Apple(Minutes): Continue to use a hybrid model to optimize costs and performance

Apple (AAPL.O) released its Q1 2025 financial report (for the quarter ending December 2024) after U.S. stock market hours on January 31, 2025, Beijing time. The key points from the conference call are as follows:

Below is the summary of Apple's Q1 2025 performance conference call. For the financial report interpretation, please refer to “Apple: Large Model 'Slimming Down', Hardware Becomes the Final Winner?

1. $Apple(AAPL.US) Core Information Review:

2. Detailed Content of Apple's Financial Report Conference Call

2.1 Executive Statements on Core Information:

1. Financial Performance Overview

Total Revenue: In Q1 2025, Apple achieved revenue of $124.3 billion, a year-on-year increase of 4%, setting a new historical high.

Earnings Per Share (EPS): EPS reached $2.40, a year-on-year increase of 10%, also setting a new historical high.

Service Revenue: Service business revenue reached $26.3 billion, a year-on-year increase of 14%, setting a new historical high. The current number of active devices exceeds 2.35 billion.

Product Revenue: Product revenue was $98 billion, a year-on-year increase of 2%, mainly benefiting from strong performance in iPad and Mac.

Gross Margin: The overall gross margin for the company was 46.9%, with a product gross margin of 39.3% and a service gross margin of 75%.

Operating Expenses: Operating expenses were $15.4 billion, a year-on-year increase of 7%.

Net Income and Earnings Per Share: Net income reached $36.3 billion, a year-on-year increase of 10%; EPS was $2.40, a year-on-year increase of 10%.

Operating Cash Flow: Operating cash flow was $29.9 billion, which includes the impact of $11.9 billion paid this quarter due to decisions related to "national assistance."

2. Performance of Each Product Line

iPhone:

Revenue reached $69.1 billion, flat compared to the same period last year.

Growth was achieved in most markets, especially in markets where Apple Intelligence features were launched.

The iPhone 16 series enhanced the smartphone experience, particularly in battery life and camera performance.

The active install base of iPhones reached a historical high, with the number of upgrading users also hitting a new high.

Mac: Revenue was $9 billion, a year-on-year increase of 16%.

The launch of the M4 chip series and the support of Apple Intelligence drove strong sales of the Mac.

The Mac's installed base reached a historical high, with both new users and upgrade users achieving double-digit growth.

iPad:

Revenue was $8.1 billion, a year-on-year increase of 15%.

The new iPad mini and iPad Air drove sales growth.

More than half of iPad purchasers are first-time iPad buyers.

Wearables, Home, and Accessories:

Revenue was $11.7 billion, a year-on-year decrease of 2%.

Despite facing high baseline challenges from last year's Watch Ultra 2, the installed base of Apple Watch still reached a historical high.

Services:

Revenue reached $26.3 billion, a year-on-year increase of 14%.

Growth was achieved in all geographic regions, with paid subscription users exceeding 1 billion.

Apple TV+ continues to gain market recognition, launching several highly anticipated new series.

3. Progress of Apple Intelligence

Functionality and Market Performance:

Apple Intelligence was first launched in the U.S. in October 2024 and expanded to more countries in December.

The features of Apple Intelligence include writing tools, image generation, visual intelligence, etc., with positive user feedback.

In markets where Apple Intelligence was launched, the sales performance of the iPhone 16 series outperformed markets where it had not been launched.

Future Plans:

In April 2025, Apple Intelligence will expand to more languages and regions, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, Simplified Chinese, etc.

Apple Intelligence will continue to deepen, with plans to launch more powerful Siri features in the future.

4. Enterprise Market and Emerging Markets

Enterprise Market:

The deployment of Apple's products and services in enterprises continues to expand, with companies like Deutsche Bank and SAP leveraging Apple Intelligence to enhance employee and customer experiences.

Emerging Markets:

In emerging markets like India, Apple achieved record sales growth, with the iPhone becoming the best-selling model in the Indian market.

The installed base and sales growth in emerging markets are strong, indicating significant market potential.

  1. Financial Outlook and Capital Return Plan

Second Quarter Outlook:

The company expects revenue in the second quarter to achieve low to mid-single-digit year-on-year growth.

