presentation

Apple's best quarter in years, albeit with a warning label.

July 31, 2026 Asymco One Office Hours, recorded day after Apple's Fiscal Q3 2026 earnings call, Tim Cook's last as CEO. Horace Dediu presents his analysis of the quarter and takes questions from Asymco One subscribers. Hosted by Horace Dediu and Farshad Nayeri.

Presentation Summary

Revenue +16%. EPS +29%. Mac +29%, double what most expected; guidance cut growth to 10%.

See inside:

• The 11-cent line item nobody modeled.
• Cook's concession
• 1.5 billion paid subscriptions, following ACTIVE model.
• R&D nearing 10% of sales, and where it's going.
• Three visits to 40x earnings. Three pullbacks.
• Apple Upgrade: every lease, priced to the penny.

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Video Recording

Transcript, with Embedded Slide

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Horace Dediu: This is the office hours that happens to be right after earnings for Apple, which came out at the end of trading yesterday. We had the conference call, and we've had a little less than a full day to digest. It's quite an interesting quarter. Let's dig in.

This is a new type of graph. I'm testing it — it's a little complicated, I admit, but I'm trying to put a lot of information in here. For the quarter, we have revenue on one graph and earnings on the other. But I also have the previous quarter, and the next quarter. In the middle, on the vertical, are all the estimates, including the actual results and the previous year, so that it gives us a growth picture.

That middle line represents all the estimates: Yahoo, TipRanks, Philip Elmer-DeWitt's Apple 3.0 — both the professionals and the independents — and my number as well. The growth in the previous quarter was 16.6%, and we had 16.4% in the just-ended quarter. This is very consistent with guidance, so there wasn't a lot of surprise. In fact, you can see how many of the estimates were clustered around the very point where we ended up.

That's revenues. In terms of earnings, Apple really outdid itself. We ended up with 29% growth, versus 21.8% in the previous quarter. The reason a lot of this was outstanding is that about 11 cents of those earnings was tariff refunds. That was a surprise to everyone — no one factored it in, although there were hints of it from the previous quarter and the outperformance in that quarter as well. If those were removed, we would be much closer to the middle — about $1.91. My estimate was $1.93, consensus was about $1.90 ($1.88 even for some). So, in line or a slight beat on earnings, but a huge windfall from tariff recovery.

Now, the guidance is where the surprises came, and we'll get into why. The guidance indicates about 11% — they gave a range, and I'm putting in an 11% estimate on revenue growth and a 10% estimate on EPS growth. As you can see, this is a significant reduction: from about 30% to 10% on EPS, and 16% to 10-11% on revenue. A lot of that is because they're actually way too successful as a company. The demand is off the charts. In fact, the demand into the first and second quarter of this year was far higher than they estimated. Tim is on the record now saying: we made a mistake. We made a mistake in planning this year. We had certain expectations of growth, and they seem to have been double that. As a result, we didn't allocate enough resources on the supply side to meet this demand, especially on the semiconductor manufacturing side.

There are also some headwinds with foreign exchange, and I suspect those have a lot to do with Japan — we've seen the yen. So there's a lot of jitters in the market, a lot of surprised people saying: why is growth decelerating? Apple threw us a curveball with demand — actually, they were surprised as well. But overall, the growth is substantial. Even at 10%, it's healthy, and I think a lot of that demand is going to be delayed into next year, and we're going to end up with a surge, if not a super cycle, as it used to be called, because of this pent-up demand.

The Numbers

Revenue's up 16%, EPS 29%, as I said. Products up 18%, Services up 12% — a little heavier on products, and Services was a bit of a surprise; a lot of that was, again, foreign exchange. We had the 11-cent favorable impact from tariff refunds. The iPhone itself: $54.3 billion, very strong growth at 22%. A June quarter record — we're talking almost holiday-level sales right now. The Mac: 29%. Outstanding, extraordinary. We expected an outstanding quarter, but we got much more than that — probably double what most people thought. I really thought 15% would have been a very strong quarter.

When you look at my own estimates, my biggest error was on the Mac: I was off by a cool 10 points there. I had overestimated Services a little bit, again due to that foreign exchange issue. iPad, a small miss, but it was a tough comp — they warned us about the comp. It ended up the only category that's down, about 6% (5.9%). But Apple constantly repeats: revenue records in every geographic segment, double-digit growth across all regions, and so on. We don't have the absolute numbers, but a lot of records are being broken.

iPhone

The top line is the smoothed version — a four-quarter average — of iPhone product shipments. This isn't what they report; they give us only revenue numbers, so I'm estimating this. When I talk about a surge, or a super cycle: we had this bump around 2015, then it looked like everybody said growth is over. Then another surge in 2022 — that's COVID — and then again a plateau. And now we're seeing another surge.

