consensus expectations of 47.5%; previous guidance was for 47%-48%.

– Net profit of $42.1 billion, up 16% year-on-year, surpassing market consensus expectations of $39.4 billion.

– iPhone business revenue reached $85.3 billion, up 23% year-on-year, setting a new historical high and surpassing market consensus expectations of $78.2 billion.

– Mac business revenue was $8.4 billion, down 7% year-on-year, falling short of market consensus expectations of $9.1 billion.

– iPad business revenue reached $8.6 billion, a year-over-year increase of 6%, surpassing the market consensus expectation of $8.2 billion.

– Wearables, Home, and Accessories business revenue amounted to $11.5 billion, reflecting a year-over-year decline of 2%, falling short of the market consensus expectation of $12.1 billion.

– Services business revenue hit $30 billion, marking a 14% year-over-year growth but slightly below the market consensus expectation.

FY26 Q2 Guidance:

The company expects next quarter's revenue to grow between 13%-16% year-over-year, with an upper guidance limit of $110.6 billion. However, iPhone production capacity is constrained, and the Services business revenue growth rate is projected to remain flat at 14% compared to the previous quarter. The gross margin for the next quarter is forecasted to be between 48%-49%, with operating expenses (opex) expected in the range of $18.4-$18.7 billion, other income and expenses (OI&E) at $100 million, and the tax rate at 17.5%.

Based on this guidance, Apple’s projected upper limit for net profit in the next quarter is $29.6 billion, representing a 20% year-over-year increase, which would mark the highest growth rate since FY22 Q1.

Options Update:

Although Apple's earnings report exceeded expectations, options traders must remain cautious as the market had already priced in extremely high expectations beforehand (implied volatility surged to 35.6% vs. actual volatility of only 20%, with an IV percentile as high as 88%). This indicates that the primary effect after the earnings release will inevitably be a sharp IV Crush.

If you are optimistic about Apple's mid-term performance, the current positioning is extremely bullish (P/C Ratio at 0.63), making call options very expensive to chase. If constructing a risk-controlled spread strategy (such as a Call Spread or Put Spread), one can express a bullish view at a limited cost while capitalizing on the opportunity for elevated volatility to revert to normal levels and monetize the premium.

Summary

Overall, Apple delivered better-than-expected results in Greater China and gross margin performance this quarter. Particularly noteworthy are the robust guidance figures for next quarter’s revenue and gross margin, which have temporarily alleviated market concerns over the impact of surging memory prices on margins. Taiwan Semiconductor’s production constraints also reflect the ongoing pressure AI is exerting on consumer electronics manufacturing capacity.

牛牛Insights related historical articles:

《Apple FY26 Q1 Earnings Preview: Government subsidies boost iPhone sales, while rising memory costs challenge the 'Supply Chain Master.'》

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