• 3Q22 revenue and PATMI in line with expectations. 9M22 revenue/PATMI at 77/80% of our FY22e forecasts.
• Record iPhone revenue for June quarter, with growing installed base and increasing customer engagement driving Services growth.
• Gross margins slightly above forecasts, demonstrating Apple’s ability to better manage supply chain constraints.
• We adjust our FY22e earnings forecasts upwards slightly to reflect higher gross margins and PATMI outperformance YTD. We expect Apple to weather the supply chain constraints and 6% FX headwind. We maintain BUY recommendation with a higher target price of US$198.00 (prev. US$194.00) on DCF with a WACC of 6.1% and terminal growth of 3.0%.

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.