Apple Faces Margin Pressure Despite Strong iPhone Sales and Revenue Growth

Josh Gilbert, Lead Analyst APAC and Middle East at etoro

Key Takeaways:

• Apple reported a 17% year-on-year increase in September-quarter iPhone sales, adding nearly $9 billion in product revenue, yet shares fell in after-hours trading.
• The catalyst for the sell-off was a structural compression in profitability: gross margin guidance dropped from nearly 48% to 45%-46% for the December quarter, while Services revenue growth slowed from ~15% to sub-10% (projected at 8%–9% next quarter). Concurrently, research and development spending surged 32%, driven by artificial intelligence investments with unproven monetization paths, and Greater China revenue missed consensus by approximately $1.2 billion despite 21% top-line expansion.

Why Did Apple Shares Fall Despite Strong Quarterly Results?

Apple delivered a strong quarterly performance under new CEO John Ternus, beating revenue expectations and forecasting what could become the largest quarter in the company's history. Yet its shares declined in after-hours trading as investors looked beyond sales growth to assess profitability, operating costs and the commercial outlook for artificial intelligence (AI).

The company expects revenue to grow by 7% to 10% in the December quarter, signalling confidence ahead of the holiday shopping season. However, concerns about slowing Services growth and pressure on gross margins tempered the positive results.

Josh Gilbert, Lead Analyst for APAC and the Middle East at eToro, said Apple's first results under Ternus gave investors reasons for optimism, but highlighted a shift in market priorities.

“Strong sales alone are not enough. Investors are increasingly focused on profitability as rising costs and slowing Services growth weigh on margins,” Gilbert said.

The results highlight a key challenge for Apple's new CEO: sustaining hardware demand while protecting the high-margin Services business and demonstrating that increased AI investment can generate meaningful commercial returns.

How Much Did iPhone Sales Contribute to Apple's Growth?

Hardware was the primary growth driver during Apple's September quarter, with iPhone sales increasing 17% year-on-year, ahead of the launch of the company's new iPhone Duo.

Product revenue generated nearly US$9 billion in additional sales year-on-year, more than three times the increase contributed by Services. The figures reinforce the continued importance of the iPhone and Apple's wider hardware ecosystem to its revenue growth.

Gilbert said Ternus had placed hardware firmly at the centre of Apple's growth strategy. However, he cautioned that selling more devices can be a less profitable growth strategy than expanding subscription-based services, which typically carry higher margins.

The distinction matters because Apple's ability to convert hardware demand into sustainable earnings will depend not only on unit sales, but also on its product mix, costs and recurring revenue streams.

Why Is Apple's Services Growth Slowing?

While hardware sales accelerated, Apple's Services business showed signs of moderation.

Services growth slowed from approximately 15% a year earlier to just under 10%. Apple is forecasting further moderation, with Services growth of 8% to 9% in the December quarter.

The slowdown is significant because Services—including subscriptions and other recurring offerings—play an important role in Apple's profitability. Slower expansion in this segment could make it harder for the company to offset rising hardware costs and maintain its overall margins.

Apple's gross margin guidance also raised concerns. The company expects gross margins of 45% to 46%, compared with nearly 48% in September.

Performance indicator	September quarter / previous period	December-quarter outlook
iPhone sales growth	17%	Not specified
Services growth	Just under 10%, down from approximately 15% a year earlier	8%-9%
Gross margin	Nearly 48%	45%-46%
Total revenue growth	Revenue expectations exceeded	7%-10%

The figures suggest that Apple's challenge is no longer simply generating demand. Investors also want evidence that the company can translate that demand into profitable growth.

How Important Is China to Apple's Growth Outlook?

China remains a major market to watch as Apple navigates competition and changing consumer preferences.

Apple's sales in China increased 21%, but revenue still fell approximately US$1.2 billion short of expectations. The discrepancy suggests that strong year-on-year growth has not fully addressed investor concerns about the company's performance in the market.

Competition in the foldable smartphone segment is another consideration. Apple's new foldable iPhone Duo faces pressure from Huawei, which holds an estimated 60% share of China's foldable smartphone market, according to the figures cited in the analyst commentary.

The competitive landscape will be important as Apple seeks to extend its hardware momentum. Strong demand for its products does not necessarily guarantee that it can capture a leading position in every emerging smartphone category.

Can Apple's AI Investment Become a New Revenue Driver?

Apple is increasing its investment in artificial intelligence, but investors are still waiting for clearer evidence of commercial returns.

The company's research and development spending rose 32% during the quarter, reflecting increased investment in areas including AI. However, higher spending also raises questions about how quickly these investments can translate into revenue growth and stronger profitability.

One potential monetisation route is expanding AI access through iCloud+. By integrating more AI capabilities into its ecosystem, Apple could create opportunities to strengthen subscriptions and generate additional Services revenue.

However, the commercial case remains to be demonstrated. Gilbert noted that investors want to see how Apple's AI investments can support stronger Services growth over time.

For Apple, the opportunity is not simply to develop new AI features. It must establish how those capabilities can encourage users to pay for additional services, increase engagement or strengthen customer retention.

What Should Investors Watch in Apple's December Quarter?

Apple's holiday-quarter performance will be an important test of its ability to sustain revenue growth while protecting profitability.

The company's forecast of 7% to 10% revenue growth points to strong expectations for the December quarter, traditionally a key period for device sales. However, investors will also be monitoring whether gross margins stabilise and whether Services growth can regain momentum.

Key indicators to watch include:

• iPhone demand: Whether strong September-quarter sales momentum continues through the holiday season.
• Services growth: Whether Apple can improve on its projected 8% to 9% growth.
• Gross margins: Whether margins recover from the projected 45% to 46% range.
• China performance: Whether Apple can close the gap between sales growth and market expectations amid competition from Huawei.
• AI monetisation: Whether increased R&D spending begins to translate into stronger Services revenue or other measurable commercial benefits.

Gilbert said Apple's immediate challenge is converting strong product demand into sustainable, profitable growth. With margins under pressure and AI investment increasing, the December quarter will test whether the company can deliver on both fronts.

For Ternus, the results establish a promising starting point, but the next phase of Apple's growth strategy will be judged by more than revenue records. Investors will want to see stronger evidence that hardware momentum, Services expansion and AI investment can work together to support long-term profitability.