Technology · Technology Hardware
Hardware Product vs Services Gross Margin
Services earn a far higher gross margin than hardware products, so mix moves the company margin. Filed product and services margins from four filers.
Selborne Research · Technology Hardware coverage: 8 guides, 7 company profiles, a primer and Excel model
Educational analysis. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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Services Earn More Gross Margin Than Products; Mix Moves the Whole
Hardware companies that disclose product and services (or subscription) gross margins almost always show a wide gap. Devices and equipment carry bill-of-materials cost; support, software and cloud attach mostly do not. Company gross margin is then a mix story. Recurring revenue tracks the installed base, the attach rate and revenue per unit; product revenue tracks units times price.
Filed Product Versus Services (or Subscription) Margins
| Company | Fiscal year | Product gross margin | Services / subscription gross margin | Mix note |
|---|---|---|---|---|
| Apple | FY2025 | 36.8% | 75.4% (services) | Services 26.2% of revenue |
| Dell Technologies | FY2026 | 13.7% | 44.8% (services) | Thin product pass-through |
| Cisco Systems | FY2026 | 63.2% | Not shown (Cisco reports subscriptions across product and services) | Subscription 50.5% of revenue |
| Arista Networks | FY2025 | 60.7% | 81.9% (services) | Two end customers 26% and 16% of revenue |
Apple’s services line at 75.4% sits more than double the products line at 36.8%. Dell’s gap is smaller in level but similar in shape: products 13.7%, services 44.8%. Arista’s services gross margin of 81.9% sits above a still-high 60.7% product margin.
Cisco reports product gross margin of 63.2%. Much of the recurring story is subscription revenue of $31,977M, or 50.5% of FY2026 total. That breaks into product subscriptions of $18,314M and services subscriptions of $13,663M. Remaining performance obligations were $46.7B. Arista’s RPO was $6.1B in FY2025.
Apple: Services Margin and iPhone Mix Over Time
Apple’s services gross margin was already 55.0% in FY2017. By FY2025 it was 75.4%. Over the same long window, iPhone fell from 63.4% of revenue in FY2016 to 50.4% in FY2025. The blended gross margin therefore turns on how much of the invoice sits on the higher-margin services line as well as on product cost.
That history is why a model that uses one blended margin for a device brand misses the installed-base maths. The base rolls forward as base(t) = base(t-1) x (1 - 1 / average life) + units sold(t). Recurring revenue is then base times attach times revenue per unit.
Reading Mix in a Downturn
When unit shipments fall on a replacement-cycle trough (PC and Smartphone Replacement Cycles), product revenue often drops faster than services revenue tied to the installed base. Blended gross margin can rise even while profit dollars fall, if mix shifts toward services. The reverse happens in a product boom if devices outgrow the recurring line.
Cyclical component makers without a large services pool do not get that cushion; their gross margin range is the cycle (Gross Margin Ranges in Hardware Since FY2016, Mid-Cycle Margins for Hardware Companies).
Practical Checks
- Pull product and services revenue and cost (or the filer’s own segment gross margin table) before trusting a single company margin.
- For Cisco-style filers, read subscription share and RPO beside product gross margin; the labels differ from Apple’s “services” line.
- Track installed-base drivers (life, attach, revenue per unit) when the recurring line is material.
- Keep customer concentration in view where disclosed (Arista’s two end customers at 26% and 16% of FY2025 revenue).
Mix is an operating fact in the filing. It is also the lever that lets two hardware companies with similar product margins print different company margins in the same year.
Technology Hardware Sector Primer
The primer splits product and recurring lines so mix, attach and installed-base revenue drive the multi-period margin path rather than a single blended rate.
- 17 sections, from units, price and the product cycle to working capital in days, mid-cycle margins and a reverse DCF
- 43 pages
- a device brand, a networking maker, a contract manufacturer and a storage maker, all fictional
- 4 worked valuations
- listed hardware makers on filed margins, working-capital days and purchase commitments, each with its fiscal year
- 7-company screen
The Excel model is the primer's product-cycle DCF live across 13 sheets: a device brand, a networking maker, a contract manufacturer and a storage maker, all fictional, plus a column for a company of your own in any of five business-model modes. Revenue is built from trend units, a yearly cycle index and price, with a recurring line on the installed base and an order book for networking; gross margin carries a fixed share of cost of goods, so it rises and falls with the cycle; working capital runs in days; capex funds growth; and the terminal value is struck on mid-cycle cash flow. A reverse DCF reads the margin and the unit growth a price requires, and the sensitivity grids re-run the model in every cell. Change the cycle, the days or the margin and the value moves.
See what's in the Technology Hardware Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Technology industries
Frequently Asked Questions
- Why is services gross margin higher than product gross margin in hardware?
- Services and subscriptions usually carry little hardware cost of goods. Support, software and cloud attach ride on an installed base, so gross margin on that revenue sits well above the margin on devices or equipment that must be built and shipped.
- What product and services margins did Apple and Dell file?
- Apple FY2025 products gross margin was 36.8% against services at 75.4%, with services 26.2% of revenue. Dell FY2026 products gross margin was 13.7% against services at 44.8%.
- How does mix change a hardware company gross margin?
- Company gross margin is the mix-weighted average of product and services (or subscription) lines. A higher services share lifts the blended margin even if each line margin is unchanged; a higher product share pulls it down.
- What share of Cisco revenue is subscription?
- Cisco FY2026 subscription revenue was $31,977M, or 50.5% of total revenue, spanning product and services subscription lines. Remaining performance obligations were $46.7B.
- How do you model hardware recurring revenue from an installed base?
- Recurring revenue approximates installed units times attach rate times revenue per unit. The installed base rolls forward from opening units, adds new shipments and retires units that reach end of life.
Read next
Mid-Cycle Margins for Hardware Companies
A single year misleads for a cyclical hardware maker. How to average gross margin across a full cycle, with Seagate FY2016-FY2026 as the worked case.
Gross Margin Ranges in Hardware Since FY2016
Hardware filers ranked by the width of their annual gross margin range since FY2016, an operating read of cyclicality with windows labelled where they differ.
PC and Smartphone Replacement Cycles
PC and smartphone shipments follow refresh cycles. Shipment history, replacement lives, and how to turn a cycle into a unit curve in a model.
See it applied
These company profiles apply the concepts from this guide to real public companies.
Also in Technology Hardware
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- Cash Conversion Cycle by Hardware Company
- Purchase Commitments vs Inventory in Hardware
- EMS Economics: Thin Margins and ROIC
- Mid-Cycle Margins for Hardware Companies
- Gross Margin Ranges in Hardware Since FY2016
- Hardware Product vs Services Gross Margin
- PC and Smartphone Replacement Cycles