Earnings Call Transcript
Apple Inc. (AAPL)
Earnings Call Transcript - AAPL Q4 2025
Suhasini Chandramouli, Director of Investor Relations
Good afternoon, and welcome to the Apple Q4 Fiscal Year 2025 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Kevan Parekh. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast, including risks related to the potential impact to the company's business and results of operations from macroeconomic conditions, tariffs and other measures and legal and regulatory proceedings. For more information, please refer to the risk factors discussed in Apple's most recently filed reports on Form 10-Q and Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Additional information will also be in our report on Form 10-K for the year ended September 27, 2025 to be filed tomorrow and in other reports and filings we make with the SEC. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. Additionally, today's discussion will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures in our fourth quarter earnings release, which is available on our Investor Relations website. I'd now like to turn the call over to Tim for introductory remarks.
Timothy Cook, CEO
Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is proud to report $102.5 billion in revenue, up 8% from a year ago and a September quarter record. Services achieved an all-time revenue record of $28.8 billion, growing 15% from a year ago. EPS came in at $1.85 setting a September quarter record. We grew in the vast majority of markets we track and had September quarter revenue records in dozens of markets, including the U.S., Canada, Latin America, Western Europe, the Middle East, Japan, Korea and South Asia. We also set a September quarter revenue record in emerging markets and an all-time revenue record in India. These results come at the close of an extraordinary year for Apple in which we achieved an all-time revenue record of $416 billion for the fiscal year. We set all-time revenue records in emerging and developed markets. We set an all-time revenue record for iPhone. And in Services, we achieved all-time records across every geographic segment. These results reflect the tremendous customer enthusiasm for Apple products and services as well as our deep commitment to innovation. We are incredibly excited about the strength we're seeing across our products and services and we expect the December quarter's revenue to be the best ever for the company and the best ever for iPhone. We are heading into the holiday season with a truly remarkable lineup. That includes the biggest leap ever for iPhone, which has had a tremendous response from our users around the world. Our Apple Watch lineup is more capable than ever to giving users ways to take charge of their health like never before, through new features like hypertension notifications and sleep score. And the next level sound quality and active noise cancellation of AirPods Pro 3 are hitting all the right notes for our users. In October, we also broke new ground and power-efficient performance with the uncomparably fast M5 chip, packed with neural accelerators in each GPU core to supercharge AI workflows. iPad Pro combines game-changing features in iPad OS 26 with the power of M5 to create our most capable iPad ever. At the same time, the M5 MacBook Pro raises the bar for what users can do with a laptop while the new M5 powered Apple Vision Pro opens up amazing possibilities on its infinite canvas. We also launched a beautiful new software design that creates a unified experience across all of our platforms for the very first time. The design is crafted with a new material called liquid glass that brings fluidity, vitality and flexibility to our products. Along with the new design, we delivered powerful new features to enable users to do even more with their devices. That includes updates to the phone and messages apps in iOS 26 to help users stay connected, continuity enhancements in MAC to deliver an even more seamless experience across devices and a powerful new windowing system that fundamentally transforms the user experience in iPad OS 26. As we continue to expand our investment in AI, we're bringing intelligence to more of what people already love about our products and services, making every experience even more personal, capable and effortless. At the heart of it all is Apple Silicon, and we were thrilled to launch new products powered by the A19 Pro chip and M5. These incredibly advanced chips make Apple products the very best place to experience the power of AI. With Apple Intelligence, we've introduced dozens of new features that are powerful, intuitive, private and deeply integrated into the things people do every day. Features like live translation, which help users communicate across languages in real time and visual intelligence, which opens new ways to learn about and explore the world. We also introduced Workout Buddy, a new experience that uses AI to provide personalized motivational insights based on a user's workout data and fitness history. And these joined so many others from cleanup and photos and new image creation tools to powerful writing tools, we're also seeing developers take advantage of our own device foundation models to create entirely new experiences for users around the world. We're also excited for our more personalized Siri. We're making good progress on it. And as we've shared, we expect to release it next year. Now let's take a closer look at the September quarter results across our lineup, starting with iPhone. iPhone set a revenue record for the September quarter at $49 billion, up 6% from a year ago, with growth in the vast majority of markets we track despite supply constraints we faced on several iPhone 16 and iPhone 17 models given strong demand. Redesigned from the inside out and powered by the outstanding A19 pro chip, the iPhone 17 Pro is by far the most powerful iPhone we've ever made, setting a whole new standard for the smartphone industry. The iPhone 17 Pro also offers our best camera system ever with an all-new ADEX telephoto camera and looks stunning with bold new finishes like COSMIC Orange. The iPhone Air introduces an incredibly breakthrough design and with a bigger and brighter display with promotion, the iPhone 17 is a fantastic upgrade packed with features users will love. In MAC, we had a strong September quarter with revenue