Apple Inc. – Expecting revenue contraction


The Positives

+ Revenue beat company guidance. Revenue dipped 2.5% YoY to US$94.8bn, lower than company guidance of 5% YoY contraction due to better-than-expected iPhone sales. iPhone revenue grew 2% YoY to US$51.3bn despite FX headwinds and challenging macro conditions, driven by strong growth in emerging markets with revenue doubling in India, Indonesia, Turkey, and UAE. Mac/iPad revenue were down 31%/13% YoY, in line with guidance, as both products faced challenging comparisons and macro conditions. Services revenue grew 5.5% YoY (~11% in constant currency) to US$20.9bn, on top of a tough comparison against 2Q22 where it grew 17%. Apple indicated it has >975mn paid subscriptions, 2x from 3 years ago and up from 935mn disclosed in 1Q23.


 + Sequential gross margin expansion. Services gross margin expanded 20 basis points QoQ to 71%, partially offset by QoQ product gross margin contraction of 30 basis points to 36.7%. Overall gross margin expanded by 130 basis points QoQ to 44.3%, largely driven by favourable revenue mix towards Services (22% of total vs 18% in 1Q23) and cost savings.  


The Negatives

- Revenue contraction to continue. Apple guided YoY revenue performance in 3Q23 to be similar to that of 2Q23, implying a potential contraction of 2%-3%, with FX expected to be a headwind of 4%. This is below our initial expectation of positive sales growth in 2H23e. Services YoY revenue performance is also expected to be similar to its growth in 2Q23, suggesting a continued increase at ~6%, while facing challenges in digital advertising and mobile gaming due to the macroeconomic environment.


Apple Inc. – Hurt by supply constraints and FX

The Positives

+ Services grow despite increasing FX headwinds. Services revenue grew 6.4% YoY to US$20.8bn despite ~7% FX headwinds, implying a double-digit growth on a constant currency basis, on top of a tough comparison against 1Q22 where it grew 24%. App Store subscription grew double digits, while revenue from cloud, payment services, and music set new records. In aggregate, Apple indicated it has 935mn paid subscriptions, up >150mn in the last 12 months and 4x from 5 years prior. The segment’s performance was helped by the continued increase in device installed base, which reached 2bn units (up 150mn units YoY) driven by double-digit growth in emerging markets, such as India and Brazil.


 + Sequential gross margin expansion. Product gross margin increased by 240 basis points (2.4%) QoQ to 37% while services gross margin expanded 30 basis points to 70.8%. Both segments’ increase was attributed to leverage and favorable product mix, resulting in overall QoQ gross margin expansion of 70 basis points to 43% despite stronger FX headwinds.  


The Negatives

- Hardware sales decline. Product revenue was down 7.7% YoY with iPhone revenue declining 8% (flat on constant currency basis) to US$65.8bn due to the iPhone 14 Pro and 14 Pro Max supply being constrained throughout November and December 2022. Mac sales were down 29% YoY to US$7.7bn, in line with Apple’s previous guidance as a result of unfavorable comparison against 1Q22 where it benefitted from the launch of the M1 MacBook Pro. Decline in hardware sales was partially offset by 30% YoY growth in iPad sales to US$9.4bn, mainly due to favorable comparison against 1Q22 when it faced supply constraints, as well as benefitting from the launch of new iPad and M2 iPad Pro. Management indicated the softening macroeconomic environment affected Mac and Wearables sales the most, while iPhone was the least impacted.

Apple Inc. – Proving its resilience



The Positives

+ Hardware product revenue remained resilient. iPhone recorded 10% YoY revenue growth to US$42.6bn, while Mac grew 25% to US$11.5bn, a new quarterly record, despite industry-wide warnings of a potential decline in smartphone and PC demand. The strong Mac performance was attributed to the ability to capture sales from backorders on M2 MacBook Air that suffered supply constraints following its launch in 3Q22. Both product categories set quarterly record for upgraders, with the iPhone growing switchers by double digits. Nearly 50% of Mac buyers during the quarter were new to the devices.


