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Apple's revenue and earnings have exceeded expectations for six consecutive quarters, with the June quarter recording the highest total revenue and EPS in history. Service revenue hit a new high for six consecutive quarters, jumping along with iPad revenue and driving total revenue to exceed expectations. Although iPhone revenue fell year-on-year, the total amount was better than expected. Revenue in Greater China was the only geographic region to decline year-on-year, and the decline was greater than expected.

After the U.S. stock market closed on Thursday, August 1, consumer electronics and technology giant Apple released its third-quarter results for fiscal year 2024 (i.e. the second quarter financial report for the 2024 natural year), closing the earnings season for large technology stocks along with Amazon.

1) Key financial data

Quarterly revenue:It increased by 4.9% year-on-year to US$85.78 billion, higher than the market expectation of US$84.46 billion.

Diluted EPS:It increased 11% year-on-year to US$1.40, higher than the market expectation of US$1.35.

Net Profit: increased by 7.9% year-on-year to US$21.45 billion.

Overall operating expenses:It increased by 6.8% year-on-year to US$14.33 billion, slightly lower than the market expectation of US$14.39 billion.

Gross profit margin:46.3%, higher than the market expectation of 46.1%.

2) Segment business data

iPhone revenue in the third quarter:It fell 0.9% year-on-year to $39.3 billion, higher than analysts' expectations of $38.95 billion.

Mac revenue in the third quarter:It increased 2.5% year-on-year to $7.01 billion, higher than analysts' expectations of $6.98 billion.

iPad revenue in the third quarter:It increased by 23.7% year-on-year to US$7.16 billion, far exceeding analysts' expectations of US$6.63 billion.

Wearables, home, and peripherals revenue in the third quarter:It fell 2.3% year-on-year to $8.1 billion, higher than the expected $7.79 billion.

Third quarter service revenue:It increased by 14% year-on-year to US$24.213 billion, higher than the market expectation of US$23.96 billion.

Product revenue for the third quarter:It increased by 1.6% year-on-year to US$61.56 billion, higher than the market expectation of US$60.63 billion.

3) Geographical partition data

Third quarter revenue in Greater China:It fell 6.5% year-on-year to $14.73 billion, below analysts' expectations of $15.26 billion.

Revenue in the Americas, the largest market: increased by 6.5% year-on-year to US$37.68 billion.

Revenue in Europe, the second largest market:It increased by 8.3% year-on-year to US$21.88 billion.

Japan Revenue: increased by 5.7% year-on-year to US$5.1 billion.

Other Asia Pacific revenue:It increased by 13% year-on-year to US$6.39 billion.

4) Capital Return

The Company's Board of Directors has declared a cash dividend of $0.25 per share, payable on August 15, 2024 to shareholders of record as of the close of business on August 12, 2024.

The company's CFO Luca Maestri said operating cash flow for the quarter was close to $29 billion, and more than $32 billion was returned to shareholders.

Cash and cash equivalents:US$25.57 billion, lower than the market expectation of US$28.98 billion.

Apple's revenue and profits have exceeded expectations for six consecutive quarters, setting an all-time record for total revenue and EPS in the June quarter (the company's third fiscal quarter). Service revenue has set a new high for six consecutive quarters, jumping along with iPad revenue and driving total revenue to exceed expectations. Although iPhone revenue fell year-on-year, the total amount was also better than expected, with an immediate increase of 1.3% after the market and then a 2% drop.

Mark Gurman, a well-known technology reporter for mainstream financial media, commented that Apple is doing well financially, but the company has greatly lost its pace of innovation and may have missed the latest major new products. At the same time, it has canceled its self-developed screen technology andAutopilot"I don't think there are any game-changing hits in Apple's product roadmap for the next two to three years. Anything new and groundbreaking won't appear until around 2027," he said.

Before the financial report was released, Apple's stock price rose 1% at the beginning of trading on Thursday before falling 1.7%. It has risen nearly 14% so far this year, basically on par with the 14% increase in the S&P 500 index and the 15% increase in the Nasdaq. The Dow Jones Industrial Average, of which Apple is a component stock, has risen nearly 7% this year.

Wall Street's consensus expectations for Apple remain "moderate buy" and relatively optimistic, with 25 analysts rating it "buy," 9 rating it "hold," and 1 recommending "sell." The average target price of $240.61 represents a 10% upside.

01 Cook: Artificial intelligence is another reason for people to buy new iPhones, and he remains confident in the Chinese market in the long run

Apple has stopped issuing formal guidance since the COVID-19 pandemic, but often gives some hints during earnings calls. Today, company executives said total revenue growth in the fourth quarter will be similar to that in the third quarter, with service revenue expected to grow by double-digit percentages.Artificial intelligence (AI) is another reason for people to buy a new iPhone, and they remain confident in the Chinese market in the long run.

