Apple (AAPL)

Business Overview

Apple is a device brand with an installed-base services line that carries a much higher gross margin, while suppliers fund the working capital. FY2025 (year to 27 September 2025) revenue was $416.2B. Company gross margin was 46.9% and operating margin 32.0%. R&D was 8.3% of revenue. Stock-based compensation was 3.1%. Free cash flow (operating cash flow less capex) was $98.8B.

Products gross margin was 36.8%; services gross margin was 75.4%. Services were 26.2% of revenue. Cash conversion cycle was -71 days (DIO 9, DSO 35, DPO 115 from year-end balances). Manufacturing purchase obligations in the MD&A were $56.2B against inventory of $5.7B; the notes' longer-dated unconditional purchase obligations are a separate $13.3B. iPhone was 50.4% of revenue in FY2025, down from 63.4% in FY2016. Services gross margin was 55.0% in FY2017, so the services margin has also widened over time.

How the Numbers Read

Mix is the margin story. A point of revenue shifting from products at 36.8% gross margin to services at 75.4% lifts the blended 46.9% without any change in either line's own margin. The cash conversion cycle of -71 days means payables more than cover inventory and receivables: suppliers fund growth. That is the opposite of an EMS or component maker carrying its own stock.

Purchase obligations of $56.2B against $5.7B of inventory is the off-balance-sheet exposure if demand drops. The MD&A manufacturing figure and the notes' $13.3B unconditional obligations are different disclosures; do not add them without reading both. Device replacement cycles (smartphones around 43 months in 2024; US commercial PCs every 3.5 to 4 years) set the unit curve the installed-base roll-forward sits on. The product-versus-services guide and the negative CCC guide place these filed figures in context.

How the Model Values This Kind of Company

Value sits on units times selling price through the product cycle, plus services from the installed base: opening base times attach rate times revenue per device. Average device life rolls the base forward, so flat unit sales can still support a steady services book.

Gross margin is mix-weighted between product and services. Working-capital days matter because a negative cash conversion cycle can free cash as the company grows; purchase commitments sit beside inventory as downturn exposure. Terminal value uses mid-cycle free cash flow, not the final explicit year, and stock pay is charged as a cost.

What to Watch in the Financials

Services share and gross margin. 26.2% of revenue at 75.4% gross margin in FY2025. Mix toward services lifts the blended margin; a stall in services growth does the reverse.

Cash conversion cycle. -71 days. A rise toward zero would mean suppliers are funding less of the balance sheet.

Manufacturing purchase obligations versus inventory. $56.2B against $5.7B. The gap is the commitment risk if sell-through slows.

iPhone share of revenue. 50.4% in FY2025 from 63.4% in FY2016. Concentration has eased, but the phone cycle still dominates product revenue.

Key Risks

Device cycle timing. Replacement-cycle lengthening or a weak launch year cuts units before services fully offset.

Purchase-commitment overhang. $56.2B of manufacturing obligations against $5.7B of inventory leaves little room if demand drops and inventory cannot absorb the contracts.

Supplier-funded working capital. A -71 day CCC depends on payable terms; a shift in supplier bargaining power can reverse the funding.

Product margin pressure. Products at 36.8% gross margin remain the larger revenue pool; component cost or mix within devices can move the blended margin even if services hold.