Service revenue is expected to grow low double digits year-on-year.

Gross margin is expected to be between 46.5% and 47.5%.

Operating expenses are expected to be between $15.1 billion and $15.3 billion.

Capital Return Plan:

This quarter, Apple returned over $30 billion to shareholders, including $3.9 billion in dividends and $23.3 billion in stock buybacks.

The board announced a quarterly dividend of $0.25 per share, to be paid on February 13, 2025.

2.2 Q&A

Q: After the launch of Apple Intelligence in certain markets, the sales performance of the iPhone 16 series improved. Can you elaborate on the specific impact of Apple Intelligence on iPhone demand? What are the most commonly used features by users?

A: In the market where Apple Smart was launched, the sales performance of the iPhone 16 series indeed outperformed the markets where it has not been launched. Users widely utilized various features of Apple Smart, including writing tools, image generation (Image Playground and Genmoji), and visual intelligence (such as camera control). Additionally, the Cleanup feature was also very popular, with positive feedback from users after in-store experiences. Currently, the launch time of Apple Smart is still relatively short, but initial signs indicate a positive impact on sales.

Q: Regarding the Chinese market, aside from macroeconomic factors, what challenges does Apple face? For example, does consumer preference for local brands affect Apple's market share?

A: Revenue in the Greater China region decreased by 11% year-on-year, with over half of the decline attributed to changes in channel inventory. Apple Smart has not yet been launched in China, while its launch in other markets has significantly boosted iPhone sales. Furthermore, the Chinese market is one of the most competitive markets globally, and the development of local brands poses a certain competitive pressure on Apple. However, China announced a fiscal stimulus plan in January 2025, covering product categories such as smartphones, which will have a positive impact on Apple's sales in the future.

Q: Is Apple benefiting from reduced computing costs? Please share your views on the DeepSeek incident and its impact on Apple's future costs and innovation.

A: The efficiency gains brought by innovation are positive, and Apple's chips are closely integrated with software, which will continue to provide advantages for the company. Apple has always taken a cautious and planned approach to capital expenditures, and will continue to leverage a hybrid model (i.e., a combination of device-side and cloud-side) to optimize costs and performance in the future.

Q: Will the product form of the iPhone continue to innovate in the future? Are there more changes to look forward to?

A: Apple is optimistic about product innovation, believing that there is still significant room for innovation in the smartphone field. The current product lineup has already demonstrated Apple's innovative capabilities, but there are still more innovations to look forward to in the future.

Q: Has the number of iPhone upgrade users reached a new high, and can this be attributed to the launch of Apple Smart? Additionally, what impact does the ultra-thin design of the iPad Pro have on sales?

A: The launch of Apple Smart has indeed played a positive role in the upgrades of iPhones. In the markets where Apple Smart was launched, the sales performance of the iPhone 16 series outperformed those where it has not been launched. Moreover, the overall performance of the iPhone 16 series surpassed that of the iPhone 15 series in the same period last year, indicating strong demand from users for upgrades.

The iPad overall grew by 15%, mainly due to the strong performance of the iPad Air and entry-level iPad. Although the ultra-thin design of the iPad Pro is well-received by users, the overall sales growth is more attributed to attracting new users. More than half of iPad purchasers are first-time iPad buyers, indicating that the iPad's appeal in the market is continuously increasing Q: Is Apple's growth in emerging markets sustainable? Is the growth in emerging markets enough to offset the decline in the Chinese market? Additionally, why is the gross margin outlook for the second quarter of fiscal year 2025 different from previous years?

A: Apple's growth in emerging markets is strong, particularly in India, where the iPhone has become a best-selling model. Apple plans to open more retail stores in India to further expand its market share. The growth in emerging markets demonstrates the global appeal of Apple products, with significant growth potential in the future.

Regarding gross margin, Apple expects the gross margin for the second quarter of fiscal year 2025 to be between 46.5% and 47.5%. Although gross margins typically rise in the second quarter, this outlook takes into account the negative impact of exchange rates on revenue and gross margin. Additionally, the relative performance of the product mix and service business will also affect gross margin.

