Apple Inc. (AAPL.O) reported its Q3 2023 financial results (up to June 2023) after the U.S. market close on August 4, Beijing time.
1. Overall Performance: The Steady "Emperor of Machines"
Apple's revenue this quarter reached $81.8 billion, down 1.4% year-on-year, slightly exceeding the Bloomberg consensus estimate of $81.53 billion. The drop in revenue is mainly due to insufficient downstream demand for hardware products. Apple's gross margin was 44.5%, up 2.2pct year-on-year, matching the Bloomberg consensus estimate of 44.4%. Software gross margins have remained above 70% for eight consecutive quarters.
2. iPhone: Average Price Stabilizes at $900
The global smartphone market dropped nearly 10% this quarter, but Apple's iPhone business outperformed the industry. Apple's smartphone shipments this quarter were slightly down, but the average price stabilized at $900.
3. Other Hardware besides iPhone: Mac Exceeds Expectations
While Mac's business fell, it performed significantly better than expected, mainly due to the unexpected recovery in the PC industry. The iPad continued to perform poorly, with quarterly revenue falling below $6 billion. Wearable and other hardware products returned to positive year-on-year growth this quarter, showing signs of recovery.
4. Software Services: The Most Steady Growth
Software service revenue this quarter was $21.2 billion, exceeding the Bloomberg consensus estimate of $20.75 billion. Even with sluggish hardware shipments, software services maintained growth. The retention of users led to a steady increase in user size.
I. General Perspective:
Apple's earnings were slightly better than expected this quarter. Looking directly at the data, both Apple's revenue and net profit for this quarter exceeded market expectations. However, in reality, from an operational perspective, the company mainly had a small outperformance in revenue. Amid overall sluggish demand in the electronic terminal market, iPhone, Mac, and iPad all experienced year-on-year declines. Despite the market's low expectations, the company managed to slightly exceed forecasts.
While Apple's overall performance was significantly better than the generally sluggish industry, it also faced undeniable pressure from the decline. Looking into the next quarter, there are no signs of a significant improvement. The company's outlook for next quarter's year-on-year revenue and gross margin is similar to this quarter, with no clear expectations for recovery.
The better-than-expected performance of Mac this quarter, coupled with previous reports from Intel and AMD, further validates that the PC market may be the first to recover. As the PC industry chain's inventory clears, the next two quarters are expected to see replenishment demand.
Apple's stock price rose from a low of $120 to around $200, partly because of expectations for a recovery. However, the recent earnings report did not show clear signs of recovery, which could put short-term pressure on Apple. The strong performance in the Indian market has given the company confidence to continue its advance into India. Currently, Apple controls more than half of India's $549 market. As it pushes into the Indian market and captures consumers' minds, it is expected to further expand its influence in India, potentially bringing new increments to the company in the future.
Detailed Analysis:
Overall Performance: The Steady "Emperor of Machines"
1.1 Revenue: Apple's revenue in Q3 2023 was $81.8 billion, a year-on-year decrease of 1.4%, slightly exceeding the Bloomberg consensus estimate of $81.53 billion. The decline in revenue for this quarter was mainly due to insufficient downstream demand for hardware products.
Looking at both hardware and software:
a. Apple's hardware business grew at -4.4% this quarter. The decline in hardware this quarter was mainly due to a comprehensive downturn in iPad, Mac, and iPad businesses. However, the Mac business performed better than market expectations with the bottoming out and recovery of the PC industry chain;
b. Apple's software business grew by 8.2% this quarter, with growth continuing in the single digits. Software business has a certain degree of risk resistance. Despite a decline in hardware revenue, software services can still maintain growth.
Looking at different regions, Apple's sales continued to decline in the American market this quarter, while Europe and Greater China began to recover. The American region is the largest source of Apple's revenue, down 5.6% this quarter. Meanwhile, Europe has grown for two consecutive quarters, and Greater China also achieved a year-on-year growth of 7.9% this quarter. The revenue growth rate in major regions has begun to show signs of improvement.
In addition, other Asia-Pacific regions, which significantly exceeded expectations last quarter, saw a year-on-year decline of 8.5% this quarter. Despite Apple's strong performance in India, demand increases in some other Asia-Pacific regions couldn't sustain. According to Counterpoint data, Apple's year-on-year growth in India this quarter was 56%, and it occupied 59% of the high-end sub-market above $549, making India one of Apple's top five markets.
