Apple Q3 Earnings: AI will boost iPhone replacement cycles, Greater China's Weakness Due To FX Headwinds
AInvestFriday, Aug 2, 2024 6:07 am ET
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After the US stock market closed on August 1st, tech giant Apple announced its financial results for the third quarter of the 2024 fiscal year (second quarter of calendar year 2024), surpassing market expectations.

Apple's revenue for the quarter grew by 4.9% year-over-year to $85.78 billion, exceeding market expectations of $84.46 billion. Net profit increased by 7.9% year-over-year to $21.45 billion. Diluted EPS (earnings per share) rose by 11% to $1.40, higher than the expected $1.35.

Revenue from all four major hardware products (iPhone, iPad, Mac, and wearable devices) exceeded expectations. iPad showed particularly strong performance with a revenue increase of 23.7% year-over-year to $7.16 billion, surpassing the expected $6.63 billion.

Software services revenue increased by 14%, slightly exceeding expectations.

In terms of regional performance, Greater China lagged with a 6.5% year-over-year decline in revenue, falling out of the top five in shipment volumes. Other regions reported year-over-year growth.

Company executives anticipate similar growth rates for the next quarter compared to the current one.

Regarding capital expenditures, CEO Tim Cook noted a gradual increase and significant investment in AI, including the transfer of many employees from other departments. Apple's investments in data centers employ a mixed approach with both proprietary and partner-operated facilities, where partners cover capital expenditures while Apple pays operational costs.

Apple's investments in AI have shown results, notably enhancing the performance of products like the Apple Watch, reflected positively in the company's financial performance.

AI will boost iPhone replacement cycles

Hardware products, powered by AI, are driving the replacement cycle among users and receiving strong reviews for their robust capabilities.

The iPhone remains among the best-selling smartphones in major markets globally, including the US, China (major cities), UK, Germany, Australia, and Japan, according to a Kantar survey. During the earnings call, Tim Cook highlighted significant improvements in the iPhone 15 series compared to the iPhone 14 series.

Apple's phased rollout of AI is expected to integrate ChatGPT into Apple Intelligence by the end of 2024. Currently in the iPhone 15 cycle, it's challenging to predict specific replacement cycles, but the introduction of AI is expected to drive upgrades due to its high demands on hardware and software, which only the latest models can meet.

Others Hardware have strong product capabilities

MacBook continued to perform strongly, attracting half of its users as newcomers.The new iPad Pro and iPad Air were well-received, with the iPad product line surpassing Mac in revenue this quarter. Half of iPad buyers were new users.

Wearable devices showed steady performance, with two-thirds of buyers being new users. Institutions like Boston Children's Hospital and Lufthansa utilize Apple Vision Pro for innovative spatial training experiences. Cook highlighted the unique nature of wearable devices, making direct comparisons challenging with other hardware categories.

User satisfaction for all these hardware products remained above 96%, demonstrating Apple's strong product capabilities.

Software services continued to grow with an expanding installation base, reaching new highs in paid subscribers and transaction accounts. Apple TV+ received 72 Emmy Award nominations for its 16 programs, reflecting high-quality content that received favorable user feedback. Apple Music, Fitness+, and other services also performed well.

Greater China: impacted by exchange rate headwinds, products performance is strong

Performance in Greater China was impacted primarily by exchange rate headwinds, with revenue declining 6.5% year-over-year for the quarter. However, at fixed exchange rates, the decline was less than 3%. Most of the sales decline was attributed to adverse exchange rates rather than product-related issues.

Excluding the impact of exchange rates, this quarter's performance was better than the first half of the fiscal year. iPhone's installed base in Greater China reached a historical high, with record numbers of upgrades. According to the latest Kantar survey, iPhone ranked among the top three smartphones in terms of sales in the Chinese market this quarter. Since its release date, the iPhone 15 series has shown superior performance compared to the iPhone 14 series over the same weeks. These are positive signals for performance improvement.

In mainland China, products like Mac, iPad, and Apple Watch attracted significant numbers of new users. iPad sales in Greater China showed strong growth momentum consistent with global trends. Long-term prospects for Apple in the Chinese market are highly favorable.

Legal and Regulatory Issues

Legal and regulatory issues, including compliance with the EU's Digital Markets Act, led Apple to make adjustments to its App Store in the EU region, which developers largely accepted. Performance in the EU region for service business and app stores has been excellent. Discussions with the European Commission are ongoing, and the impact is manageable, with EU app store revenue accounting for approximately 7% of total revenue.

Apple Intelligence may face regulatory issues in certain regions like mainland China and the EU. Cook mentioned constructive discussions with regulatory agencies in these areas, aiming for swift deployment of Apple Intelligence while respecting local regulatory requirements and timelines.

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