of $8.7 billion, up 13% year-over-year driven by the strength of the MacBook Air. The MacBook Air enables users to get things done easily on the world's most popular laptop. Mac mini users are loving how much performance is packed into our smallest Mac ever made while Mac Studio customers are pushing the envelope of what's possible with our most powerful Mac ever, and the latest 14-inch MacBook Pro unlocks incredible speed and next level performance with the all-new M5 chip, which delivers 3.5x faster AI performance than M4. Turning to iPad. Revenue was $7 billion for the September quarter. Last month, we released one of the most attention grabbing software updates we've had in years with iPad OS 26 and we recently gave iPad users even more to love with the launch of the incredible M5 iPad Pro, which offers an incredible boost in AI performance. With an unmatched combination of power and versatility, the new iPad Pro makes every interaction delightful with its thin, light and portable design. In Wearables, Home and Accessories revenue was $9 billion. As I mentioned earlier, we were excited to unlock new possibilities for users with the launch of our newest Apple Watch lineup, making the world's most popular watch even better. That includes Apple Watch Ultra 3 with the largest display ever in an Apple watch, improved battery life and emergency SOS via satellite. Apple Watch Series 11 brings our users the most comprehensive set of health features yet. And Apple Watch SC3 delivers advanced capabilities at an incredible value. AI and advanced machine learning are at the core of powerful health features like heart rate monitoring, fall detection, crash detection and more. With our latest Apple Watch lineup, we were proud to introduce hypertension notifications, developed using large-scale machine learning models. Hypertension is one of the leading risk factors for heart attack and stroke affecting more than 1 billion adults worldwide, and we expect to notify more than 1 million users of this life-threatening condition. We're also excited about sleep score, a simple, intuitive way to help users better understand their sleep quality and discover ways to improve it. That's something I'm sure we can all benefit from. Meanwhile, AirPods Pro 3 have been a huge hit. You have to hear them to really understand just how remarkable they are. Users and reviewers alike are praising their incredible sound quality and improved fit. They feature the world's best in-ear active noise cancellation, removing up to 2x as much noise as the previous generation. And with live translation powered by Apple Intelligence, AirPods deliver an incredibly new and exciting experience for users around the world. Turning to Services. As I mentioned earlier, revenue was $28.8 billion for the September quarter, 15% higher year-over-year and an all-time record. We saw double-digit growth in both developed and emerging markets and set new all-time records across advertising, App Store, cloud services, Music, payment services and video. Apple TV celebrated a big night at this year's Emmy Awards with 22 wins. The studio led the night with 13 wins the most of any comedy series in Emmy's history. Severance topped all dramas with 8 wins, adding to the accolades for this landmark series. To date, Apple TV productions have now earned over 600 wins and 2,800 nominations in total, driven by powerful original storytelling. And we're excited for audiences to discover new productions like Pluribus and to catch returning favorites like slow horses and the morning show. And soon, Apple TV will be the destination for F1 fans across the U.S. on track day, thanks to a new partnership with Formula One. F1 is one of the most exciting and fastest-growing sports in the world. And starting next year, Apple TV will be the place for subscribers to follow every twist and turn of the new season. And in addition, F1, the movie, one of the year's biggest blockbusters will be coming to Apple TV on December 12. During the September quarter, we also marked the 10-year anniversary of Apple News. Apple News provides access to front page news from all around the world, putting hundreds of publications right at users' fingertips. Turning to retail. We're heading into our busiest time of year with our best ever lineup. In the last few months, we've opened new stores in emerging markets like India and the UAE and new locations in the U.S. and China. I was also in Tokyo last month for the opening of the redesigned and reimagined Apple Ginza store and the energy among the crowd was truly remarkable. When it originally opened, it was our first store outside the United States, and so it was especially meaningful to come back to welcome customers to the beautiful new space. Everywhere we operate, and in everything we do, we strive to give the best to our users while living by our values, whether that's building new accessibility features into our most recent software releases or advancing our environmental work by using even more recycled materials in our latest lineup or providing free educational programming to train and support American businesses with our new Apple Manufacturing Academy in Detroit. And we're continuing to invest in innovation and user experiences that will transform our future. A great example is the work we're doing in the U.S. where we're committed to invest $600 billion over the next 4 years with a focus on innovation in strategic areas like advanced manufacturing, silicon engineering and artificial intelligence. These commitments build on our long-standing investments in America, while supporting more than 450,000 jobs with thousands of suppliers across all 50 states. We built a new factory in Houston for advanced AI service, for example, which just started shipping its first products off the line, and we're leading the creation of an end-to-end silicon supply chain across the country. In recent months, I've connected with developers, innovators, artists, entrepreneurs and so many others around the world, people passionate about innovation and all the things they can do with Apple products. Each one is another reminder of why we do what we do. We're driven to empower people to do more of the things that matter most to them and enrich their lives along the way. As we head into the holiday season with our most powerful lineup ever, I couldn't be more excited for what's to come.
