As a software developer for Apple platforms, I’ve spent quite a bit of time over the years attempting to understand Apple financial statements, though I’m admittedly not an expert in corporate finances. This blog post is for other non-experts who are also interested in Apple finances. I originally became interested in Apple quarterly reports and financial statements because I wanted to see the unit sales of Apple hardware: Mac, iPhone, iPad. Unfortunately, Apple ended its longtime practice of reporting unit sales in 2018. Another significant change since then is the increased prominence of so-called “services” in Apple finances. In the second fiscal quarter of 2018, services generated $9 billion in revenue (net sales), whereas in Q2 2026, that amount had grown to $31 billion! In this blog post, I want to focus on understanding the relative financial importance of products and services for Apple.
The Apple 2025 Form 10-K, filed with the US Securities and Exchange Commission, provides an explanation of the difference between products and services. Products, for Apple, are essentially hardware products: iPhone, Mac, iPad, Apple Watch, AirPods, Beats, Vision Pro, Apple TV 4K, HomePod, and hardware accessories such as keyboards and mice. Services include advertising (e.g., App Store search ads), AppleCare, iCloud, App Store sales (most prominently, the Apple cut of third-party App Store revenue), Apple Music, Apple Books, Apple Arcade, Apple Fitness, Apple News+, Apple TV streaming, Apple Card, and Apple Pay. The list of services is not comprehensive: notable by its absence in the documentation is the lucrative deal with Google to be the default search engine in Safari. Apple quarterly financial statements subdivide net sales in several ways. There are four categories of products: iPhone, Mac, iPad, and (collectively) wearables, home, and accessories. Net sales of services are also listed, but unfortunately, services are not further subdivided. Separately and independently from products and services, net sales are categorized into five regions (“segments,” for Apple): Americas, Europe, Greater China (presumably forced deference to China’s claim on Taiwan), Japan, and the rest of Asia Pacific (the Professor and Mary Ann).
In 2025, services were 26% of Apple net sales. However, this number is not particularly useful in understanding Apple finances, because net sales are not profit, what the financial statements call “net income.” It’s not really possible to subdivide net income by products and services, because some expenses apply indeterminately to both. The “cost of sales,” on the other hand, do apply specifically to products and services in the financial statements. Net sales minus cost of sales leaves the gross margin. In 2025, services were 42% of Apple gross margin. How does 26% of net sales become 42% of gross margin? The explanation is that services have a much lower cost of sales. The products gross margin was 37% of products net sales, while the services gross margin was an astonishing 75% of services net sales. In other words, Apple services are almost pure profit!
Cost of sales is what a company spends directly to generate net sales. For products, the most costly part of cost of sales are the expenses of hardware components and manufacturing. Apple services require fewer physical resources, which is why they have a lower cost of sales and thus a higher gross margin than products. Services cost of sales would include, to list a few examples, web hosting, payments to music labels, and production expenses for TV shows and movies.
Gross margin is not the end of the story. Gross margin minus operating expenses leaves operating income. Operating expenses are not divided by products and services in the quarterly financial statements but are divided into two categories: (1) research and development; (2) selling, general, and administrative. An obvious example of research and development would be the expenses of developing a new, unannounced hardware product. The rumored, canceled Apple Car project was R&D (you might say rinse & drain). At some point in the past, every current Apple product was merely R&D. An obvious example of selling, general, and administrative would be human resources, the department that Apple calls “People.” I believe that Apple stores, both physical retail stores and the online store, would also fall under the second category of operating expenses. Marketing, even product marketing such as iPhone advertisements, is actually an operating expense too. This is not clear in the quarterly financial statements but is clear in the 10-K form, which interestingly and unlike the quarterly statements subdivides operating income into regions. The 10-K adds a sixth region (segment) to the five of the quarterly reports: “Corporate.” Cupertino is a world of its own! For each region, the 10-K lists net sales, cost of sales, research and development, sales and marketing, and general and administrative. In other words, the two categories of operating expenses in the quarterly reports become three in the annual report. Curiously, aside from Corporate which is all expenses (R&D, general and administrative) and no sales, the Americas are the most costly region at 41% operating income from net sales, and Japan is the least costly at 49% operating income from net sales. Of course in absolute terms, the Americas do generate the most total operating income.
As far as I can tell, the financial labeling of expenses as either “cost of sales” or “operating expenses” is more of an art than a science. The law, such as it is, cannot predetermine every possible scenario; we have courts and judges and juries for that, though corporate financial statements rarely precipitate legal scrutiny or consequences. I certainly have unresolved questions about the two accounting categories. How exactly does Apple distribute software engineer salary and compensation between cost of sales and operating expenses? I suppose that only Apple knows the answer.
Although operating expenses are not subdivided into products and services, I think it’s reasonable to estimate that operating expenses are heavily skewed toward products rather than services. If Apple were mostly a services company, it wouldn’t bother to operate retail stores worldwide. After all, there are no Google or Facebook retail stores! Apple Stores opened 25 years ago to sell Apple hardware. At the time, predating the iTunes Music Store, services were not even worth mentioning in the quarterly financial reports. The majority of Apple marketing is for a product, iPhone; as far as I’ve seen, Apple no longer produces “there’s an app for that” App Store commercials. (Sadly, Apple no longer produces Mac vs. PC commercials either.) I’m confident that the vast majority of Apple research and development is spent on products rather than services. How much money does Apple need to spend to “research” whether to double the number of App Store search ads?
Thus, factoring in operating expenses, I think it’s reasonable to estimate that services contribute more to Apple profit than their 42% of the gross margin, and products contribute less than their 58% of the gross margin. And total operating expenses are 32% of gross margin, so they’re not insignificant. Mathematically, products and services would be 50-50 in operating income when operating expenses are around 75-25 products to services.
Investors want growth, and services are growing. If we look at the Apple 2019 Form 10-K, pre-pandemic to avoid comparing with an historically unprecedented period (the Apple fiscal years ends in September, by the way), products gross margin was $69 billion and services gross margin $30 billion. Fast forward to 2025, products gross margin was $113 billion and services gross margin $82 billion. Both products are services grew between 2019 and 2025, but services grew faster in relative terms (2.7x vs. 1.6x) and in absolute terms ($52 billion vs. $44 billion). Moreover, Apple now faces major component price pressure on products, which means higher products cost of sales for the indefinite future. As a result, Apple recently announced steep consumer price increases on its hardware, presumably to maintain products gross margin (37% of net sales in 2025). It seems likely, though, that these price increases will decrease net sales and consequently decrease total products gross margin in dollars rather than percentage. With persistent general inflation, consumers do not have unlimited money to spend on Apple products. At least in the near future, it’s reasonable to question how much further room is available for growth in profits from Apple products. To satisfy the demands of investors, Apple executives including CEO-elect John Ternus may be forced to rely even more than before on growth in services, which do not face as much pressure on cost of sales as hardware products.
Addendum: A natural response to “consumers do not have unlimited money to spend on Apple products” is that consumers do not have unlimited money to spend on Apple services either. In the abstract, this is true, but there are a few mitigating circumstances. First, Apple services customers are only a subset of Apple hardware customers, so there is more room for growth in the services market than in the hardware market. Second, Apple services customers appear to be disproportionately wealthier than Apple hardware customers on average. That is, Apple services market specifically to “cash cows” who can afford to pay for new and multiple services. Third, an Apple hardware upgrade is much more costly to a consumer than an Apple service, and hardware upgrades can be postponed while still purchasing Apple services. Fourth, not all Apple services sales come from consumers: App Store search ads are purchased by App Store developers, and the Safari default search engine is purchased by Google.