 + Growth in international markets despite strengthening US dollar. Aside from Japan, revenue across all geographies outside the US experienced YoY growth during the quarter with Europe increasing 10% and the Rest of Asia Pacific segment growing 23%, despite facing headwinds during the conversion of local currencies to the US dollar. Apple credited the strong performance in several large emerging markets, with India setting a new revenue record and strong double-digit growth in Thailand, Vietnam, Indonesia, and Mexico.


The Negatives

- Guided for QoQ revenue growth deceleration. Management guided for a slower revenue growth in 1Q23 compared to 4Q22’s growth of 8%, mainly due to the 10% of expected FX headwinds. Moreover, Mac sales are expected to decline substantially YoY, mainly because of the tough comparison with 4Q21 where it benefited from the launch of the newly redesigned M1 MacBook Pro and grew 25%. Services is expected to grow but hindered by the macroeconomic environment that increases FX headwinds and decreases spending on digital advertising as well as games on the App Store, although Apple has indicated that the advertising business does not contribute a large portion of the overall revenue.

Apple Inc. – Managing supply chain and FX headwinds well


The Positives

+ Record revenue for iPhone and Services. AAPL reported record sales from its iPhones for 3Q22 – US$63.4bn (3% YoY), with customer satisfaction and brand loyalty at an all-time high. There were also a record number of people switching to iPhones in the quarter. The company also mentioned no obvious macroeconomic impact on iPhone sales in the quarter besides FX. Services also set records for the quarter across both developed and emerging markets, up 12% YoY overall despite almost 5% FX headwinds, supported by a growing customer installed base, and increasing customer engagement.


+ Gross margins slightly above forecasts. AAPL recorded gross margins of 43.3%, slightly above consensus forecasts, demonstrating its ability to manage supply chain constraints better despite COVID-related factory shutdowns in China, and increasing FX headwinds.  Products gross margin was down almost 1.5% YoY to 34.5%, while Services gross margin up 1.7% YoY to 71.5%.

The Negatives

- Supply constraints and FX to impact revenue growth. A couple of headwinds are likely to continue from 3Q22 into 4Q22. For Products, AAPL expects supply constraints to continue, although at slightly lower levels compared to 3Q22 – affecting Product margins. A strengthening US dollar relative to most other currencies is also likely to provide approximately 6% of negative headwinds for revenue growth.



Supply chain constraints will ease, and strength of the US dollar will continue to hurt margins. AAPL expects 4Q22 revenue growth to accelerate compared to 3Q22, despite FX headwinds. The company also guided gross margins between 41.5% and 42.5%, with operating expenses of US$12.9bn-13.1bn.

Apple Inc – Bottlenecked by supply constraints


Results at a glance

Source: Company, PSR


The Positives

+ Demand remains robust. Revenue grew 9% YoY to US$97.2bn, beating estimates of 5% growth. Services, iPhone, Mac and iPad all outperformed despite concerns of waning consumer confidence. iPhone demand was up 5%, and it remains strong for the iPhone 13 family. Mac demand grew 15%, and the new M1 chip Mac saw its best seven quarters with record upgraders and 50% new purchasers. iPad demand declined 2%, but it remains highly sought after in education, creativity and entertainment. It continues to be weighed down by supply constraints. Services demand was up 17%, and the installed base are at all-time highs for App Store, iCloud and Apple Care.


+ Gross margins beat for all segments. Gross margins for products and services were 36.4% and 72.6%, beating estimates of 35.6% and 71.4% respectively. For products, Apple is successfully passing on higher costs to consumers. Services margins benefited from growth in the higher margin services mix, which we believe are App sales and subscriptions.

The Negatives

- Nil



Short-term headwinds cloud the outlook. 3Q22 revenue growth will be impacted by US$4bn-8bn due to COVID-19 shutdowns in China, which began in end-March 2022, and lingering semiconductor shortages affecting production and demand. This is substantially larger than in 2Q22. In addition, the stronger US$ and stoppage of sales in Russia is expected to hit growth by 300bps and 150bps respectively. No revenue guidance was provided.


