Apple designs and sells smartphones, computers, tablets, wearables and accessories, and the services attached to them. Hardware is assembled almost entirely by third parties, which the filing places "primarily in China mainland, India, Japan, South Korea, Taiwan and Vietnam". Product revenue is recognised on shipment and services revenue over time; for third-party applications sold through the App Store the company records "only the commission it retains". Direct channels were 40% of FY2025 net sales and indirect channels 60%.
The business in one page
Net sales were $416,161 million, up 6.4%. iPhone is 50.4% of the total at $209,586 million and Services 26.2% at $109,158 million, but Services are 42.2% of gross profit against 35.7% two years earlier. The operating segments are geographic, not by product, and the filing publishes no operating income by product line. Greater China is $64,377 million, down 11.3% over two years, while Europe including India grew 9.6% and Japan 14.6%. Employees at year end: approximately 166,000.
Six items for FY2025 have no counterpart in the comparative columns: tariff costs, cited among the causes of the fall in Products gross margin but never quantified; a "Change in valuation allowance" of $2,091 million in the tax reconciliation; a $4,500 million debt issuance after a year with none; the adoption of ASU 2023-07 on segment reporting; the 500 million euro Digital Markets Act fine of April 23, 2025 together with the April 30, 2025 injunction in the Epic Games case; and the September 2, 2025 remedies order in the antitrust proceedings against Google.
What we think matters
- Operating margin of 32% on $416 billion of sales
- Services growing at 13.5% with a 75.4% gross margin
- Cash generation of $98.8 billion
- Reported earnings growth is not what it looks like
- Half of revenue is one product
- Greater China keeps shrinking
How Apple makes money
Competitive advantage
The stated advantage is the integration of hardware, software and services, and in the filing it can only be measured through margins: a 32.0% operating margin earned, by the company's own account, with "a minority market share in the global smartphone, personal computer, tablet and wearables markets".
Services gross margin is 75.4% and Products 36.8%. Services are 26.2% of net sales but 42.2% of gross profit, against 35.7% in FY2023.
The filing publishes no installed base, no subscription count and no retention rate, so the durability of the advantage cannot be verified on usage data.
Pricing power
No unit volumes or average selling prices are published, so pricing power is read indirectly. iPhone net sales grew 4.2% "due to higher net sales of Pro models", that is through mix towards the high end.
Products gross margin fell from 37.2% to 36.8% in a year with tariff costs. The filing attributes the decline to mix and tariffs, partly offset by other favourable costs, without saying how much of the tariff was absorbed rather than passed on.
On currencies the company states that a weakening of foreign currencies "generally leads the Company to raise international pricing", and warns on the same page that it may decide not to.
In Services the margin rose 1.5 points "primarily due to a different mix of services". No price increases are cited, and management writes that gross margins "will be subject to volatility and downward pressure".
Transparency of growth
The filing reports no acquisitions with amounts and has no business combinations note. Investing outflows other than capital expenditure and securities are grouped in one "Other" line of $1,480 million.
On that basis the 6.4% growth should be read as organic, with the reservation that acquisitions are not disclosed separately.
No constant-currency growth is given. The filing only notes that weak foreign currencies had an unfavourable effect on Americas net sales.
Scalability
Operating leverage in FY2025 came from gross margin, not from operating expenses. Cost of sales grew 5.0% against net sales up 6.4%; operating expenses grew 8.2%.
Research and development is the fastest-growing line at 10.1%, after 4.9% in FY2024, which the filing attributes to headcount and "infrastructure-related costs".
Operating expenses went from 14.7% to 14.9% of net sales. The unallocated corporate costs that segment reporting excludes grew 9.8% to $42,627 million.
Catalysts identified in the filing
- The mix keeps shifting towards Services
Services grew 13.5% at a 75.4% gross margin while Products grew 4.1% at 36.8%. That shift alone took the consolidated gross margin from 44.1% to 46.9% in two years.
- A product cycle announced at the year end
The filing places the announcement of the iPhone 17 line, iPhone Air, new Apple Watch models and AirPods Pro 3 in the fourth quarter of FY2025, so most of their first twelve months falls in FY2026. That is an inference from the calendar: the filing gives no indication of demand.