Apple CEO Cook said in the financial report statement that in the second quarter of the 2024 calendar year, the company announced "amazing updates" to the software platform at the Worldwide Developers Conference, including a breakthrough personal intelligence system, Apple Intelligence, which puts powerful and private generative AI models at the core of the iPhone, iPad and Mac.

Company executives also said that thanks to extremely high customer satisfaction and loyalty, the active device installation base has hit an all-time high in all geographic regions. Apple said in February that its global active device count had reached 2.2 billion. Apple also said that the number of paid subscription users has reached 1 billion, including data on iPhone applications subscribed through the Apple App Store.

In an interview with the media, Cook said that although iPhone sales in the third fiscal quarter fell by about 1% year-on-year, its mobile phone business grew year-on-year at a constant exchange rate. "From an operational perspective, this is how we look at this issue."

In addition, iPhone sales in the second quarter of the calendar year set records in the UK, Spain, Indonesia, the Philippines, and several other markets.

He also said that while Apple won’t know the positive impact its newly announced Apple Intelligence service will have on sales until it starts shipping to customers later this fall, the company has been increasing spending in preparation for the service:

“We have moved a lot of people from other jobs into AI, and from a data center perspective, we have a hybrid approach where we use both our own data centers and our partners’ data centers.

Therefore, the capital expenditure (capex) in this regard is included in the partner's financial statements, and we will pay the expense.The latest Apple earnings report certainly shows that our spending on AI and Apple Intelligence is growing year-on-year。”

Cook also mentioned that about half of iPad buyers have never owned an iPad before, indicating that the tablet market is not yet saturated. Apple released its first new iPad since 2022 during the reporting period, making the department's year-on-year sales growth the strongest among all product lines. At the same time, as many as two-thirds of Apple smartwatch buyers are buying this product for the first time, and the user base is still increasing significantly.

When evaluating the performance of Greater China, Cook mentioned:

"The iPhone installed base in mainland China and Greater China actually hit a record high, and market research and consulting company Kantar told us that Apple's smartphone sales ranked in the top three in Chinese cities, and performance in the Chinese market is accelerating from the first half of the fiscal year."

02 Market expectations before financial report

Wall Street expects Apple's revenue in the third fiscal quarter to increase 3.2% year-on-year to $84.4 billion from $81.8 billion in the same period last year, better than the first quarter's total revenue, which fell 4.3% year-on-year to $90.75 billion and fell 1.4% year-on-year in the same period last year.

Adjusted earnings per share (EPS) are expected to increase 6.3% year-on-year to $1.34 from $1.26 in the same period last year. Adjusted EPS in the previous quarter was $1.53, which was a record high in the March quarter.

Apple has stopped providing official performance guidance since the COVID-19 pandemic, but management will provide development clues on overall business or professional areas during earnings calls. Analysts expect fourth-quarter revenue of $93.36 billion and earnings per share of at least $1.55.

In terms of business,The iPhone, the “core product” that accounts for 60% of Apple’s total revenueSales are expected to decline 2.6% to $38.64 billion from $39.67 billion a year ago.Services with the highest profit margins and accounting for 20% of total revenueRevenue is expected to increase 12.7% to $23.9 billion from $21.2 billion in the same period last year, and will set a new record for six consecutive quarters. Last quarter, it increased 14.2% year-on-year to $23.87 billion.

Services include the App Store, audio and video streaming services Apple Music and Apple TV+, iCloud storage, AppleCare warranty, advertising revenue from the Google search engine licensing agreement, payment fees from Apple Pay and other products, etc. After the iPhone has become a more mature product, services are an important area of ​​Apple's business diversification, and they even reflect consumer demand trends earlier.

Other hardware accounts for the remaining 20% ​​of Apple's total revenue.，iPad tablet revenue is expected to grow fastest.It increased by nearly 14% to US$6.6 billion from US$5.8 billion in the same period last year, and fell by nearly 17% year-on-year to US$5.56 billion last quarter; Mac computer revenue is expected to increase by more than 2% to US$7 billion from US$6.84 billion, and increased by 3.9% year-on-year to US$7.451 billion last quarter; wearable devices, home and accessories revenue is expected to fall by 6% year-on-year from US$8.28 billion to US$7.8 billion, and fell by 9.6% year-on-year to US$7.913 billion last quarter.

In the same period last year, iPhone revenue fell 2.4% year-on-year, iPad revenue plummeted nearly 20% year-on-year, Mac revenue fell more than 7%, wearable device revenue increased 2.5%, and service revenue increased more than 8% to a new high.