Kevan Parekh, CFO
Thanks, Tim, and good afternoon, everyone. Our revenue was $102.5 billion, marking an 8% increase from last year and setting a new record for the September quarter. We achieved record results in various regions including the Americas, Europe, Japan, and Asia Pacific, with growth seen in most markets we monitor. Revenue from products reached $73.7 billion, up 5% year-over-year, greatly supported by sales of iPhone and MAC, also hitting a September quarter record. Our high levels of customer satisfaction and loyalty have led our active installed base of devices to reach a new all-time high across all product categories and regions. Services revenue totaled $28.8 billion, up 15% from the previous year, reaching an all-time record. This growth was widespread, with double-digit increases in most tracked markets and service categories. Our company's gross margin stood at 47.2%, exceeding our guidance and up 70 basis points sequentially, thanks to a favorable product mix, which includes about $1.1 billion in tariff-related costs that align with our prior expectations. The gross margin for products was 36.2%, increasing by 170 basis points due to a favorable mix, while services gross margin was 75.3%, showing a slight decline of 30 basis points sequentially. Operating expenses were $15.9 billion, an 11% increase year-over-year, largely due to heightened R&D investments. These strong business results culminated in record net income and diluted earnings per share for the September quarter, with net income at $27.5 billion and diluted earnings per share at $1.85, reflecting a 13% increase year-over-year on an adjusted basis, excluding a one-time charge from the fourth quarter of 2024. Operating cash flow was also a new record for the September quarter at $29.7 billion. Now, I'll elaborate on our revenue categories. iPhone revenue reached $49 billion, a 6% increase year-over-year, mainly driven by the iPhone 16 family. iPhone sales grew in most tracked markets, with notable records in several emerging markets, including Latin America, the Middle East, South Asia, and an all-time high in India. The active installed base for iPhone hit an all-time high, and we recorded a September quarter record for upgraders. According to a recent survey from World Panel, the iPhone was the top-selling model in the U.S., Urban China, the U.K., France, Australia, and Japan. Customer satisfaction for iPhone in the U.S. remains high at 98%, as reported by 451 Research. Mac revenue totaled $8.7 billion, up 13% year-over-year, primarily driven by sales of the MacBook Air. We saw growth across all regions, especially double-digit increases in emerging markets. The Mac installed base has also reached a new high, with nearly half of new Mac buyers being first-time customers. Customer satisfaction for Mac in the U.S. was reported at 96%. iPad revenue was flat at $7 billion year-over-year, facing tough comparisons due to last year’s full-quarter impact from the iPad Air and iPad Pro launches, despite better-than-expected performance this quarter. The iPad installed base reached a record high with a record number of upgraders, and over half of iPad purchasers this quarter were new to the product. Customer satisfaction for iPad was also reported at 98% in the U.S. Revenue from Wearables, Home, and Accessories was flat at $9 billion year-over-year, driven by growth in Watch and AirPods, but tempered by the performance of accessories compared to last year's strong sales from iPad launches. Both the Apple Watch and AirPods installed bases achieved new all-time highs, with over half of Apple Watch purchasers being new customers and a record number of upgraders for the Apple Watch as well. Customer satisfaction was measured at 95% in the U.S. Our services revenue reached an all-time high of $28.8 billion, up 15% year-over-year, with records in the Americas, Europe, Japan, and Asia Pacific, along with a September quarter record in Greater China. Most service categories exhibited a sequential acceleration. As Tim mentioned, we also reached all-time revenue records in payment services, with Apple Pay Active Users seeing double-digit growth year-over-year. This strong performance drove our total fiscal year services revenue past $100 billion, a 14% increase year-over-year and our best performance to