- Repurchase capacity still authorised
Of the $100 billion programme authorised in May 2025, $99,779 million remains, equal to 2.7% of market capitalisation at the supplied price. The programme does not oblige the company to repurchase.
- Investment running ahead of revenue
Capital expenditure rose 34.6% to $12,715 million and research and development 10.1% to $34,550 million. Long-lived assets in the United States grew 12.9% to $40,274 million. The filing does not link any of it to specific products or revenue.
- Growth outside Greater China
Europe, which in Apple's definition includes India, grew 9.6% and Japan 14.6%. Together they added $13,355 million of net sales, against $2,575 million lost in Greater China.
- The Epic appeal
The court of appeals agreed to hear the appeal on an expedited basis. A reversal of the April 30, 2025 injunction would restore the ability to charge commissions on purchases made outside an app. The outcome is unknown at the date of the filing.
Financial analysis
Figures for 3 fiscal years, taken from the Key Metrics tables of each annual report. When a later filing restates a figure, we use the figure reported for that year's own filing.
Key metrics
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Revenue | $383.3B | $391.0B | $416.2B |
| Gross margin | 44.1% | 46.2% | 46.9% |
| Operating margin | 29.8% | 31.5% | 32.0% |
| Net margin (GAAP) | 25.3% | 24.0% | 26.9% |
| Operating cash flow | $110.5B | $118.3B | $111.5B |
| Capex | $11.0B | $9.45B | $12.7B |
| Free cash flow | $99.6B | $108.8B | $98.8B |
| Stock-based compensation | $10.8B | $11.7B | $12.9B |
| Dividends + buybacks | $92.6B | $110.2B | $106.1B |
| Net cash | – | $37.6B | $20.0B |
| Total debt | – | $119.1B | $112.4B |
| Shareholders’ equity | – | $57.0B | $73.7B |
| Effective tax rate | 14.7% | 24.1% | 15.6% |
| ROIC (equity + gross debt, year-end) | – | 53.1% | 60.3% |
Key risks
The main weaknesses and risks identified in the latest annual report, in the order the report presents them.
- Reported earnings growth is not what it looks like
Net income rose 19.5%, but the FY2024 base carried a $10,246 million State Aid charge and FY2025 a $486 million credit for the same item. Removing that line from both years leaves 7.3% growth. Free cash flow meanwhile fell 9.2%, in a year when operating income rose 8.0%.
- Half of revenue is one product
iPhone is 50.4% of net sales and grew 0.3% and 4.2% in the last two years. The filing itself warns that a fall in demand for that single category "could significantly impact net sales and gross margins". No unit volumes or average selling prices are published, so the split between price and volume is not observable.
- Greater China keeps shrinking
Segment net sales fell 7.7% in FY2024 and 3.8% in FY2025, down 11.3% over two years to $64,377 million, and segment operating income went from $30,328 million to $26,917 million. China mainland is also one of the assembly locations the filing lists.
- The most profitable revenue is the most exposed to regulators
On April 30, 2025 a US court found the company in violation of the 2021 Epic injunction and barred "any commission or any fee on purchases that consumers make outside an app". The European Commission fined it 500 million euros under the Digital Markets Act, with a theoretical ceiling of 10% of worldwide net sales. A September 2, 2025 order on remedies could end the search arrangements with Google. The filing does not disclose how much revenue any of this touches.
- Shareholder returns ran ahead of free cash flow
Buybacks and dividends of $106,132 million were 107.5% of free cash flow, an excess of $7,365 million, while liquidity fell $24,230 million over the year. The average repurchase price in FY2025 was $222.3, against the $254.52 used for the multiples.
Open questions the filing does not answer
- How much revenue comes from the licensing arrangements with Google and from US and European App Store commissions? The filing does not break either out within Services.
- What did tariffs cost in FY2025, and how much of that was passed through to prices? The filing names tariffs as a cause of the Products margin decline without quantifying them.
- What are unit volumes and average selling prices by category? Without them, pricing power stays an inference drawn from mix.