Is this due to the periodic nature of the iPhone — the fact that people tend to hold on to the product for a while and then come back to upgrade? Is there pull-forward demand because people anticipate price increases? Is there AI demand? (That wouldn't happen in advance.) To me, this is a cyclical thing that's very much built into the history of the product. So I don't read much more into that, but I do see a surge coming. What I'm surprised by is that Apple themselves were surprised by the surge — they hadn't planned for it, as Tim's comments said.

Mac

The Mac is hardly a ripple on this scale, but the Mac is also seeing an obvious secular surge right now. According to IDC — and not just IDC, many others are reporting the same thing — there are share gains around the world on all these products.

Back to the Mac: $10.4 billion, 29% growth. They repeat that the MacBook Neo was a big driver. A lot of skeptics would have said it's too cheap to make a dent, it's low margin, it's not available in large enough numbers. But clearly management has highlighted it as the driver, plus the MacBook Pro, and it's driving enormous growth: over $10 billion in a quarter that is not the holiday quarter. They also gave anecdotal evidence about the MacBook Neo being used in retail and in education, replacing Chromebooks and Windows. Nothing new there, but they are confirming a lot of the assumptions people had.

iPad & Wearables

iPad revenue was down, as I mentioned: $6.2 billion, about −6%, on a tough compare. Wearables, Home & Accessories revenue was $7.9 billion, up 6% — a decent amount, actually; it hasn't been growing a lot lately. I also have gross margin estimates on an individual product level. From my deductions (Services margins are not a deduction — everything else is), the margins on the iPhone are holding around 40% and actually growing slightly on average. The Watch, apparently, is doing really well, growing with new customers as well.

Services

Services was $30.7 billion, up 12%. There were a lot of estimates above 15%. I think they guided pretty close to this, but they missed due to sequential foreign exchange headwinds. This seems like something you could hedge against, but apparently there was a missed anticipation there.

But the bombshell was that they reached 1.5 billion paid subscriptions. This was not a figure we've received an update on since they hit 1 billion, which was a couple of years ago. Everything since has been an estimate on the trajectory we had. 1.5 billion paid subscriptions — this includes Apple's own services, but also third-party services that Apple manages through the App Store. It's significant. It is possibly coming close to the number of users out there, which is probably 1.4 to 1.5 billion. And it's to be contrasted with the trajectory of growth in active devices, which since January has been at 2.5 billion.

This is a famous graph in the sense that it's been maintained for many years — a decade even. It's every data point Apple ever shared about the number of users it has: everything from iCloud accounts to iTunes accounts, active devices, even Apple Music (some of these are no longer reported). I've also mixed in third parties: Amazon, Netflix, even Peloton, and — based on a suggestion I received — Tesla's FSD subscribers. I've also added, as data points, Google search users (about 4 billion) and Facebook monthly users across all properties (about 3 billion). Below the active devices trajectory crossing 2.5 billion, we have Instagram monthly users at 2 billion, then an estimate of the iPhone base, and below that, with the arrow, Apple subscriptions, just printed at 1.5 billion.

How does that fit the pattern? There's the line — and that line is pretty much dead on what we've had since the beginning of that data set. Compare that to Netflix and Amazon and we're talking about order-of-magnitude differences: latest data, Netflix subscriptions were 325 million and Amazon Prime 260 million. Peloton has not moved much at 2.6 million. And there's a lot of pride among Tesla fans that FSD has reached 1.48 million. That's one 1,000th of Apple subscriptions. I'm not saying it's a bad thing, but it's in a different category altogether. The big question, again: can we use this to project? Is this linearity going to continue? As far as I can tell, since starting this more than 10 years ago, it has been holding.

Supply Constraints

This is a very wordy slide because I picked up a lot of text from the conference call — direct quotes from Tim Cook and Kevan, the CFO. I've used bold to identify supply-constraint citations and highlights for the points about demand. Let me summarize: supply constraints are the primary reason they are unable to project growth similar to what they've had before. The reason for supply constraints is that there's excess demand.

As Tim Cook said in response to a question: we had high expectations. It wasn't that our expectations were low. But as you can see from iPhone growth of 22% and Mac growth of 29%, these were extraordinary numbers. The supply chain just couldn't cope. They've been pulling as much supply forward as they could, but at some point there's a limit. By the way, one of the places this shows up is in inventories, which have increased significantly — Apple has pulled a lot of inventory and pushed manufacturing as much as they could to take advantage of the imbalances that are present.