date. Our growing installed base of active devices continues to create opportunities for the future, with increased customer engagement and new all-time highs in both transacting and paid accounts for our services. We're also enhancing the quality and reach of our services offerings, from expanding Apple Pay to nearly 90 countries to launching AppleCare One, which provides coverage for multiple Apple products under one plan. In the enterprise sector, we've seen a surge in the adoption of Apple products across various industries aimed at enhancing productivity and encouraging innovation. For instance, the BMW Group has been deploying thousands of iPhones among factory employees to boost digital capabilities and innovation. Capital One has broadened its Mac Choice program by adding thousands of MacBook Airs to its workforce. In the Czech Republic, the largest bank is investing in the Apple ecosystem, incorporating over 5,000 iPhones along with existing iPads and Macs. Purdue University has unveiled a spatial computing hub centered around Vision Pro to prepare students for the next phase of innovation in key industries like semiconductor and pharmaceutical manufacturing. Now, regarding our cash position and capital return program, we ended the quarter with $132 billion in cash and marketable securities. We had $1.3 billion in debt maturities and reduced commercial paper by $1.9 billion, leading to a total debt of $99 billion. Thus, our net cash at the end of the quarter was $34 billion. During this period, we returned $24 billion to shareholders, which included $3.9 billion in dividends and equivalents and $20 billion in repurchases of 89 million Apple shares. Reflecting overall, we are delighted with our record results for the fiscal year 2025. Total company revenue for the year hit $416 billion, with growth across iPhone, Mac, iPad, and Services and all-time records in most markets we monitor. This strong revenue performance translated into outstanding full-year operating results, with record net income and diluted EPS reflecting double-digit growth year-over-year on an adjusted basis. Looking ahead to the December quarter, I'd like to review our forecast, which entails forward-looking information. Importantly, this guidance is based on the assumption that global tariff rates and policies remain unchanged and that there are no adverse changes in the global macroeconomic landscape. We anticipate that total company revenue for the December quarter will grow by 10% to 12% year-over-year, which would be our best quarter ever. We expect iPhone revenue to exhibit double-digit growth year-over-year, aiming for our best quarter for iPhone. On the Mac front, please be aware that we expect significant comparison challenges against last year's M4 MacBook Pro, Mac Mini, and iMac launches. We foresee services revenue growth mirroring the same year-over-year rate we reported for fiscal year 2025. Our expected gross margin is projected to be between 47% and 48%, including an estimated $1.4 billion in tariff-related costs. As previously stated, we are significantly increasing our investment in AI while maintaining our product development efforts. For the December quarter, we expect operating expenses to be between $18.1 billion and $18.5 billion. We project other income and expenses to be around $150 million, excluding any potential impacts from the mark-to-market of minority investments, and our tax rate is expected to be around 17%. Finally, our Board of Directors has declared a cash dividend of $0.26 per share of common stock, scheduled to be paid on November 13, 2025, to shareholders on record as of November 10, 2025.
Suhasini Chandramouli, Director of Investor Relations
Operator, could you please provide the first question?
Operator, Operator
Certainly, we will go ahead and take our first question from Erik Woodring with Morgan Stanley.
Erik Woodring, Analyst
Congrats on the results. Tim, can you maybe share a bit more detail on why you think the iPhone 17 is having the degree of success that it is at this point? And really, the question is, do you believe this is the aged installed base replacement cycle kicking in? Or are there specific features or functionality you believe stand out this cycle versus past cycles that consumers are really looking for? And then just a quick follow-up.