1.2 Gross Margin: Apple's gross margin in the third quarter of the fiscal year 2023 was 44.5%, a year-on-year increase of 2.2pct, which was in line with Bloomberg's consensus forecast (44.4%). This quarter saw a continued rise in the company's gross margin, with the proportion of high-margin software business increasing, structurally lifting the overall gross margin of the company.
When breaking down the gross margin between software and hardware:
The software gross margin for Apple this quarter continued to stand firm above the 70% mark. However, the market's primary focus remains on the gross margin level of the hardware end, which fell slightly this quarter to 35.4%.
1.3 Operating Profit: Apple's operating profit in the third quarter of fiscal year 2023 was $23 billion, a slight year-on-year decline of 0.3%. The decrease in Apple's operating profit this quarter was mainly due to increased costs.
The operating expense ratio for Apple this quarter was 16.4%, a year-on-year increase of 1pct. Affected by the drop in revenue this quarter, both the sales and administration expense ratio and the research and development expense ratio saw year-on-year increases.
II. iPhone: Average Price Steady at $900
In the third quarter of fiscal year 2023, iPhone revenue was $39.7 billion, down 2.4% year on year, which is basically in line with Bloomberg's consensus expectation ($39.77 billion). This quarter, the global mobile phone market declined nearly 10%, and the company's mobile business declined significantly better than the overall market performance.
Looking at the relationship between quantity and price, let's look at the main source of growth for the iPhone business this quarter:
a. iPhone Shipments: According to market research data, the global smartphone market declined by 10% year-on-year in the second quarter of 2023. With its own product power, Apple's market share continued to increase from 16% to 17%. The company's shipments this quarter only declined about 3%, significantly better than the industry level;
b. Average iPhone Shipment Price: Combined with iPhone business revenue and shipment calculations, the average shipment price of iPhones continued to grow year-on-year this quarter, reaching about $923. Under the pull of mid-to-high-end device shipments, the average iPhone shipment price has risen overall and can now stabilize above $900.
III. Other Hardware Beyond the iPhone: Mac is the Only One That Exceeded Expectations
3.1 Mac Business
In the third quarter of fiscal year 2023, Mac revenue was $6.8 billion, down 7.3% year-on-year, which is the only hardware that exceeded expectations ($6.36 billion). The continuous decline in Mac business this quarter was mainly affected by weak industry demand.
According to IDC's report, global PC shipments declined by 13.4% year-on-year this quarter, but Apple's shipments increased by 10.3%. I believe Apple mainly benefited from the low base number last year, when supply chain shutdowns caused supply-side issues.
3.2 iPad Business
In the third quarter of fiscal year 2023, iPad revenue was $5.8 billion, down 19.8% year-on-year, below Bloomberg's consensus expectation ($6.33 billion). Weak overall downstream demand for iPad led to a continuous decline in the company's business revenue.
3.3 Wearables and Other Hardware
In the third quarter of fiscal year 2023, revenue from wearables and other hardware was $8.3 billion, up 2.5% year-on-year, basically in line with Bloomberg's consensus expectation ($8.38 billion). Apple's wearables and other hardware business achieved positive growth again this quarter. With the warming of market economic activities, it has started to drive the demand for wearable devices to a certain extent.
IV. Software Services: Continuous Growth
In the third quarter of fiscal year 2023, software service revenue was $21.2 billion, a year-on-year increase of 8.2%, slightly better than Bloomberg's consensus expectation ($20.75 billion). The software business is the most robust part, showing a continuous growth trend.
Apple's software service revenue growth rate has slipped from double digits to single digits, mainly affected by both quantity and price. ① Quantity: This is because Apple integrates software and hardware. When the high growth of hardware in previous quarters is no longer, it will also affect the user growth rate of Apple's software service end; ② Price: Under the influence of the macroeconomic background, it affects consumers' willingness to pay for services to some extent. However, compared with the declining hardware business, the software business has a stronger resistance to risks.
Among software services, the most attention-grabbing is the gross margin level of software services. In this quarter, the gross margin of software services reached 70.5%, maintaining above 70% for eight consecutive quarters. In the overall downturn of the Internet advertising industry, Apple can still maintain a gross margin of over 70%, which shows the importance of Apple's hardware entrance.