- Where is the increase in capital expenditure and research and development going? The filing describes it only as headcount and infrastructure.
- How much of the $8,120 million tax benefit on foreign earnings comes from non-repeatable releases of reserves? The filing says the line includes changes in unrecognised tax benefits without separating them.
- What are interest expense and portfolio income? Both are compressed into a net "Other income/(expense)" of $(321) million, which makes interest cover uncomputable.
- How large is the active installed base, and how many paid subscriptions are there? Neither is published, so the durability of Services revenue cannot be checked.
At the $254.52 close of September 27, 2025 and 14.77 billion shares, the market valued Apple at $3,759 billion, 33.6 times net income. The free cash flow yield is 2.63%, and 2.29% net of stock-based compensation. Reported net income grew 19.5%, but that comparison runs against an FY2024 depressed by the $10,246 million State Aid charge: removing that single line from both years, net income grew 7.3% and adjusted earnings per share 10.1%, the difference being a 2.6% fall in the diluted share count.
The price embeds three assumptions. Services keep growing at double digits with margins near 75.4%. Earnings per share keep outgrowing earnings through repurchases. And the litigation over the App Store and the search arrangements does not reach the most profitable part of Services. The second has an arithmetic limit: buybacks and dividends were 107.5% of free cash flow, and at that pace the $20,043 million of net cash is gone in 2.7 years, after which repurchases need debt.
Strengths
- Operating margin of 32% on $416 billion of sales
Operating income was $133,050 million, 32.0% of net sales, against 29.8% in FY2023. The gain came from gross margin, which rose from 44.1% to 46.9% in two years on product mix, not from operating expenses: those grew 8.2% against net sales up 6.4%, from 14.7% to 14.9% of sales.
- Services growing at 13.5% with a 75.4% gross margin
Services net sales of $109,158 million are 26.2% of the total but 42.2% of gross profit, up from 35.7% in FY2023. The Services margin rose 1.5 points in the year, which the filing attributes to "a different mix of services" rather than to price increases. Services supplied 51.7% of the whole increase in net sales.
- Cash generation of $98.8 billion
Free cash flow was $98,767 million, 23.7% of net sales, with capital expenditure at 3.1% of sales. Net of stock-based compensation it is $85,904 million. Owner earnings, net income plus depreciation and amortisation less capex, are $110,993 million.
- Net cash and an unlevered balance sheet
Liquidity of $132,420 million against gross debt of $112,377 million including leases leaves $20,043 million of net cash, or $33,763 million excluding leases. Gross debt is 0.78 times EBITDA and net debt is negative at 0.14 times.
- A share count that keeps falling
Shares outstanding fell 2.3% in the year net of issuance, and weighted-average diluted shares fell 2.6% in each of the last two years. That is what turns 7.3% growth in adjusted net income into 10.1% growth in adjusted earnings per share.
Last year’s watch-list, checked against this filing
| What we flagged | What happened | Result |
|---|---|---|
| Buyback programme announced on May 2, 2024, up to $110 billion | Fully used, the final $19.8 billion in the fourth quarter of FY2025 | DONE |
| State Aid charge of $10.2 billion net recorded in the fourth quarter of FY2024 | A $486 million credit in FY2025 and the escrow no longer on the balance sheet | BETTER BY $486 MILLION |
| Quarterly dividend of $0.25 until May 2025 | Raised to $0.26 from May 2025 | INCREASED - up 4.0% |
| Margin targets, capital expenditure plan, multi-year targets | Not present in the filing, which publishes no numerical guidance | NOT MEASURABLE |
What to watch in the next filing
- Services net sales growth. Below 10% a year, from 13.5%, the main driver of the mix shift would be gone.
- Services gross margin. A return below the 73.9% of FY2024 would suggest that injunctions and the Digital Markets Act are compressing commissions.
- Products gross margin. Below 36.5%, the three-year low, tariffs would no longer be offset by mix and other costs.
- Greater China net sales. A third consecutive annual decline, or segment operating income below $26,917 million.
- Shareholder returns against free cash flow. Above 100% for another year, with net cash under $10,000 million, would signal repurchases close to being debt-financed.
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