Timothy Cook, CEO
Thank you for your comments. I believe it's all about the product. Our product lineup is incredibly strong, the strongest we've ever had. The 17 Pro is the most professional phone we've created, with amazing design features. The iPhone Air feels very thin and light in your hand, almost like it could float away. Additionally, the 17 phone offers exceptional value by incorporating features that were previously exclusive to the Pro models into the consumer lineup. Overall, this is our strongest iPhone lineup ever, and it is resonating globally.
Erik Woodring, Analyst
Great. And maybe a follow-up for you, Kevan. Can you maybe just discuss your approach to managing component cost inflation during this time, you're obviously increasing the memory content in your devices quite substantially at the same time. Memory prices are going through some pretty significant inflation. So just how are you managing through this cycle.
Kevan Parekh, CFO
Erik, thanks for the question. Look, as you know, we've got a pretty incredible world-class procurement team as we're constantly finding ways to continue to drive cost opportunities. Right now on the commodity side, I would say we're seeing a slight tailwind on memory in storage prices and nothing really to note there. And as we saw from our gross margin performance, we landed in a pretty good spot above the high end of the guidance range we provided at 47.2%. And as well, we're guiding at 47% to 48%. So I think we're managing costs pretty well. As you'll recall, when we talked about this time in the cycle, we just launched a bunch of new products. Those new products do have a slightly higher cost structure than the products they replace, but the team does a very good job of focusing our efforts on getting those costs down over time. And we feel pretty good about the performance we're seeing right now overall on material cost savings.
Suhasini Chandramouli, Director of Investor Relations
Operator, can we get the next question, please?
Operator, Operator
Our next question is from Ben Reitzes with Melius Research.
Benjamin Reitzes, Analyst
Tim, can you talk a little bit about iPhone in China specifically? How is that going to trend in the December quarter? And have you turned the corner there? And how do you think that trajectory is going? And then I have a quick follow-up.
Timothy Cook, CEO
Yes, Ben, I was just there. It's incredibly vibrant and dynamic. Store traffic has increased significantly year-over-year. The iPhone 17 has been very well received there. We believe we will return to growth in Q1, driven largely by the positive reception of the iPhone. I'm very pleased with how things are progressing there so far.
Benjamin Reitzes, Analyst
That's great news. The services segment shows impressive potential, which is a bit unexpected considering our concerns just a few quarters ago. I'm curious if there were any significant payments included or if the positive outcome related to the antitrust ruling with one of your partners contributed to this success, or if it was primarily due to organic growth driven by the factors you've mentioned.
Kevan Parekh, CFO
Ben, it's Kevan here. Let me try to answer that question. I just wanted to clarify, when you mention the antitrust piece, are you talking about the Google trial? Is that correct?
Benjamin Reitzes, Analyst
Yes. Yes, sir.
Kevan Parekh, CFO
Okay. Yes, there was no tax-related impact. And what I would say is our strong performance for the quarter is really organically driven. And again, just to reiterate, we had an all-time revenue record here for the quarter at $28.8 billion. And as well, we surpassed $100 billion, so best year ever at 14% year-on-year. So really that was all organic growth. As Tim outlined and I outlined in the prepared remarks, we saw a majority of the categories have sequential acceleration, and we had many all-time revenue records. But nothing abnormal at all, really pretty much all organic growth.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we get the next question, please?
Operator, Operator
Our next question is from Michael Ng.
Michael Ng, Analyst
I just have two as well. First, just to follow up on the last one. The services revenue growth, I think, was the fastest across many categories and certainly the fastest in the last 2 years. I was just wondering if you could just unpack a little bit more of the drivers of the acceleration, was there kind of cross-selling with the new iPhone launch? Was it just installed base growth? I know you've been doing a lot of bundling with Apple One and Apple Care One. So any thoughts on that would be very helpful. And then I just have a quick follow-up.
Kevan Parekh, CFO
Michael, it's Kevan. Thanks for the question. Yes, let me build on the answer there. I think that the way we look at it is not one thing to point to that would have driven this higher performance. You're right that it is slightly higher than we've seen in the last few quarters. But as you know, our services portfolio is very broad with a broad range of businesses, all that have different growth profiles and different performance characteristics. So those can vary in any given quarter. I would say our strength, again, was very broad-based, both across categories and also geographically. So I wouldn't point to any particular factor that drove any kind of outperformance at all. We were just very pleased to see that result.