I encourage you to read through, or even search, the transcript for instances of "supply constraints" — this is not even the full set here. And on and on about high levels of demand: "We continue to see extremely high levels of demand. The Mac and iPhone are both doing remarkably better than we thought." The demand is there, and typically with Apple products, if the demand isn't fulfilled, it's delayed. We've had this situation before, especially at the beginning of the iPhone: it was very much constrained on production and supply, and the demand was persistent. It kept going.

The other, more subtle thing is foreign exchange headwinds — a terrible, jargony phrase. It simply means that if people are paying in a foreign country for product or services, they're paying in local currency. If that currency dropped significantly against the dollar, Apple's getting paid less in dollars, and they report in dollars. From a European perspective, the euro hasn't weakened very much, but in Asia there's been a lot of turmoil — we've heard quite a bit about the yen. I haven't dug into all the currencies Apple is exposed to, but if they're feeling this much pain — two and a half points of so-called headwinds, especially against Services — this is something they felt they needed to highlight. And they have, rather cryptically, put forward that this will impact next quarter as well, to the extent of another 2.5%.

So those are the two primary excuses: first, we can't meet demand, especially on the SoC — the system on a chip, their main processor, which cuts across multiple products — and on Services, because of the foreign exchange headwind.

Capital Returns: Stronger Than Ever

This incredible money mountain graph shows generated cash and capital returned (the gray sections): Apple has generated cash flow of $1.2 trillion for its shareholders and has returned $1.12 trillion of it. It holds a decreasing amount of debt — very low interest rate debt, and it seems they're not raising more as rates have changed; they seem to be paying it down. Net cash is holding flat. They said last quarter that they will no longer be targeting net cash zero. We only have two quarters of that to see what happens, but there's the trend.

Below that, a new graph: the split, for every quarter, of how capital is returned — buybacks in an olive color, net share settlement (a little obscure — it seems to have been constant, now a little more lumpy), and dividends, which have been growing as consistently as ever. As you can see, there was a period last quarter where there was a disturbance in the force, so to speak — the buybacks seemed very weak. But we're back to full blast, and I think the highest ever in that regard.

As a result, the number of shares outstanding is decreasing — less rapidly than it used to, which is mathematically understandable: as the shares increase in price, you cannot afford to buy as many as you used to. In the good times, when the market was oblivious, shares were cheap, and the steepness of the curve was far higher. But we're still heading towards what I call the halving point — targeting 13.27 billion shares, half the number since the beginning of this capital return program. And the graph below that shows your percentage as a shareholder — indexed to, say, 10 million shares — your concentration of wealth going up.

The Growth Scorecard

This is a table that is very long — this view goes back to 2020. Every quarter has green, yellow, and red indicators, from net sales at the top to EPS at the bottom and every category in between. We're looking to see green across the board. Dark green is super-fast growth — we saw those back in Q1 2021, in the middle of COVID, that whole area of green. The bottom line was even above green — above 100% turns blue in my algorithm. When you look at the latest, we actually had a better-looking quarter, I think, than the one before. The Mac turned from moderate to very high growth. Going forward, I think these are going to be closer to 10% than 20%, but I think it's green into the next quarter as well.

OpEx: The Cost of AI

On the cost side: SG&A relative to R&D — together they make up OpEx. R&D has overtaken. Back in the days of Steve Jobs, R&D was far lower than SG&A. That flipped around 2020, and now what we're seeing is incredible growth. I think that's their allocation to AI. It's not just research — I think a lot of the costs baked into AI development are going into R&D for Apple. Since it's core to their business, they can book it as research and development — similar to Amazon putting almost all of their engineering into OpEx, because for them, all of that is not core to retail.

We are seeing the surge, but perhaps a slight tapering off on the rise. As a percent of sales, the two together are reaching higher and higher, closer to the all-time peak of 18% — again, back in the days of Steve Jobs. It's not outrageous, but it is something to keep an eye on. R&D alone reaching about 10% of sales I consider a little bit excessive, but it is the nature of the business today, especially with respect to the need to do more pure research on the hardware side, and on the software side with AI.

Valuation

This is one of those graphs that's hard to process, but very rewarding. What we see here is EPS (trailing twelve months, now about $8.70) as the blue line, and multiples of that EPS as parallel curves above it — note that it's a log scale. The black graph is Apple's price per share. Apple touched 40 times earnings. As we speak — I checked a couple of hours ago — it seems to have come down to 34, because the share price fell, but also because earnings went up a bit.

Historically, it seems to bounce off these upper bounds. Around 2010, it was bounded by a P/E of only about 20 — hitting that and bouncing down. We've seen that migrate up to about 40 now, and we've had three episodes hitting P/E 40, with some pullback each time. I'm not here to predict what's going to happen, but it does seem it's a bit bound by a multiple. That's not to say it can't change — we can see euphoria, we can see faster growth rates justifying it. But we also have situations where companies growing very rapidly with very low P/Es slip dramatically in one day.

