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Text | Dolphin Investment Research

Apple (AAPL.O) released its third-quarter financial report for fiscal year 2024 (ending June 2024) after the U.S. stock market closed in the early morning of August 2, 2024 Beijing time.

1. Overall performance: revenue and profit, better than market expectations。Apple's revenue for the quarter was $85.8 billion, up 4.9% year-on-year, better than the market consensus of $84.46 billion.The company's revenue growth this quarter was mainly driven by the growth of iPad and software services business.Apple's gross profit margin was 46.3%, up 1.8 percentage points year-on-year, slightly better than the market consensus (46.1%)The gross profit margin of the software service business remained at a high level of 74% this quarter.

2. iPhone: Reduce prices while maintaining volume to stop the downward trend.Although iPhone shipments returned to growth this quarter, their performance was slightly worse than the overall market.Dolphin estimates that the average price of Apple mobile phones fell by 5.3% year-on-year. This quarter, the company used strategies such as price cuts and promotions to stabilize iPhone shipments.

3. Other hardware besides iPhone: iPad becomes the biggest source of growthThis quarter, driven by new productsiPad business revenue returned to above $7 billion, the largest source of growth for the company this quarter.In addition, other hardware businesses such as Mac and wearables also performed in line with market expectations this quarter.

4. Software services: a new high. Software services revenue this quarter was $24.2 billion, better than the market consensus (US$23.96 billion).This quarter, the revenue of the software business hit a new high, and the gross profit margin continued to remain at a high level of 74%.。The growth of the software business mainly comes from user retention and the increase in per-user revenue.With high and continuously growing gross margins, the software business has an increasingly greater impact on the company's profits.

Dolphin’s opinion: Apple’s financial report this time is still good.

Both revenue and net profit were better than market expectations.Although the mobile phone business is still declining,iPad and wearable devices have performed significantly better than expectedThe gross profit margin of software services has remained at 74% for two consecutive quarters, bringing the company's profit performance this quarter to exceed expectations.

Specifically,This financial report has both highlights and flaws.

1) Business other than iPhone is a bright spot:①iPad benefits from new product launches this quarter, driving the recovery of downstream demand, which is the main source of growth this quarter; ②Mac Business and WearablesThe performance of other equipment is greatly affected by industry demand, butApple performed slightly better than the overall market；③Service BusinessWhile continuing to grow, the gross profit margin also remained stable at74%；

2) iPhone business has flaws:The iPhone business, the company's largest revenue source, still declined 0.9% this quarter.Although the company eventually stopped the decline in business by reducing prices and promoting sales, it still performed slightly worse than the overall market.。

In addition, the company's outlook for the next quarter is also close to market expectations.“Revenue growth in the fourth quarter was similar to that in the third quarter, with gross margins ranging from 45.5% to 46.5%.”。

Overall, Apple is still relatively stable in terms of operations. Although the iPhone business has some shortcomings, the company can adjust its strategy in a timely manner and has a relatively strong ability to resist risks. Apple still maintains single-digit growth in performance, but the current company valuation has reached a PE of about 30 times, which already includes the market's expectations for the company's AI terminals and software monetization capabilities. Although this financial report did not disappoint, it did not bring too much expectation. The further rise of the company's stock price requires waiting for the subsequent new phone launch conference and paying attention to whether AI can really bring a big wave of iPhone replacement next year.

The following is a detailed analysis

1. Overall performance: revenue and profit, better than market expectations

1.1 Revenue: In the third quarter of fiscal year 2024 (2Q24), Apple achieved revenue of US$85.8 billion, a year-on-year increase of 4.9%, slightly better than the market consensus (US$84.46 billion)The company's revenue growth this quarterThe main benefit was driven by the growth of iPad and software service business. Although the revenue in Greater China still declined, the revenue in other regions showed different degrees of growth.。

From the hardware and software perspectives:

1) Apple’s hardware business grew 1.6% this quarter.Hardware sales returned to growth this quarter. Although iPhone sales still declined by 0.9%, the strong recovery of iPad sales directly stopped the decline in hardware sales.

2) Apple’s software business still grew by 14.1% this quarter, maintaining double-digit growth.The software business has a certain degree of risk resistance. Even when hardware revenue is relatively sluggish, software services have maintained a growth trend.