Michael Ng, Analyst
Great. And just on iPhone sell-through, I was wondering if you were seeing any notable shifts in trends between the sell-through coming from upgraders versus switchers? Is the U.S. carrier competitive dynamic helping at all in terms of promotional activity? And any thoughts on channel inventory.
Timothy Cook, CEO
Okay. We did set a September quarter record for upgraders and so it was a great quarter from that point of view. It's really too early in the cycle on 17 to make any comments about upgraders or switchers. In terms of channel inventory, we ended the quarter toward the low end of the targeted range. Obviously, because we had constraints on several models of the 16 and 17. And for complete transparency and clarity, we're constrained today on several models of the iPhone 17. There's not a ramp issue. It's just we have very strong demand. And we're working very hard to fulfill all the orders that we have.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we get the next question, please?
Operator, Operator
Our next question is from Amit Daryanani with Evercore.
Amit Daryanani, Analyst
I guess Kevan, maybe just start with gross margins. Can you just walk through the expectations for the December quarter? I think it implies up 30 basis points or so sequentially. Can you just talk about the puts and takes on gross margin given you do have very sizable operating leverage in the quarter. So just maybe what are the puts and takes around that would be really helpful.
Kevan Parekh, CFO
Yes, sure. Amit, let me walk through the outlook. As we mentioned in our outlook, we are targeting a range of 47% to 48%. You take the midpoint of that range at 47.5%, you said it's roughly 25 basis points, 30 basis points higher. Really, there's a lot of puts and takes. As I talked about earlier, this is a quarter we launched a lot of new products. Those new products tend to have a higher cost structure than the products they replaced. So there's definitely an impact from the cost side of things, but that was more than offset by a favorable mix, especially on the product side as well as you outlined, we typically see higher leverage in this quarter. So I would say those are the two big drivers. And so the sequential increase is really going to be driven by favorable mix particularly from the product side.
Amit Daryanani, Analyst
Got it. And then if I just go back to the China discussion for a minute, the performance in China, at least in September quarter was a bit muted. Could you just talk about what resulted in the weakness over there? And do you think it was a bit more of a pause given iPhone Air, for example, I don't think was available until a few weeks ago. So just somewhat what drove the weakness in September? And is the uptick of that expectation for December there just from the iPhone Air coming out? Or are there other factors as well?
Timothy Cook, CEO
The Greater China revenue decreased by 4% year-over-year in the September quarter, primarily due to iPhone sales. The majority of the year-over-year change was a result of supply constraints previously mentioned. Essentially, these supply issues impacted our results. However, we are encouraged by the significant year-over-year increase in traffic and the positive reception of the iPhone 17 family, and we anticipate returning to growth this quarter.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we have the next question, please?
Operator, Operator
Our next question is from Wamsi Mohan with Bank of America.
Wamsi Mohan, Analyst
Tim, if I can follow up on your comments about the constrained supply in the quarter, just given the very strong demand for iPhones. Do you expect that as you can see your visibility across demand and supply, do you think that you will be exiting December at a point where you wouldn't be constrained anymore? Or do you still expect that there could be constraints as you exit the December quarter? And any way to quantify sort of what revenue could have been in this quarter without constraints?
Timothy Cook, CEO
Yes. If you look at the supply constraints, today, we are constrained on several 17 models. We're not predicting when the supply/demand will balance. We're obviously working very hard to achieve that because we want to get as many of these products out to the customers as possible. But today, I'm not going to predict.
Wamsi Mohan, Analyst
Okay. As a follow-up, could you discuss the new records achieved in various categories and services? I didn't hear Search specifically mentioned. This ties in with Ben's question about concerns regarding the deceleration of search volumes potentially impacting AI. What are your thoughts on the long-term sustainability of these strong mid-teens growth rates for services, not just for the upcoming quarter where you're guiding to 14?
Timothy Cook, CEO
This is Tim. The advertising category, which is a combination of third-party and first-party did set a record during the quarter.
Wamsi Mohan, Analyst
Okay. And sorry, just to be clear, both Apple's own internal advertising and within the licensing individually set records?
Timothy Cook, CEO
I'm not saying that. I'm simply stating that the combination of the two achieved a record. I’m intentionally not addressing the question directly because we don’t provide a breakdown at that level.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we get the next question, please?
