The Positives
+ Strong gross margin delivery. AAPL recorded 1Q24 gross margins of 45.9%, coming in at the high end of its guided 45-46% range. Product margin expansion is driven by a higher mix of the pricier Pro version of iPhone, while the Services margin is driven by a record installed base of more than 2.2 bn. We expect a sustained growth in gross margin due to the recent robust performance of Services (11.2% YoY). The margin could expand further as the revenue mix shifts towards this more profitable segment. (The Services gross margin was at 72.8%, almost twice of that of Products gross margin of 39.4%).
The Negatives
- Weak outlook for China. Revenue from China contracted 13.0% YoY in 1Q24 due to increased competition and FX headwinds. AAPL is struggling to battle local competitors like Huawei, who are edging into the high-end market that Apple has traditionally dominated. China represents roughly 20% of iPhones. We believe the continued weakness in China market will remain a drag on Product growth, especially when iPhone accounts for 58% of AAPL’s total revenue.
- Weak demand for products remains a drag. Product revenue remain flat in 1Q24. iPad and Wearables saw revenue declines 26% and 11% YoY due to different product launch times and muted demand. iPhone revenue saw a 5.9% YoY increase, despite the weak demand in the China market. AAPL has guided flat growth of iPhone in 2Q24e while expecting iPad and Wearables to decelerate further. We believe the continued weakness in demand for AAPL’s other products will remain a drag on Product growth.
The Positives
+ Services benefit from higher installed-base. Services was the standout with revenue of US$22.3bn (16% YoY) beating our estimates by ~12%. Growth was broad-based across categories and geographies, and benefitted from AAPL’s growing installed base of >2bn active devices, and >1bn paid subscriptions. In our opinion, faster growth in Services vs Products is AAPL’s most significant way of expanding margins given Services Gross Margin is ~70%, twice that of Products. Services currently contribute ~25% of total revenue.
+ iPhone sales resilient. iPhone sales of US$43.8bn (3% YoY) were resilient given the uncertainty surrounding demand for tech hardware, beating both AAPL’s and our estimates. Much of the growth was driven by demand in emerging markets like India, Latin America, and China. Sales in China were a pleasant surprise given worries over increasing competition from Chinese manufacturers in the Premium smartphone category, with AAPL seeing record 4Q iPhone sales in China while the overall market contracted – implying market share gains for the company. Revenue growth from China would have been ~4% YoY in constant currency.
The Negatives
- Weak outlook for products. Aside from iPhones, AAPL’s other products (iPad/Mac/Wearables) saw revenue declines YoY as demand remained muted for these products. Product revenue contracted -5% YoY in 4Q23. AAPL’s outlook for its products was not any better, with the company guiding 1Q24e YoY acceleration only for Mac – although we still estimate contraction of 10-15% YoY, while expecting iPad and Wearables to decelerate significantly due to unfavourable timing of product launches. We believe the continued weakness in demand for AAPL’s other products will remain a drag on Product growth.
The Positives
+ Continued growth in emerging markets. Revenue dipped 1% YoY to US$81.8bn, better than company guidance of 2-3% YoY contraction, driven by sales boost in emerging markets. iPhone set an all-time record in India with the performance of the recently opened stores in the country exceeding Apple’s expectations, while sales in Mexico, Indonesia, Philippines, Saudi Arabia, Tukey, and UAE also set the June quarter record. Greater China (~20% of revenue), which includes sales to China and Taiwan, also improved from 3% YoY contraction in 2Q23 to 8% YoY increase as iPhone sales improved, while Wearables and Services set June quarter records in the region.
+ Services growth re-acceleration. Segment revenue grew by 8% YoY to US$21.2bn, a re-acceleration from the 5% YoY growth in 2Q23 and better than company guidance of 5-6%. Growth came from across the board with categories like Cloud, Video, AppleCare, and payment services setting all-time revenue records, while App Store, advertising, and Music set a June quarter record. This was due to increasing customer engagement as both transacting accounts and paid accounts grew by double digits YoY. The number of paid subscriptions also exceeded 1 billion, up from the 975mn disclosed in 2Q23. Apple continues to leverage on its ecosystem strength and grow its installed base of >2 billion units. Gross margin also expanded 130bps YoY and 20bps QoQ as Services make up a larger portion of total revenue at 26% (vs 24% in 3Q22 and 22% in 2Q23).
The Negatives
- Mac and iPad continue decline. Revenue for Mac and iPad declined by 7% and 20% YoY, respectively. iPad recorded a larger decline due to unfavourable comparison against a full- quarter impact of then-newly launched iPad Air in 3Q22. Apple has guided for Mac and iPad sales to decline by double digits YoY in 4Q23 as both products experienced supply disruptions from a factory shutdown in 3Q22, which resulted in an unusually high sales in 4Q22 as Apple fulfilled a significant pent-up demand.
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.
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.
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.
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.
Outlook
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.
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
Outlook
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%.
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%.
Outlook
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.
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.
Outlook
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.