Same view with the drawdown bands carried over: plotting EPS and net sales on a TTM basis, we see the correlation, and the oscillation — product cycles in there. We have a drop due to what I call the EU heist; had that not been there, we would have seen a different picture. Nonetheless, TTM EPS is growing very, very robustly. And its change — the delta in TTM EPS — is the red line below it. You can make your own conclusions about whether it indicates or precedes the share-price sell-offs, but it is at least one indicator of how the company's doing.

Apple Upgrade: A Preview

I want to spend a few minutes on Apple Upgrade. I think this is going to deserve its own hour's worth of conversation. I had done this work prior to earnings and haven't published it yet, so I'll give you a preview and run through it fairly quickly. I think this is one of the most extraordinary and exciting developments with Apple.

They say that necessity is the mother of invention. But return on invested capital is the mother of innovation, is what I like to say. And in this case, what we're witnessing is innovation. This is nothing more, apparently, than packaging of an existing product with new ways of buying it, new ways of financing it. But boy, is this thing a great idea. It makes it so much simpler for people to make decisions on Apple products. Unless competitors are able to replicate this perfectly — and there are a lot of questions about that — I think Apple is going to make a tremendous impact with this. Of course, it needs to go global, it needs to scale, it needs to be well communicated. And it must not fail due to other factors — for example, rates of delinquency. I'm not an expert on this.

One of the things I've wondered for many decades was: why doesn't Apple do this? And I kept coming to the conclusion that it's very hard to do. This is hardware as a service. I don't want to buy a phone; I want to use a phone. As the old saying goes, people have a job to be done: I don't need a drill, I need a hole in the wall. What Apple was offering with the iPhone was: pay $1,000 upfront and you can get all these jobs done. But most people don't care about the product so much; they just want to get things done. And here is a way to package that proposition and say: for $33 a month, you can get it done.

The subscription makes perfect sense. A lot of people read too much into it as some sort of magical thing, or evil thing. It's just convenience. Tremendous convenience. The old way of calculating the cost per day was: you pay $1,000, and then maybe after two or three years you tire of the product, or you want to upgrade, and then you find a way to sell it — maybe Apple trades it in, maybe a third party, maybe you give it to a relation or a friend. All of these were possibilities, but you had to do a lot of calculation in your mind. Well, this is very plain and simple now.

What I did is I went through the website and got every single configuration that has a price on it, and put it in a spreadsheet. This is just the iPhone, split into the 12-month lease and the 24-month — I call these the short and the long term. For each product, I took down the price, forwarded to August 1st. The thing to do is to track this and see whether it changes. We know that with the iPhone as it is, once they set that price in September, it doesn't change for the full year — they've never moved it. But here we're seeing the potential for Apple to tweak this on an ongoing basis.

Also notice that each price is down to the penny. This isn't $9.99, some feel-good price known to resonate. There are some in here that are essentially $18.01 per month — one cent. We see 67 cents, 35 cents, 56 cents, all over the place. These are very carefully chosen. These aren't chosen by a marketeer who says this is a feel-good price. These are chosen either because of the cost, or because of the knowledge of what the product can do.

To summarize: the median long lease for the iPhone is $34.89 per month, or $1.15 a day. The median short lease — only a year — is $50 a month, $1.66 a day. A very simple proposition: 34 or 50. On top of that comes the carrier plan, which is probably another similar amount. It makes a lot of sense to me, and I would love to do this, because if I commit to two years, then I know I'm going to get a new one after it's over. Nothing new, nothing special — it's just packaging and convenience.

Jumping through the others quickly: the Watch is $24 a month, or 78 cents a day, on the long lease ($43 a month, $1.44 a day, on the short).

The iPad, it turns out, has a lot more configurations than the iPhone — it's the most complex, having to do with different displays, not just memory. The median for the iPad is $32 a month on the long lease, or $1.05 a day, and $36 a month, $1.18 a day, on the short. (By median I mean the price band halfway between the top and the bottom — half the prices above, half below. It's not the average; it shows where the midpoint is.) It comes out to about a dollar a day. The lease terms are slightly different for the iPad: 24 months is the short and 36 is the long, and the same with the Mac.

Mac prices surprised me — this is the first time I've done this exercise — but it's $44 a month median on a long lease ($1.45 a day) and $61 a month on the short. You could present this and say: if you want to get into a Mac, you can go as low as 82 cents a day. Or if you want to max out your system — some options cannot be put on a lease; they're purchase-only — a more or less fully loaded Mac Studio goes up to $5 a day.

