Apple (AAPL) FY24 Q3 Earnings Review (Apr-Jun 2024)

The smartphone giant Apple (AAPL) released its FY24 Q3 financial results (April to June 2024) after the bell on August 1, beating market expectations on revenue and earnings.

Apple (AAPL) FY24 Q3 Financial Results Release

• Revenues: $857.8B (YoY +5%)
• EPS: $1.4 (YoY +11%)
• iPhone: $392.96B (YoY -1%)
• Mac: $70.1B (YoY +2%)
• iPad: $71.6B (YoY +24%)
• Accessories: $80.97B (YoY -2%)
• Services: $242.1B (YoY +14%)

Four of Apple’s five major product lines outperformed market expectations, with Mac being the exception. The iPhone, accounting for the largest revenue share (46%), reported $392.96 billion, surpassing analysts’ expectations of $388.1 billion.

The CFO revealed that iPhone performance exceeded his expectations from three months ago, with iPhone 15 outperforming iPhone 14 in the same cycle. Additionally, iPad, Wearables, and Services businesses all beat market consensus. However, Mac sales fell slightly short of Wall Street expectations.IPad and Services businesses showed strong growth compared to last year, increasing 24% and 14% year-over-year, respectively. iPhone and Wearables performed relatively poorly, decreasing 1% and 2% year-over-year, respectively.

Geographically, revenue growth improved across all regions compared to the previous quarter, with all areas except Greater China returning to year-over-year growth. The closely watched Greater China region saw a 7% year-over-year decline in revenue, slightly narrowing from the previous quarter but still falling short of market expectations. The Americas region’s revenue grew from a 1% decline in the last quarter to a 1% increase. Europe’s revenue growth accelerated from 1% to 8%. Japan’s revenue growth flipped from -13% to 6%. The Rest of Asia Pacific improved from a 13% decline to a 13% increase.

Benefiting from an increased mix of high-end models, strong growth in high-margin Services revenue, and effective cost control, Apple’s gross margin came in at 46.3%, slightly better than Wall Street analysts’ expectation of 46.1%. This figure was at the high end of the company’s previous guidance range (45.5% to 46.5%). It improved by about 1.8 percentage points compared to the same period last year, outperforming the gross margin range of the past three years (approximately 42% to 46%). Net income grew by about 7.9% year-over-year to $21.45 billion.

Apple (AAPL) FY24 Q3 Earnings Call

Apple set new quarterly revenue records in over twenty countries and regions, including Canada, Mexico, France, Germany, the UK, India, Indonesia, the Philippines, and Thailand. Despite weak revenue in the Chinese market, mainly affecting Mac and iPad businesses, the iPhone 15 outperformed the 14 series. Additionally, while memory prices increased, declines in other component prices offset this impact, keeping hardware business gross margins stable.

Product Lines

iPhone sales were strong, with revenue (excluding currency effects) growing year-over-year this quarter and iPhone 15 outperforming iPhone 14 in the same sales period.

Mac and iPad attracted many new users, with about half of purchases coming from first-time buyers. iPad revenue growth was primarily driven by consumer enthusiasm for the latest products.

All Mac computers using Apple Silicon chips since 2020 will be able to use Apple’s AI system, Apple Intelligence, in the future.

The Services business, advertising, cloud services, and payment businesses set new revenue records. Apple’s Services business saw strong double-digit percentage growth in paid subscriptions.

AI

Apple remains cautious about the impact of Apple Intelligence on Services business growth, stating it’s too early to discuss. However, the company showcased several AI features at WWDC and plans to release more over the next two years.

Regarding future AI operations, Apple CEO Tim Cook stated that their models are mainly used for processing information on devices and private cloud computing. At the same time, understanding the external world relies on partner ChatGPT.

Although Apple has adopted a hybrid approach to AI development, the company’s capital expenditure investment in AI is expected to continue increasing.

Regarding changes in demand for Pro series iPhones after WWDC, Apple stated that the observation period is too short to conclude.