Meanwhile, an incremental US$90bn share buyback program was announced, roughly 4% of market cap as at 29 April 2022. This should lend some support to share prices. Apple aims to be net cash neutral. As at 2Q22, Apple’s net cash position was US$73bn.


Maintain BUY and unchanged TP of US$214.00

Given the near-term headwinds, we are keeping our forecasts unchanged despite the outperformance this quarter. Demand remains robust but supply remains constrained. We maintain BUY and our target price of US$214.00 on DCF with a WACC of 6.2% and terminal growth of 3.0%.

Apple Inc – Record quarter

The Positives

+ iPhone beat on volume and prices. According to IDC, iPhone shipments of 85mn exceeded market expectations of 82mn for 1Q22. Apple outmaneuvered the supply chain constraints. Customers are also purchasing higher-end models, with ASPs at US$844 vs consensus of US$833, and our FY21e forecast of US$835. Demand was across all geographies, especially in China, which contributed a five-year high of 21% of Apple’s revenue for the quarter. Alongside the 5G iPhone 13’s appeal, Apple’s smartphone market share in China has benefited from US sanctions against Chinese rival Huawei preventing them from securing parts for their smartphones.

+ Record gross margins. 1Q22 gross margin of 44% exceeded our FY22e expectations of 41% despite elevated transport and component costs. Apple’s Services segment comprising Apple Care, iCloud and the App Store enjoyed record margins of 72% while beating consensus revenue growth estimates, (24% vs 19%) driven by Apple’s installed base of 1.8bn, up 20% YoY. The Products segment also provided record margins of 38% driven by higher ASPs from sales of more expensive iPhone and Mac models.

The Negatives

- iPad impacted by chip shortages. iPad was impacted the most by chip shortages. iPad revenues declined 14% YoY to US$7bn, affected by shortages on trailing nodes. Demand, however, remained healthy with half of iPad purchases made by first-time users. iPad contribution to 1Q22 revenue is only 6%.


Despite tough comparables of 54% revenue growth last year and a roughly 7% headwind from FX and supply constraints, Apple guided record revenue for the March quarter. The Services segment is expected to continue growing at double digits, driven by the higher installed base. This will help keep gross margins elevated between 42.5% and 43.5%. Apple also guided supply constraints to ease on a sequential basis.

Maintain BUY and higher TP of US$214.00

Valuations based on DCF with a WACC of 5.8% and terminal growth of 3.0%. We raise our FY22e PATMI by 9% to reflect higher revenue from increased iPhone shipments as the supply chain eases, as well as higher gross margins from stronger ASPs and growth in Apple’s higher margin Services segment.

Apple Inc – Supply constraints, but demand strong


The Positives

+ Robust iPhone demand. Apple sees strong orders for the iPhone 12 and 13 line up from online and retail stores, carrier channels, and other channels. Upgraders and switchers grew double digits in the quarter. Lead times, a common indicator of demand, are at four weeks for the iPhone 13 Pro and Max, compared to three days for the iPhone 12 Pro Max launched last year, however, this may be skewed by supply constraints. Continued global investments in 5G and aggressive promotions by carriers support the smartphone super cycle story.


+ Services growth exceeded expectations. 4Q21 services revenue grew 26% YoY to US$18.3bn vs our forecast of 18%. FY21 growth was 27% vs 25% forecast. Growth was broad-based across all services. Higher margins from services of 70% (vs 35% for products) helped push FY21 gross margins to a 7-year high of 41.8%.

The Negatives

- Larger-than-expected supply constraints. US$6bn (9%) impact on 4Q21 revenue from silicon shortages and COVID-19 manufacturing disruptions affecting iPhone, iPad and Mac. COVID-19 disruptions have since eased as Vietnam reopened in late September. The impact from chip shortage will become more acute come holiday season as sales volume spike. Unclear if lost sales during holiday season can be recaptured.