I find these numbers extremely exciting, and most people, when they see them, cannot believe it. When I presented some of this on X, on Threads, and on Mastodon, people said: how do I sign up? How is it possible I can get a Mac for this little money? This is how people are going to react. Nobody believes it — they think it's a $5,000 product at the top end of the Mac scale.

I think this is very compelling. I think it's innovative because it makes it easy and convenient. Many critics said: if you do a lot of mental arithmetic, you'll probably realize you'd maybe save $15 going a different way; if you just want convenience, this is convenient. To which I'd respond: who's ever known anybody who cares about convenience? Obviously this is going to fail. Convenience is so important. People pay huge amounts of money for it — probably 20% of the economy is trying to deliver convenience to people. It's what credit cards do, it's what Apple Pay does. And it just is phenomenally resonant with consumers. It's not hiding anything. It's all transparent. You don't pay that much more — it's actually 0% financing in effect. You don't own the product, but who cares?

One summary slide on this. Across all these products — iPhone, iPad, Mac, and Watch — the median daily cost sits right around the $1 line. A little higher here ($1.10), $1.05 there, 78 cents for the Watch. Remarkably consistent. When I wrote this story about a dollar a day, maybe 15 years ago — prompted by Jean-Louis Gassée, by the way, who asked me one day over dinner: why don't you take the value of a Mac and divide it over its lifespan? — I did it for the iPhone, and lo and behold, it was a dollar a day. That would have been 2010, '11, '12. And it's still a dollar a day.

On top of that, you could ask: how many hours do you use this? That's one more graph — the cost per hour. The iPhone is used four hours a day; take that as an estimate. The average usage of an iPad is lower per day, therefore it's more expensive per hour. The Mac has a higher number of hours, but the product is more expensive. So we're looking at about $0.30 per hour, on average.

We could go a step further and ask: what about the number of times I use the product? It's hard to know how to measure the Mac, but in the case of the iPhone it's easy, because you can get it through your iPhone itself in Screen Time — it's called pickups: how many times you picked up the phone and turned it on. That number is about 100 on average. (It used to be 80; it's going up.) You can find out your own, take the amount you spend on a daily basis, and divide it yet again by the number of uses. The iPhone comes out to, if it's a dollar a day, about a penny per use. A penny each time it's unlocked.

And not only is this important from the consumer's point of view, it's a way to define the proposition of value for the whole company. Take every instance of use, multiply it by the number of people using it, multiply it by the number of days in a year, and you start to see how many transactions, how many interactions, and how many pennies add up to the value Apple creates. It's an absolutely phenomenal way of doing unit economics for the iPhone.

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A transcript of the May 1, 2026 Asymco One Office Hours, recorded one day after Apple's Fiscal Q2 2026 earnings call. Horace Dediu presents his analysis of the quarter and takes questions from Asymco One subscribers. Hosted by Horace Dediu and Farshad Nayeri.

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Horace Dediu: So I'll do a short presentation, and then we're going to open it up for questions. We are speaking approximately one day after Fiscal Second Quarter 2026 earnings call. Let's dig into it and see if we can understand it even better.

First, I think that there was a comfortable beat from already a highly elevated expectation.

So we had a range of estimates— I collected those from Yahoo and TipRanks, each one had about 30 [analysts], probably a lot of overlap between them. So we had a range of about 105 to 115 in terms of revenues in billion, and then we had EPS in a range of about 1.6 to about 2.15.

And not only did it beat the consensus, but also you can see what happened a year earlier, which is the circle at the bottom of the graph. So the beat was from already a pretty high growth rate expected from the year before.

So we have a measure of how each of us, myself included, performed relative to the actual results.

I was about 1.8% under revenues delivered, and 1.6% on EPS. And then you can see red is Yahoo and blue is TipRanks.

So speaking for myself, I was perhaps a little bit too conservative on my revenues, and I was a little bit more accurate, relatively speaking, on EPS. Roughly speaking, again, I think these are not big errors, 1% to 2%. Worst case, 3% on the consensus basis.

Now, on the segments, these are the actual growth that we ended up with, iPhone almost 22%, 16% on services, 8% on the iPad, which is impressive. 5.7 on the Mac, we'll talk about that a little bit, and 5% on wearables and growth.

Segment level, again, the worst case, you're looking at an 8% overestimation on the Mac. The Mac— I think a lot of people, once they saw the Neo come out, once they heard about the Mac mini stockouts, when they heard about the Claude bots, you know, everybody buying up all these Macs, there was an expectation of a big boom in the Mac, but those all happened fairly late in the quarter. My expectation was a little bit over, but not as much. I was off about 3% on that estimate. So although we saw 5.7% growth, some people expected double digits. Also, the pros had the same fault there.

