Apple expects slower services growth during the holiday quarter while absorbing the cloud-computing costs of Siri AI and preparing to charge customers for expanded access to artificial intelligence features.
Decoding the Holiday Quarter Guidance
- Kevan Parekh, the Chief Financial Officer, predicted that services would expand by 8% to 9% in the December quarter, pointing to sequential headwinds driven mainly by foreign exchange rates and third-party licensing.
- Services revenue increased 10% to $31.6 billion in the September quarter, driven by records in video, cloud services, payments, and advertising.
- Apple shares fell about 4% in after-hours trading on Monday, November 2, following the margin and services forecast rollout during the earnings call.
Speaking on his first earnings conference call as CEO, John Ternus outlined plans for paid access when answering an analyst question regarding iCloud+ and Apple Intelligence. Usage limits will apply to server-side features like Siri AI and intelligent photo editing. Anyone needing greater capacity can purchase expanded access in the future, though pricing and launch dates remain unannounced.
Services momentum from the September quarter pushed total platform subscriptions past 1.5 billion at a double-digit growth rate. Yet, management pointed to headwinds in mobile gaming, App Store business model adjustments, and a U.S. court ruling affecting transactions through external links. Gaming weakness is expected to persist through December.
Hardware Performance and Manufacturing Constraints
Hardware revenue delivered mixed results across categories during the quarter. iPhone sales increased 17% to $57.6 billion, and Mac revenue rose 24% to $10.8 billion. Conversely, iPad revenue declined 10%, while Wearables, Home and Accessories fell 8%.
Geographic strength was anchored by Greater China, where revenue increased 21% to $17.5 billion, boosted largely by iPhone and Mac demand. Chief Operating Officer Sabih Khan noted that the foldable iPhone Duo remained supply-constrained. While advanced-chip manufacturing bottlenecks are easing, memory availability will restrict Mac and iPad shipments during the December period.
| Segment | Q3 Revenue | YoY Change |
|---|---|---|
| iPhone | $57.6 billion | +17% |
| Mac | $10.8 billion | +24% |
| Services | $31.6 billion | +10% |
| iPad | Not Disclosed | -10% |
Managing the Infrastructure Costs of On-Device and Cloud AI
With Apple taking on the cloud-computing expenses associated with Siri AI and getting ready to bill users for broader entry to specific artificial intelligence capabilities,. English beta into French, Japanese, Korean, Portuguese, and Spanish, management is balancing local processing with server inference expenses. Requests run both on devices and through Private Cloud Compute, with server inference costs recorded directly in services cost of sales.
Apple will defer a portion of hardware revenue to reflect Siri AI among the features bundled with devices. Meanwhile, enterprise customers are deploying on-device AI to cut cloud overhead. Gap is running loss-prevention AI on Mac Mini across hundreds of stores to eliminate cloud token costs, and Christie’s is utilizing local models on Mac Studio for pricing estimates.
For the December quarter, Apple forecast total revenue growth of 7% to 10% and gross margins of 45% to 46%. Management expects higher memory costs to account for most of the sequential margin decline, accompanied by additional expenses from the broader rollout of Siri AI.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.