Q: Is the channel inventory in the Chinese market too high? What is the market performance expected to be in the coming quarters? Furthermore, has the regulatory environment facing the service business globally impacted Apple's revenue or profit margins?

A: Globally, Apple is satisfied with the channel inventory of the iPhone. In the Chinese market, the reduction in channel inventory is one factor contributing to the decline in revenue, but Apple remains optimistic about the overall market performance.

The service business set a record high in the first quarter of fiscal year 2025, growing by 14%. Despite challenges in the global regulatory environment, Apple's service business continues to perform well, with increasing user engagement. Apple will continue to optimize its service business to address changes in the regulatory environment across different markets.

Q: Is the sales growth of Mac and iPad sustainable? How does Apple Smart impact Mac sales? Additionally, does Apple's supply chain planning in the Indian market reflect growth expectations for that market?

A: Both Mac and iPad achieved double-digit growth in the first quarter of fiscal year 2025, indicating strong market demand. The launch of Apple Smart has positively impacted Mac sales, particularly in artificial intelligence and machine learning tasks, where Macs outperform competitors. Apple will continue to invest resources in product innovation to maintain market competitiveness.

In the Indian market, Apple's supply chain planning considers both domestic market demand and export demand. Apple's manufacturing operations in India not only meet domestic market needs but also support export business. As the Indian market grows, Apple will continue to optimize its supply chain layout to support sustained business development.

Q: Although Apple Smart has a positive impact on the iPhone business, the revenue from iPhones seems to have changed little in the past few quarters. How can this phenomenon be explained? Additionally, will the gross margin of the service business continue to rise?

A: The launch of Apple Smart has positively impacted the iPhone business, especially in markets where the feature has been introduced, with the iPhone 16 series performing better than in markets where it has not been launched. Although iPhone revenue has changed little in the past few quarters, the introduction of Apple Smart lays the foundation for future sales growth The gross margin of the services business reached 75% in the first quarter of the 2025 fiscal year, demonstrating strong growth momentum. Apple will continue to optimize its services business by expanding service offerings and enhancing user experience to drive business growth. The gross margin of the services business will be adjusted based on market performance and changes in the business mix.

Q What are the driving factors behind the growth in Mac sales? Is it due to the innovation of the M4 chip, or the upgrade cycle of the Mac? Additionally, is there further room for improvement in product gross margins?

A The driving factors behind the growth in Mac sales are multifaceted, including the innovation of the M4 chip and product upgrades. The launch of the M4 chip series has significantly enhanced the performance of the Mac, especially in artificial intelligence and machine learning tasks. Additionally, the introduction of Apple Smart has also supported the growth in Mac sales.

The product gross margin reached 39.3% in the first quarter of the 2025 fiscal year, showing strong growth momentum. Although product gross margins are influenced by various factors, including product mix and cost environment, Apple will continue to enhance gross margins by optimizing product design and supply chain management.

Q How can Apple accelerate the market promotion of Apple Smart? Is there a need to increase R&D investment or adjust pricing strategies? Additionally, will Apple's product pricing strategy be adjusted based on market demand?

A The market promotion of Apple Smart will be achieved by expanding the supported languages and regions. As the number of devices supporting Apple Smart increases, user engagement with these features will also rise. Apple will continue to invest resources in R&D to drive technological innovation.

Apple's product pricing strategy will remain robust. Apple will adjust its pricing strategy based on market demand and product value to ensure competitiveness and profitability.

Q How will Apple respond if new tariff policies emerge in the future? Additionally, are there any "killer applications" among the future features of Apple Smart?

A Apple is closely monitoring changes in tariff policies, but currently, there is no further specific information to share.

The future features of Apple Smart will be optimized based on user needs and market feedback. While it is difficult to determine which feature will become a "killer application," Apple will continue to introduce innovative features to enhance user experience.

Q How do you view the lifespan and upgrade cycle of Apple devices? Especially after the sales peak in 2021, will there be opportunities for accelerated upgrades in the future?

A The lifespan of Apple devices varies by user type. Some users frequently update their devices to access the latest technology, while others use them for a longer time. Apple will continue to optimize product design and features to attract users to upgrade their devices. The sales peak in 2021 provides opportunities for future upgrades, and Apple will drive device upgrades through innovation and market strategies.

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