Overall, though, I think these are pretty impressive. I didn't break out the geographic segments. China grew extremely well. Rest of the world, that grew very well. Management also pointed out that they're doing very well in developing markets. So overall, regionally, there were some extraordinary performances. But as we see here, just the iPhone was incredible, 22%. Very similar to performance in the previous holiday quarter, where, again, unprecedented growth, or at least in the near history of the product.

And we'll get into some reasoning why that is. People talk about super cycles, people talk about the assumption that we have these giant surges once in a while. Well, here's how to look at it.

There are two graphs here. The bottom graph shows in green the net sales, but trailing 12 months, so it's smoothed out, so we don't see the spikes on the holidays. That's the green line. Above that, we have the EPS line. Now you'll see how they tracked very similarly for a while, and then they began to diverge. That occurred around COVID. It also occurred during the surge in services, especially subscriptions and services. But still, there's a similar pulse, if you will, a cyclicality to it.

I mean, part of that has to do with the introduction of a new form factor. This has been true all the way back since 2012. When a new iPhone comes, especially a new, distinctive-looking iPhone, people will go out, especially in China, buy it for showing off that they have the latest, which there's nothing wrong with that. But then the second year usually is not the same, the phone is not new, it's the same form factor. That has to do a lot with tooling. That's a long, old story, that the tooling is depreciated on a two-year schedule, so you're going to produce roughly the same look a couple of years in a row, and then by the next cycle, you'll see people upgrading or replacing their older phones. So you're going to have this— I guess what they used to call a super cycle.

And you see it also in the upper graph, where I try to separate out of sales just the phones. Now this is an estimate because we have no unit sales for the phones since 2018, so some of that is an estimate. But you'll see again, once you smooth out the cyclicality, you'll see these surges once in a while. Now, again, this is a valid observation, but I don't think it's the main driver. The oscillation isn't huge, it might be significant, but it's a blend of many things.

The bottom graph is particularly interesting. The gray areas are when the stock price fell. And the red line represents the derivative of EPS. And you'll see how, when that is about to dip, there's usually a stock price sale going on. I wouldn't say it's predictive, but it's an interesting pattern to go through.

So what's happening now? You'll see from the iPhone, there's a new surge happening. Now, when Tim has been asked this question, he says that, well, the iPhone 17's really nice, people really love it, and that's a good answer, but the fact is, it's a distinctive-looking product. Some say it's the orange color, but it's certainly attractive. So we're seeing this pattern, a nice surge.

We'll get into the guidance in a minute, and that actually demonstrates that we're in some kind of an acceleration. But here's the thing, underneath all that, services is just absolutely steady growth, compound growth, and as a result, it just lifts the whole story.

Here, services is at the bottom. Normally, in a graph like this, you want to put the oldest products at the bottom and the newer ones at the top, but I wanted to highlight the fact that services is foundational, in the sense of showing how it holds up everything else.

Most people put it the other way, they say the iPhone holds everything up, but services is looking more and more to be the thing that keeps people in the ecosystem. There's a lot of value there. There's a lot of things people depend on there, and I think it's one of the reasons people don't switch. So it's another one of these stories that people aren't appreciating enough. It's been years and years of pounding the table on services, but here you see it, just how important it is. It's the tide that lifts all the boats, and the boats being all the products.

So let's now talk a little bit about margins. Unbelievable, unbelievable margins. We just hit almost 50% on gross margins. Gross margin here is the blue line. And that's composed of two subcategories. We have services in red at the top, and we have products with the purple triangles.

And although products margins are exceptional— they're right around 40%— those services, again, are pulling the whole average up, and you can see that bend in the curve in the blue line, where we were very steady around 40%, but as services took more and more; it just pulled the whole curve up.

And we also see here operating and net margins, which also are going up, naturally. There is a little bit more operating expense. We'll get into that, which maybe decreases the slope of the bottom line. But this gross margin is absolutely incredible. We just haven't seen anything like this since 2010-11. We saw that surge back then, and then it sort of leveled out, and everybody was happy with 40%, and now we're flirting with 50. I just cannot believe it.

Just one more thing. I remember being an analyst decades ago, when I was looking at different companies in hardware and software, in phones and computers and so on, and everybody was really impressed by Microsoft, because Microsoft, had an 80% gross margin, because there was very little cost of sales. That's exceptional. An 80% margin business is a money printing machine. And everybody was impressed and jealous of Microsoft that they could pull that off. Of course, Microsoft, a software company, is going to have extraordinary margins, right?

And so for a phonemaker like Nokia, there was something to be jealous of. And here we are with Apple services, a significant component on the business, approaching also almost 80% right now. And it's still rising. I just can't get over how impressive this is.

R&D Acceleration

A little bit about the difference between gross and net— you have to take out the operational expenses, and this is what we have here. It's interesting what's happened. Obviously, you see R&D overtaking on the absolute basis. So R&D overtook SG&A already in 2021. And now it's just [going] almost vertical.