1Q22 revenue impact from supply constraints is expected to be higher than US$6bn due to larger product volumes during the holiday season. Despite this, gross margins guidance for 1Q22 is still a material increase YoY from 39.8% to 41.5%-42.5%. The historical five-year average margin is 39%. The margin guidance already factors in significantly higher freight costs and higher cost structures from new product launches.

Apple Inc – Super-cycle in price, margins and product


Company Background

Apple’s revenue comes from the iPhone (50% of FY20 revenue), iPad (9%), Mac (10%), wearables, home and accessories (11%), and services (20%). Main markets are the Americas (45%), Europe (25%), Greater China (15%), Japan (8%), and the rest of Asia Pacific (7%).

Investment Merits

  1. 5G to drive record iPhone sales. Apple’s flagship 5G iPhone 12 line-up launched in 2020 sold 100mn units two months earlier than the iPhone 11. Volumes were close to its iPhone 6 super-cycle during the 4G transition in 2015. Customers see 5G as a key reason for upgrading their iPhones after years of holding back replacements. Apple’s new iPhone 13 line-up is expected to be launched in September 2021, featuring up to 20% more efficiency and larger batteries to complement the power-hungry 5G phone. In anticipation of strong demand, Apple has ordered more than 100mn A15 chips from TSMC for the launch, 25% more than the 75mn chips for its 2020 iPhones. We expect the iPhone super-cycle to continue, with FY21e and FY22e sales potentially topping 2015’s record of 231mn units sold. This would be powered by upgrades from an estimated 48% of the iPhone users still using iPhone X and older. iPhone sales are Apple’s main cash cow, at 50% of sales in FY20.
  2. Margins to remain elevated. Strong growth in Apple’s services is expected to lift gross margins, together with higher ASPs of 5G devices in the product segment. Service margins of 66% are more than double product margins. Service revenue has also been expanding at a faster CAGR of 17% vs flat growth for iPhone. Growth is spearheaded by Apple’s ever-growing installed base, which topped 1.65bn in January 2021. Apple expects service growth to moderate after a bumper 3Q21 - when YoY growth was 33% from the COVID-19 rebound - to more sustainable double digits. Apple’s 5G products also allow it to raise weighted ASPs by more than 20% from a year ago, boosting product margins. We expect gross margins to track above 40% in FY21e and FY22e, higher than their 5-year historical average of 38%.
  3. Gaining market share through supply-chain dominance. As competitors grapple with chip shortages, Apple’s share of global smartphone sales breached 5-year highs, hitting 21% in 4Q21. In the high-end market, Samsung was hit by its Texas semiconductor fabrication plant’s month-long power shut-down and Vietnam factory suspensions due to COVID-19. Samsung’s new Galaxy Note’s launch in 2H21 may be delayed as a result. Apple managed to mitigate shortages in 3QFY21, with the revenue impact coming in lower than its US$3-4bn guidance. Apple holds buying power over suppliers through scale purchases and upfront cash payments, leaving competitors handling price shocks and shortages created by Apple deals.


We initiate coverage with a BUY rating. Our target price is US$187.0, based on DCF valuation with a WACC of 5.8% and terminal growth of 3.0%.



Apple has five revenue segments: iPhone (50% of sales), Mac (10%), iPad (9%), Wearables, Home and Accessories (11%), and Services (20%). The first four are grouped under products. Wearables, home and accessories consist of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories. Services are licensing, App Store, AppleCare, iCloud, Apple Music, Apple Pay and iTunes. Service revenue grew by a 17% CAGR from FY16 to FY20 to double from 9% to 20% of total revenue (Figure 3). iPhone revenue was flat in the same period but is expected to surge in FY21 and FY22.



Cost of sales grew at a 5% CAGR from FY16 to FY20, in line with its revenue CAGR of 5%. Operating expenses include selling, general and administrative expenses (7% of sales) and research and development (7%). Over the past five years, SG&A consistently ranged at 6-7% of sales, while R&D grew from 5% to 7% of sales. Total operating expenses grew at a 8% CAGR.


Gross margins averaged 38% in the past five years. Margins for services averaged 61% in the past four years, almost double the product margins of 33%. We forecast elevated margins for both services and products for FY21 and FY22 on the back of higher ASPs of new 5G devices and a higher installed base for services boosting operating leverage. Normalisation of freight costs could jack up product margins further.