Forecast for FY24 Q4

Apple did not provide specific financial guidance for FY2024Q4. However, the CFO revealed that Q4 year-over-year growth is expected to be roughly in line with Q3, factoring in about 1.5 percentage points of foreign exchange headwinds, potentially setting a new record for the company’s corresponding period.

The CFO added that services revenue is expected to maintain double-digit growth as in previous quarters, estimated to be between 11% and 14%. As for gross margin, the company expects it to fall in the range of 45.5% to 46.5%. This forecast reflects the negative impact of rising component prices and unfavorable exchange rates. While this figure is lower than the 46.3% reported in Q3, it’s still slightly higher than the market expectation of 45.8%.

Review and Analysis

Strengths and Opportunities:

• Apple Silicon series chips continue to maintain a leading edge in the market
• The introduction of Apple Intelligence has been well-received, with the large number of active devices being a powerful asset for Apple in the AI field

Weaknesses and Threats:

• The global smartphone market saturation remains unchanged
• iPhone replacement cycles are lengthening
• iPhone 15 generation sales have stagnated, and M3 Mac and Apple Vision Pro performance has fallen short of expectations
• Apple Intelligence may not be ready when iPhone 16 launches
• Market share ranking in China has dropped from third to sixth place compared to the same period last year
• Google’s antitrust lawsuit loss could impact Apple’s profits (Google pays $20 billion annually to be the default search engine on Apple devices, accounting for about 36% of Apple’s Safari browser search advertising revenue)

iPhone

According to research firm Canalys, global smartphone shipments in Q2 2024 increased by 12% year-over-year to 288.9 million units. This marks the third consecutive quarter of shipment growth for the worldwide smartphone market, following seven straight quarters of decline, driven by new device launches and improved macroeconomic conditions.

Apple’s core business, the iPhone product line, saw a moderate decline this quarter, possibly benefiting from the introduction of Apple Intelligence at WWDC. As the base iPhone 15 model doesn’t support this feature, some consumers may have shifted towards the Pro series, increasing the average selling price (ASP).

However, Apple’s claims that iPhone 15 sales outperformed the iPhone 14 generation are questionable. Comparing Q4 2022 to Q2 2023 data with Q4 2023 to Q2 2024, iPhone 15 generation revenue shows a declining trend. Considering the difference in release timing, overall sales of the iPhone 15 generation may be very close to the 14 series.

Other Businesses

Mac business growth failed to outpace the overall personal computer (PC) market, with the M3 chip upgrade not bringing significant success to Apple. iPad returned to growth after consecutive declines driven by new products but has yet to show an apparent breakthrough. The Wearables business has stagnated for nearly three years, with Apple Vision Pro not making a significant contribution yet.

The services business continues to be Apple’s only stable growth driver, effectively improving the company’s gross margin. As Apple’s installed base of devices continues to grow, this part of the business still has broad development potential.

Apple Intelligence

Whether Apple Intelligence can trigger a replacement cycle remains unknown. When iPhone 16 launches, Apple AI features may still be limited, affecting the scale of the replacement cycle. However, AI technology could still positively impact Apple’s business in the long term.

Apple faces challenges with slowing hardware business growth, but the steady growth of its Services business and potential opportunities in AI technology provide new possibilities for the company’s future development. However, legal risks and intensifying market competition also bring uncertainties to Apple’s long-term development.

Conclusion

Apple’s quarterly earnings report didn’t bring many surprises but clearly outlined the company’s current strategic dilemma. The slowdown in hardware business growth has become a fact, while the Services business is increasingly becoming the mainstay of the company’s operations. This pattern is not accidental but a challenge that tech giants inevitably face after market saturation.

As the AI wave sweeps the globe, the release of Apple Intelligence is undoubtedly a heavy blow, making the market re-recognize that Apple’s vast device ecosystem could be its strongest card in the AI field. However, as with all technological innovations, there’s a vast gap between concept and practical application. Whether Apple can truly transform its massive hardware advantage into leadership in the AI field remains an open question.