From the perspective of regions：Apple's sales in Greater China continued to decline this quarter, while other regions saw varying degrees of growth.The company is still facing the impact of insufficient market demand and intensified competition in Greater China. Specifically, the Americas region is Apple's largest source of revenue, growing 6.5% this quarter, while revenue in Greater China fell again by 6.5%.

1.2 Gross profit margin: In the third quarter of fiscal year 2024 (2Q24), Apple’s gross profit margin was 46.3%, an increase of 1.8pct year-on-year, slightly better than the market consensus (46.1%).The company's gross profit margin continued to recover, mainly driven by higher software business.

Dolphin Jun breaks down the gross profit margins of software and hardware:

Apple's software gross margin remained at a high level of 74% this quarter, which was the main source of the company's gross margin increase this quarter. The gross margin of hardware fell seasonally to 35.3%, mainly due to promotional policies such as price cuts and profit sharing.

1.3 Operating Profit: In the third quarter of fiscal year 2024 (2Q24), Apple’s operating profit was US$25.4 billion, a year-on-year increase of 10.2%.Apple's operating profit growth this quarter was driven by higher revenue and gross margin.

Apple's operating expense ratio was 16.7% this quarter, up 0.3 percentage points year-on-year.This quarter, the company's sales expenses and R&D expenses both increased year-on-year.

2. iPhone: Cutting prices to maintain volume and halt the downward trend

In the third quarter of fiscal year 2024 (2Q24), iPhone business revenue was US$39.3 billion, a year-on-year decrease of 0.9%, in line with market consensus expectations (US$39 billion).This quarter, global mobile phone market shipments grew by single digits year-on-year.The company's mobile phone business is still declining, mainly due to the impact of price cuts and promotions.。

Based on the relationship between quantity and price, I would like to look at the main sources of the decline in iPhone business this quarter:

1) iPhone shipments:According to IDC, the global smartphone market grew 7.6% year-on-year in the second quarter of 2024.Apple's shipment growth rate this quarter was about 6.4%, and the company's shipment growth performance was slightly lower than the overall market.；

2) Average price of iPhone shipments:Combining the iPhone business revenue and shipments,The average price of iPhone shipments this quarter was around US$869, down 5.3% year-on-year.The overall performance of the iPhone 15 series was not ideal after its release.The company implemented price cuts and other promotional measures this quarter, which boosted sales but also reduced the average price of iPhone products.。

3. Other hardware besides iPhone: iPad becomes the biggest source of growth

3.1Mac Business

In the third quarter of fiscal year 2024 (2Q24), Mac business revenue was US$7 billion, a year-on-year increase of 2.5%, in line with market expectations (US$6.98 billion).

According to IDC's report, global PC market shipments increased by 5.4% year-on-year this quarter.Apple's shipments grew 7.5% year-on-year this quarter, and the company performed slightly better than the overall market。Combining company and industry data, Dolphin estimates that the average price of the company's Mac shipments this quarter was $1,230, a year-on-year decline of 4.7%.。

3.2 iPad Business

In the third quarter of fiscal year 2024 (2Q24), iPad business revenue was US$7.2 billion, a year-on-year increase of 23.7%, exceeding market consensus expectations (US$6.63 billion).The release of new iPads in May boosted iPad business, with quarterly revenue back above $7 billion. The new generation of iPad Pros uses OLED screens and is upgraded directly from M2 to M4, boosting market demand.

3.3 Wearable and other hardware

In the third quarter of fiscal year 2024 (2Q24), revenue from wearables and other hardware businesses was US$8.1 billion, down 2.3% year-on-year, but better than market consensus expectations (US$7.8 billion).Although Apple's other hardware businesses such as wearables continued to decline this quarter, the decline was significantly narrowed.Considering Qualcomm's IoT business which declined by 8.5% year-on-year, the overall market demand is still sluggish.，But Apple performed relatively better than Android.

4. Software Services: Reaching New Heights

Software service revenue in the third quarter of fiscal year 2024 (2Q24) was US$24.2 billion, a year-on-year increase of 14.1%, better than the market consensus (US$23.96 billion). The software business is the most stable part, and business revenue continues to grow.The growth of the software business mainly comes from user retention and the increase in per-user revenue.

In software services, the most concerning thing is the gross profit margin level of software services.In this quarter, the gross profit margin of software services reached 74%, which remained high and remained above 70% for 12 consecutive quarters. With continuously growing high gross profit margin, the software business has an increasingly greater impact on the company's profits.