By reading a little bit the guidance, I think it's going to taper a bit into the next quarter. But what we see is a significant R&D increase, also as a percent of sales, which you're seeing below in the graph below, but in a stacked fashion. In that sense, the two of them together are now approaching— haven't yet reached— a percentage of sales that was in evidence around 2007 and 8, when the iPhone was just emerging. But you'll see back then, R&D was tiny, SG&A was huge as a percent of sales. So much so that R&D—this is during Steve Jobs era, R&D was like 2% of sales. And now it's approaching 8%, which is extraordinary. Because that's an engineering company that's doing breakthrough work.

And that's something that Apple's not recognized for doing. There's a negative side of spending a lot on R&D. The positive, though, is that Apple is doing a lot of fundamental research now. This isn't fixing products, this isn't updating OS. This is engineering that is really driving what might be considered breakthrough. And that's something— and I've said this to the media when interviewed about Ternus and the succession— I said, the new CEO will need to be— this is before he was announced— I said [the CEO] would need to be someone who is acceptable to engineering, because Apple is an engineering company today. Fundamentally, culturally, operationally, it's an engineering company, and it is being now led by an engineer.

Steve Jobs was not an engineer. And none of the other CEOs were engineers. Tim Cook was an operations manager. He was excellent in a fundamental part of the business. And that is acceptable to engineers, culturally speaking. But the thing is that John is an engineer's engineer. He understands the culture of engineering and will understand how to motivate and retain talent, as well as to allocate capital effectively, not wasting it on pipe dreams. Engineers have a tendency to try to chase dreams, by the way, so you got to be harsh sometimes to shut things down. So, keep an eye on the R&D— it's a great story.

However overdoing it can be a problem. There are downsides to an engineering-led company where, again, it turns into kind of an engineering welfare state. Engineers tend to get projects and do a lot of navel-gazing, which needs to be managed carefully.

Now, let's just touch on ACTIVE. Active is the number of users, the fundamental measure of the value of the company. It's not counting iPhones. It's counting users, and these are the comments from management, just so we capture them. They come every quarter. Sometimes some products are mentioned, sometimes they're not.

So here's what we have exactly on the topic. Record upgraders and customers new to the Mac. They mentioned that Mac lifespans have been long, which is good and bad. They talk about the iPad, half the customers being— over half— new to the product. Same with the Apple Watch, this has been going on for a while.

So this is going to be important when we measure installed base, because if we see every quarter an estimate for the number of watches, or Macs, or iPads, you just take half of that and allocate it to the installed base, and the other half is growth of the installed base. So there's an interesting way to measure that, and I've been applying it. We're going to keep an eye on this.

And finally, there was a mention with respect to India during an answer to the question. The citation is that the iPhone, Mac, iPad, watch, all of these have a majority of customers that are new to the product in India. As you would expect, part of the developing market story. But this drum is still getting beaten. And that's a positive. Always want to look forward to that every quarter.

So let's jump in now to what I thought was the most unexpected comment during the call. I've pasted in here exact, verbatim the comments from the CFO. I need to point out a few things here, and I've highlighted these things in bold.

One is the dividend. The dividend number is 3.8. Last quarter was 3.9, so that's not a surprise. However, open market purchases were only $11 billion. Now, that is represented in the graph by the buyback, and that is this mustard color. And you'll notice it is extremely low. The previous quarter, we were over 25 on buyback, so we're less than half that. This is an anomaly. You'll see that it does not match the rest of the graph at all.

The blue area is dividends. The reddish area is net share repurchases, or settlements. And there's a pattern to both. Dividends has been growing in a predictable fashion, very steady. Buybacks have been somewhat steady, but up and down a little bit. During the last few periods, we've seen something unprecedented.

Now, you'll see that the 11 from last quarter was offset by a much higher number the previous quarter, but on balance, we're still down. And there's also these comments that say that they are abandoning the net cash neutral position. And I'm wondering if it's already started, because this $11 billion caught me by surprise.

I've highlighted that "our repurchase activity at any time can be affected by a number of factors that we take into account." So this was essentially explaining why sometimes there's a difference in the amount of purchases, right? And then in the middle of that commentary, he says, "as you're aware, we recently announced a CEO transition." Why does that comment fit in the middle of a paragraph, talking about the general theme?

I read this as it suggests that already the CEO choice is deciding how much to allocate to capital returns. And it appears— and again, I could be wrong— but it appears that John is probably against the idea of huge returns to shareholders in capital form. So keep an eye on this. This was, I found, very, very strange and out of character in a way. Very out of character of a Tim Cook presentation. I'm not judging it, I'm just pointing out that it isn't normal.