Assets: Fixed assets increased modestly by 36% in the past five years to US$37bn, roughly in line with revenue growth of 27% between FY16 to FY20. Fixed assets only comprised 8% of total assets as Apple outsources most of its manufacturing needs. Inventory grew 90% in the past five years to US$4bn, likely due to Apple’s wider range of product line-ups in recent years.

Liabilities: Net debt averaged US$19bn in the past five years. It was pared down to lower levels in FY19 and FY20 as fixed assets were flat in those years.


Apple historically generates strong cash flows every year. Cash flow from operations in FY20 jumped 16% YoY to US$81bn from a strong iPhone 12 launch. Much of the cash was used for stock repurchases of US$72bn in that year. Meanwhile, capex averaged US$11bn in the last five years, largely stable.



Apple designs, makes and markets smartphones, personal computers, tablets, wearables and accessories, and sells a variety of related services. Customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. Apple sells its products and resells third-party products in most of its markets directly to customers through retail and online stores and a direct sales force. It also distributes indirectly through third-party cellular network carriers, wholesalers, retailers and resellers. FY20 net sales through direct and indirect distribution channels accounted for 34% and 66%, respectively, of total net sales. No single customer accounted for more than 10% of net sales in 2020, 2019 and 2018. Main markets are the Americas (45% of FY20 sales), Europe (25%), Greater China (15%), Japan (8%), and the rest of Asia Pacific (7%).


In the service segment, the main revenue contributor is the App Store, which takes in 30% of revenue from in-app purchases of games, app sales, and app subscriptions. Next is licensing, which includes payments from companies like Google to be featured on Apple products. Other services include AppleCare, which is Apple’s extended warranty service with a price range that depends on the product. iCloud generates revenue through subscription fees for use of cloud data. Apple Music also generates subscription fees as well as revenue from carrier partnerships. Apple Pay earns a percentage of transaction fees from users and banks. New to services and not yet meaningfully contributing are Apple TV, which earns subscription fees, and Apple Card, where Apple likely takes a cut of the interest charged by its partner bank.



The high-end smartphone market is predominantly served by Apple and Samsung. Huawei has fallen out of the ranks following U.S. sanctions. Apple’s share of global smartphone sales averaged 14% in the past three years, hitting a historical high of 21% in 4Q20 on the back of the iPhone 12 launch (Figure 8). The International Data Corporation (IDC) expects the global smartphone market to grow at a 3.6% CAGR over 2020-2025 (Figure 6). Apple’s key markets, China (18% of sales) and the US (45%), are forecast to grow 6.0% and 3.5% respectively.


Despite tepid market growth, Apple can rely on its consistently growing ecosystem of installed users to outperform the market. The iPhone’s installed base breached 1bn in 2020 (Figure 9), growing by a stronger 5-year CAGR of 7% than the pre-pandemic smartphone sales CAGR of 2%. Most iPhones are sold to upgraders in its installed base (Figure 7).


  1. Antitrust laws could affect service revenue. Apple could lower its App Store fees for larger developers as a result of lawsuits. Apple last year lowered its fee to 15% for smaller developers making less than US$1mn per year from their apps. But App Store revenue is largely driven by its larger developer base, contributing 30% fees.


  1. China’s gaming crackdown could hit App Store spending. China’s gaming revenue contributed an estimated US$2bn or 13% to App Store revenue in FY19. That said, even if China’s gaming crackdown intensifies, we believe the impact will be minimal as China’s gaming revenue translated to less than 1% of FY19 revenue.


Chip supply shortage. Apple guided for a US$3-4bn of impact from chip shortages earlier this year. This will affect iPhone and iPad sales in the coming quarter. There is a risk of the impact coming in at the higher end of the range.


We initiate coverage on Apple Inc with a BUY recommendation. We have a DCF valuation of US$187.0, based on a WACC of 5.8% and terminal growth rate of 3.0%.


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