The iPad and Mac revenue may return to growth in this financial report, which is related to the release of the new iPad Pro equipped with M4 chip and iPad Air equipped with M2 chip by Apple during the quarter, as well as the new MacBook Air series equipped with M3 chip released in March.Sales of wearable devices continued to decline year-on-year.Or reflect Vision ProMixed RealityThe headset has not yet been able to effectively boost revenue. In the third fiscal quarter, Apple released the new Apple Pencil Pro and launched Vision Pro pre-orders in eight additional countries.

In addition, Wall Street expects the closely watchedGreater China contributes about 20% of Apple's revenueThe revenue of the Greater China region fell by 8.1% year-on-year to US$16.37 billion last quarter, but it was better than the market expectation of a double-digit percentage decline.

Greater China is Apple's third largest sales market after North America and Europe. As a core business with sales far exceeding that of other hardware products, the health of the iPhone, especially its sales trends in Greater China, will attract special attention.

03 Why is it important and what do you pay most attention to?

Technology stocks were generally under pressure in July, with the Nasdaq falling 0.8% for the month. It and the chip index were the only two major indices to fall. However, Apple's stock price rose 5% against the market trend, partly boosted by the Apple Intelligence artificial intelligence software demonstrated at the Worldwide Developers Conference in June.

Apple is currently the largest company in the U.S. stock market with a market value of $3.30 trillion. Its financial report is crucial to the future trend of the stock market. As a 3C consumer goods giant, Apple's performance can also reflect the overall economic health and provide clues to consumer spending intentions.

Investors will be paying close attention to management's sales outlook for the latest iPhone 16 series to be released in the fall, Apple's sales in Greater China and the fierce competition it faces, comments on the launch of a beta version of AI features to developers this week, and the launch of the iPhone 16 series in the fall.Generative AIThe scale of planned expenditure.

When Apple released its last quarterly report in early May, its stock price had fallen by 10% this year, and its stock price performance ranked second to last among the "Seven Sisters of Technology Stocks". It can be seen that the subsequent progress in the deployment of artificial intelligence technology is particularly important for the company to reverse its decline. Apple Intelligence requires at least a newer model of the high-end iPhone 15 series, which may start a new round of iPhone sales super cycle.

04 What does Wall Street think?

On the one hand, Wall Street hopes to get clues from the earnings call about when this year's iPhone 16 series will be released.Although Apple usually releases new products in September, it has postponed them to October in the past.

Both Bank of America and Evercore ISI believe the September quarter, which includes a full week of new iPhone sales, will see iPhone revenue return to year-over-year growth as early signs of demand are strong. The market currently expects iPhone revenue to be $44.18 billion in the fourth quarter, up from $43.81 billion in the same period last year.

Evercore ISI said that comments about the iPhone will be a key catalyst for this earnings report. "Optimistic comments about iPhone 16 expectations and the stabilization of the Chinese market may drive stock prices higher." Dan Ives, a well-known technology analyst at Wedbush, pointed out that 270 million iPhones have not been replaced in more than four years, and the AI-driven super cycle will detonate suppressed demand.

At the same time, the market generally believes that new AI functions will become the main driving force for the "super cycle" of replacement and upgrade of Apple's entire family of hardware products, led by the iPhone, although there are reports that AI functions for mass consumers will be postponed until October. There are also concerns that heavy investment in the development of AI technology will have a negative impact on Apple's profits.

TD Cowen analyst Krish Snakar warned that Apple's performance still faces some unfavorable factors, such as the continued loss of market share to local brands in Greater China, macroeconomic disruptions to global consumer demand, and foreign exchange trends.

The latest data from research institutions IDC and Canalys both show that domestic leading mobile phone brands surpassed Apple in shipments in the second quarter, and Apple was out of the top five. Others pointed out regulatory risks, such as Google paying Apple to become the default search engine or posing a threat of litigation.

Unlike JPMorgan Chase, which is optimistic that sales in Greater China may increase year-on-year in the third fiscal quarter, David Vogt, an analyst at UBS Global Research, believes that sales in Greater China may decline by 6% in the quarter, which is more pessimistic than market expectations. He rated Apple as "hold" with a target price of only $190, "reflecting Apple's challenging growth prospects and unclear artificial intelligence strategy":

“Apple is up 38% from its April low, and the AI ​​frenzy surrounding its stock is misplaced as the iPhone super-cycle may be hard to come by.

After WWDC in June, confidence in the iPhone’s AI super cycle in fiscal 2025 has reached its peak. The most optimistic expectations are that iPhone sales in the next fiscal year are expected to exceed 250 million units, and some forecasts are even as high as 260 million units.

But our analysis of smartphone demand by region, past replacement cycles, income demographics, and carrier subsidies suggest a more muted cycle next year. As a result, we forecast iPhone revenue growth of 2.4%, about 400 basis points below the Street consensus and nearly 1,000 basis points below the most optimistic forecast.”