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Text | Kiki from Silicon Research Lab

"Apple set new quarterly records in multiple regions around the world".

In the early morning of August 2nd, Beijing time, Apple released its third quarter financial report for fiscal year 2024 (ending June 29th) after the U.S. stock market closed. Both profits and revenue exceeded expectations. In an investor conference call, Cook excitedly emphasized Apple's new record.

There are two reasons why this quarterly report has attracted great attention from Wall Street: first, this quarter is the first batch of results achieved by Apple since it announced its AI plans, including Apple Intelligence, in June; second, many Wall Street analysts previously believed that Apple’s growth turnaround story is about to come, thanks to the release of Apple Intelligence and the iPhone 16.

However, after releasing its financial report, Apple is testing investors' patience to some extent.

The financial report shows that this quarter, Apple achieved revenue of $85.8 billion, a year-on-year increase of 5%, a faster-than-expected growth, finally getting rid of the previous continuous sales slump, mainly benefiting from the strong growth of the iPad business. At the same time, although iPhone revenue continued to be sluggish, the decline has narrowed significantly, down 1% year-on-year to $39.3 billion. However, the performance of the Chinese market is still disappointing, with revenue in Greater China falling 6.5% to $14.7 billion, lower than the $15.3 billion expected by analysts.

With the mixed hot and cold Chinese market and the ambiguous AI narrative, Cook and Apple have still not been able to give a satisfactory answer about the blueprint for future growth.

1. The hot and cold "Chinese market"

One good sign Apple sent this quarter is that its sales in China are picking up.

In terms of regions, America and Europe are the first and second largest sources of Apple's revenue, respectively. Over the past five quarters, Greater China's revenue has accounted for about 17-18%. This quarter, Apple's revenue in Greater China was US$14.7 billion, down 6.5% year-on-year, a significant improvement from the previous decline (down 8.1% year-on-year in the previous quarter), but still lower than analysts' expectations of US$15.3 billion.

Apple's revenue decline in Greater China has improved mainly due to two reasons: First, a more aggressive price reduction strategy. According to the "Silicon Research Lab", from the beginning of this year to the 618 period, Apple has carried out large-scale price reduction promotions for the Chinese market. In the "low-price competition" of the 618 e-commerce platform this year, the price reduction of the iPhone 15 series was as high as 2,500 yuan. The second is to continue the iteration of new products such as the iPad series to boost sales. In May of this year, more than a year after the iPad series was discontinued, Apple launched the latest iPad Pro. Cook also stated in a conference call that the iPad has resumed growth in Greater China.

But the B side of this good news is that Apple's high-end share in the Chinese market is being further eroded by domestic manufacturers. According to data recently released by IDC, in the second quarter of 2024, Apple fell out of the top five in China's smartphone shipment rankings and became the "others" in the list. This is the first time in the past five years that Apple has not entered the top five camps. Previously, well-known Apple analyst Ming-Chi Kuo also expressed pessimism about Apple's future sales in the Chinese market, mainly because of the return of Huawei and the fact that foldable phones are gradually becoming the first choice for high-end users in the Chinese market.

During the earnings call, the Chinese market was also a focus of analysts' inquiries and attention. When analysts asked about the declining performance of the Chinese market, Cook cited two sets of data - the record high iPhone installation base in Greater China and Apple's smartphone sales ranked in the top three in Chinese cities, but it still failed to allay analysts' concerns.

It is worth mentioning that Apple executives have visited China many times this year and kept a close eye on the Chinese market. In addition to Cook's visit to China in the first half of the year, Apple COO Jeff Williams also visited several Chinese suppliers at the end of July. Earlier, China Securities Journal reported that Apple had fine-tuned its stocking target for the iPhone 16 series, with the stocking target rising to 90 million units.

2. Ambiguous "AI Narrative"

Another new story about Apple that deserves much attention is its AI strategy.

In the earnings call, unlike the silence on AI strategy in the previous quarter, Cook mentioned Apple intelligence very early in the call, and even mentioned it no less than ten times during the entire call, including Siri, ChatGPT and other upcoming AI tools.

Shortly before the release of the financial report, Apple launched the iOS 18.1 Beta version for paid developers, completing the first appearance of "Apple Intelligence" on the terminal side. According to foreign media reviews, the functions of the test version mainly focus on writing tools, Siri, photo albums, etc. Bloomberg technology reporter Mark Gurman also mentioned: "So far, Apple Intelligence has very few functions, and only writing tools and call records are prominent, and there are not many changes in other aspects."

In other words, judging from the current beta version, it is still some distance away from the "system-level AI" that Apple mentioned at WWDC.

Fortunately, compared with Apple's previous slow response, the "Apple Intelligence" that is being implemented has two visible driving forces for Apple:

The first driving force is the most direct replacement of mobile phones. At present, AI mobile phones have become a consensus for the growth of the smartphone industry. According to estimates by the US investment bank Wedbush, the integration of AI into Apple products may increase Apple's share price by another $30 to $40. Morgan Stanley also pointed out that thanks to AI technology, Apple's average selling price (ASP) will increase by 5% annually, which may help Apple sell up to 235 million iPhones in fiscal 2025 and 262 million iPhones in fiscal 2026.

In the earnings call, when talking about the demand for replacement phones brought about by "Apple Intelligence", Cook said that although this is a "compelling reason to promote upgrades", it is "too early" to draw a conclusion. Cook confirmed the previous news of the postponement of the release of "Apple Intelligence". He said that AI tools will be launched in stages and all the features shown at WWDC will not be available immediately, even on the latest iPhone.

The second driving force is the "new Apple tax" under the "new walled garden". After AI goes online, in Apple's closed ecosystem, users, large model manufacturers and content service providers will establish a new cooperation model, so Apple's revenue sharing will also change. For example, on the user side, Apple's AI function may replace some tool-type apps. Guosen Securities pointed out in a research report that if Apple's intelligence is successful in the future, its bargaining power will continue to rise. This quarter, Apple's software service revenue continued to increase, up 14% year-on-year to US$24.2 billion, and gross profit margin continued to stabilize at 74%.

What is certain is that compared with the many uncertainties in the previous quarter, with the implementation of AI strategy and the promotion of new products, Apple has more weight for growth. However, despite this, Apple’s growth anxiety cannot be alleviated. With AI functions not fully implemented in new phones and the more complex competitive situation in the Chinese market, it is still difficult for the king Apple to "have it all."