So here's the bottom line. This is the graph representing what's happening with the entire cash position and return of capital. The debt has decreased slightly, and it has been decreasing. And that's a good thing. As interest rates go up, you don't want to hold debt. A lot of that is fixed rate, but they're not taking on more. It seems like they're paying it down.

Net cash, which is the blue dotted line, has now been increasing two quarters in a row. Now, it's increased in the past, but never for long. It's had only one tick, during the holiday period. Here, where we're seeing two ticks— holiday and the quarter after.

Now, if you'll notice here, I'm going to try to zoom in. Those red lines represent what I would say were the trajectories to get to net cash zero. So that blue line, since they announced it, they kept missing the target. You would see that, another year goes by, and there's a notch up. Overall, the trend is down, but they haven't kept that path down all the way to zero. And that is now completely abandoned.

Again, we'll have to figure out why. The buyback, as I mentioned, halved— at least more than halved— to 11. Net cash zero abandoned, $100 billion net cash reduction. You'll see that this blue dot line has gone down by about half. It was down even further than that until it came back a bit. So that is going from about $160 billion net cash to the current $62 billion, which is why we get to 100 reduction. And $1 trillion overall return, which is, again, something they mentioned. In fact, they're at $1.085 trillion. And still $100 billion will be allocated further. Whether they actually spend it is another matter, but that's been approved.

So now— is this good news or bad news? I don't think it matters. I think at the end of the day, the value of the company doesn't change because of this. The value might be captured in the share price, or it might be captured as a percentage of the company that has been increasing.

In fact, let me just pop into the next slide. What does this mean? Are we never going to reach what I call the halving? Well, we were at the maximum 26.5 billion shares. And now we've reduced that to about 14.6. Half would be 13.2. So we're still going down. But there's 1.4 billion shares to go before it's half of what the max was. Now, this is an arbitrary figure. I just thought it was an interesting target to have. And as you can see, it's getting asymptotic as the price goes up. It should be harder and harder to get there. But we have $100 billion allocated. $260 billion at the current share price would need to be spent to get to half. But probably we're not going to get there. I really don't— if I were a betting man, I would say we're probably going to see this taper.

Let's look a little bit at guidance. This is based on what management already communicated. So if you put in the numbers they gave us, you will get revenue growth of 16%, coming at about— well, they guided 14 to 17, so I'm estimating 16 conservatively right now. That gets you to $108.7 billion. If you put in the other numbers— the margin, the OI&E and the tax— and do something about this share reduction. (We're still going to probably see a share reduction.) We're going to look at EPS 1.92. Which is another 22% growth. This is what we had last quarter as well.

I'm putting gross margin at the top of the guidance. [Last quarter] they went over. They guided high, and even so they went over, so I'm going to assume they're going to still hit towards the upper end of the range. I'm exactly at the upper end of that range.

If those things are true, the iPhone almost necessarily has to grow about 19%. Now, here, I'm dialing the Mac way up to 18% growth, because I do think they're going to get a lot more Mac Neos into customers' hands. Now, that's a lower price point, but it will drive sales. So yeah, I could be a little bit high on this. If I am, then iPhone needs to go a little bit higher because I still think they're going to get the revenue there.

They did warn that iPad is facing a tough comp, so I'm putting iPad down 3%. Wearables and home, 4%. It was 5% last time, so maybe consistency there. And Services, just the same as before, 16%, could come in a little bit less. But if it does, again, it's going to be put into something else like the iPhone.

So overall revenue growth, I think 16% is very much being telegraphed. And as I always say, they already have April on their books. They're communicating exactly at the end of April. They're not going to lie to us and withhold data from April. They know about a third [of the quarter] already, so that's why this guidance is so useful.

And, as you saw with my error analysis, nowadays, people's estimates are very close. There's a lot of consistency. We're not off more than a couple percentage from each other. That's just because they're so accurate on their guidance.

And speaking of analysts, one more graph. This is just some of the latest price targets. I'm just trying to bring everything together that came out today. This is all very brand new. A lot of targets moved up. Not that it's all that important, but people are getting more and more excited. Almost all the targets from anybody who has a positive— effectively a buy rating— is now above $310 as a target. There's two who are negative, that are at 270 and below. This is Barclays and Rosenblatt. And then there's a few which have no ratings. So they're typically neutral.

But overall, all these numbers are higher than they used to be. Now, again, I don't use that very much, but it's worth keeping an eye on things just to get a sense of how the sentiment is out there. And it looks like the stock is responding positively today. Not by much— 3% or so, last I checked. But that's the story today.

So given that, this is my first take on the quarter. Love to take questions.

-- End of Presentation --

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Recording of Q&A Section

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