Operator, Operator
Our next question is from Samik Chatterjee with JPMorgan.
Samik Chatterjee, Analyst
Maybe for the first one, Tim, you talked about the strong momentum you're seeing in China, which is also driving your conference for the December quarter. Any thoughts on the role that the smartphone subsidies in that region are playing in this momentum? And how do you think about sort of what portion of consumers are maybe using some of those subsidies, leveraging the subsidies at this point? Any more insights into that? And I have a follow-up.
Timothy Cook, CEO
Yes, the subsidies have a positive impact. They apply to various categories, including PCs, tablets, smart watches, and smartphones. However, it's crucial to note that these subsidies only cover certain price ranges. There is a maximum price limit, and several of our products exceed that limit, making them ineligible for a subsidy. Nevertheless, the subsidies do positively influence consumer demand from our perspective.
Samik Chatterjee, Analyst
Okay. Got it. And a follow-up for Kevan here. On the OpEx increase going into the December quarter, a fairly sizable step-up. So if you could just dig into that number a bit more what are sort of the components towards what you're spending? And then that increase year-over-year in OpEx does sort of exceed your revenue growth. So is that sort of what we should expect on a going forward basis as well where you probably need to invest a bit more in the near future?
Kevan Parekh, CFO
Yes, Samik, thanks for that question. As we've been outlining and reiterated in our last call, we are increasing our investments in AI. We're also continuing to invest in our product road map. So the vast majority of the increase to our operating expenses are driven by R&D. While we continue to manage the company in a thoughtful and disciplined way, we're also managing the business for the long term and are super excited about all the opportunities that we see ahead. As it relates to the question around OpEx and revenue growth, while OpEx has been growing at a faster rate than revenue, we have seen gross margin expansion. And so when we look at that on a combined basis, it does allow us to have healthy operating leverage, and our operating income growth has been generally outpacing revenue growth for the past several years.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we get the next question, please?
Operator, Operator
Our next question is from David Vogt with UBS.
David Vogt, Analyst
So maybe, Kevan, can I ask first. Can you help us understand sort of the tariff impact sequentially from the September quarter to the December quarter, particularly around iPhone supply constraints because I think I heard you say tariffs go from $1.1 billion to $1.4 billion, but the sequential uplift in iPhone revenue and presumably production given supply chain constraints is dramatically bigger. So you can help us understand how to think about the timing of those tariff headwinds as we move forward and sort of that correlation? And then I have a follow-up.
Timothy Cook, CEO
David, I'll take this one. You're right, it goes from $1.1 billion to a projection of $1.4 billion. And the $1.4 billion is based on sort of what we know right now and where the tariff rates and policies and so forth are. So it assumes a stable kind of environment for the quarter. It does comprehend the change that was just made, which we're very encouraged to see with the tariffs moving from 20% to 10% in China. And so that is factored in. And that is one of the reasons why the it's not linear to volume, if you will. Does that make sense?
David Vogt, Analyst
No, that's helpful. I was asking if the change is reflected in that outlook. As a follow-up, when you think about the Macs, I know people aren't inquiring about it, and you've mentioned the tough comparison, but you're approaching the holiday season, which I understand. Considering the potential for other products to attach to the iPhone during this holiday season, how should we evaluate where consumers' minds and wallets are at this point in the cycle? Acknowledging it's a challenging comparison, is there a chance to see some upside in the attach rate given the strength of the iPhone portfolio?
Timothy Cook, CEO
We always like to remind people that buy an iPhone, all the other things that we offer. And so you can bet that we're doing that. From a Mac point of view, the challenges that last year was sort of the mother of all Mac launches. All of these from Mac mini to iMac to all the Macbook Pros, all launched literally at the same time. And this year, that compares to launching the 14-inch MacBook Pro. And so there's a very difficult compare. Of course, in the long run, I'm very bullish on the Mac. And you can see that the Mac again last quarter outgrew the market. And so we feel really well about how Mac is positioned, but this certain quarter is an extremely difficult compare.
Kevan Parekh, CFO
Yes. And Tim, I'll add to that, that we also have the DRAM upgrades last year for the Mac lineup also as another factor.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we get the next question, please?
Operator, Operator
Our next question is from Krish Sankar with TD Cowen.
Sreekrishnan Sankarnarayanan, Analyst
My first one is on the iPhone constraints. Is there a way to quantify how much this is you left on the table because of those constraints? And is the different iPhone manufacturing from two different regions contributing to the constraint? And then I have a follow-up for you.
Timothy Cook, CEO
To be clear, the constraint was not related to manufacturing capacity per se. It was that we called the number of iPhone 16s that we were going to make, and we're a bit short of where the demand really was. So we could have sold more. We're not publicly at least estimating the extent of that. And then on iPhone 17 family, the demand is very strong. And so we obviously came out of the Q4 timeframe with lots of back orders.
Sreekrishnan Sankarnarayanan, Analyst
Got it. And then a quick follow-up. Given like the prevalence of chatbots and now some of these AI-infused services, do you think that could change the consumer behavior on mobile app ecosystems or are you seeing any of that? And would that have any impact on your App Store?
Timothy Cook, CEO
I believe there are opportunities on the App Store with artificial intelligence. As we have made our on-device models available to developers, we have noticed their adoption. As this continues to grow, there is a chance for both developers and Apple to benefit by adding features to their apps and similar innovations.
Suhasini Chandramouli, Director of Investor Relations
Operator, could we get the next question, please?
Operator, Operator
Our next question is from Aaron Rakers with Wells Fargo.
Aaron Rakers, Analyst
I have two as well. I guess the first question is when we look at the iPhone 17 demand, which you've repeatedly highlighted is very strong. I'm curious if there's been any discernible kind of change in the mix within the iPhone 17 categories between the Pro and the Pro Max versions relative to prior cycles?
Timothy Cook, CEO
It's really too early to determine the mix. We prefer not to disclose that information publicly due to competitive reasons. Honestly, we don't know what the mix will be yet because we have constraints on both sides of the ledger at the top and entry points. We'll see how things unfold as we receive more supply.
Aaron Rakers, Analyst
Yes. As a quick follow-up, I'm interested in your updated thoughts on the development of Apple's private compute cloud and how we should consider that moving forward as the AI narrative continues to grow.
Timothy Cook, CEO
Yes. We're obviously using PCC, our private cloud compute today for a number of queries for Siri, and we will continue to build it out. In fact, the manufacturing plant that makes the servers used for Apple Intelligence just started manufacturing in Houston a few weeks ago, and we've got a ramp plan there for use in our data centers and it's robust.
Kevan Parekh, CFO
Yes, Aaron, I'll add that in 2025, we incurred capital expenditures related to developing our private cloud compute environment in our first-party data centers. You would have noticed this reflected in some of the capital expenditure investments for the year.
Suhasini Chandramouli, Director of Investor Relations
Operator, can we get our last question, please?
Operator, Operator
Our last question is from Atif Malik with Citi.
Atif Malik, Analyst
Great execution. The first question is on iPhone Air. Does the consumer reception and iPhone Air gives you a feel on perhaps the foldable corn market? Or are the two form factors very different?
Timothy Cook, CEO
I'm not sure that that one is a proxy for the other. The thing that I would say is that where we don't get into the model kind of demand. At the aggregate level, we are thrilled with how iPhone has been received, and that's the reason that we're expecting double-digit growth in the current quarter.
Atif Malik, Analyst
Great. And Tim, as a follow-up, good to know that the personalized Siri is making good progress and on track for next year. Will you continue to use a three-pronged approach with your own foundation models and partner with other LLM providers and maybe potential M&A? Or is one strategy more emphasized over another?
Timothy Cook, CEO
We're obviously creating Apple Foundation models within Apple. We ship them on device and use them in the private cloud compute as well. And we've got several in development. And so we also, from a continually to surveil the market on M&A and are open to pursuing M&A if we think that it will advance our roadmap.
Suhasini Chandramouli, Director of Investor Relations
A replay of today's call will be available for 2 weeks on Apple podcast as a webcast on apple.com/investor and via telephone. The number for the telephone replay is (866) 583-1035. Please enter confirmation code 0689794 followed by the pound sign. These replays will be available by approximately 05:00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408) 862-1142. And financial analysts can contact me, Suhasini Chandramouli with additional questions at (408) 974-3123. Thanks again for joining us.
Operator, Operator
Once again, this does conclude today's conference. We do appreciate your participation.