Apple: The thunder that was wrapped around it finally came out.

On the morning of February 3, 2023 Beijing time, Apple (AAPL.O) released its Q1 2023 financial report (ending December 2022) after the US stock market closed.

1. Overall performance: Core data has declined across the board. $Agilent Tech(A.US)pple.US achieved revenue of $117.2 billion this quarter, a year-on-year decrease of 5.5%, lower than Bloomberg's consensus expectation ($121.2 billion). This quarter was lower than market expectations, mainly due to poor performance in the mobile phone, Mac, and wearable businesses. Apple's gross margin this quarter was 43%, a year-on-year decrease of 0.8%, in line with Bloomberg's consensus expectation (42.9%). The software gross profit margin remained stable at over 70%, while the hardware gross profit margin recovered slightly due to the drive of high-priced machines this quarter, but still lower than the same period last year.

2. iPhone: Unable to increase volume and only priced products remain. As the global mobile phone market declines by double digits this quarter, the shipping volume of the iPhone business is also unable to stand alone. Dolphin Analyst estimates that Apple's mobile phone shipment volume this quarter has experienced considerable decline, and can only be compensated to a certain extent by the shipment of high-priced models.

3. Other hardware outside of the iPhone: Lack of innovativeness and weak demand. The Mac business could not withstand the industry's decline of more than 20%. After replenishing channel inventory this quarter, revenue saw a significant decline. The iPad business was the only hardware business that exceeded expectations this quarter, benefiting from the new products released in October. Wearable hardware products lack innovation and cannot boost downstream demand, leading to another decline this quarter.

4. Software services: Steady instead of strong growth. Apple's software services revenue this quarter was $20.8 billion, slightly higher than Bloomberg's consensus expectation ($20.4 billion). As Apple adopts a hardware-software integrated mode, the slowdown in hardware growth in the previous quarter will also affect the user growth rate of Apple's software and service aspect. Although the software business no longer has double-digit growth as in the past, it still maintains growth this quarter.

Overall view: Apple's Q1 report this quarter fell short of market expectations. With the exception of the iPad business and software services, all other businesses showed significant underperformance. Of course, the appreciation of the US dollar exchange rate this quarter has had a negative impact on Apple's non-US dollar income, but there has also been a decline in the US market.

Combined with Dolphin Analyst's risk expectations for Apple's "mobile phone and Mac business" in the previous financial report, they have come as expected in this quarterly report. With the end of Mac's previous inventory replenishment, PC shipments will also return to considering product competitiveness. After the pandemic subsides, the decline in mobile phone shipments cannot continue to be attributed to the impact of the pandemic on the supply side.

Looking at the entire industry, the mobile phone market declined by 17% and the PC market declined by 27% this quarter, with no signs of improvement. However, due to the overall poor market conditions, the industry and companies will also adjust in terms of supply chain, inventory, and costs, speeding up clearance in order to return to the right track.

As for investment in Apple, the recent decline in US bond yields has boosted the overall valuation of technology stocks. Even though the industry has not yet seen a turnaround, the stock price may still receive some support. Dolphin Analyst believes that although there is no sign of recovery in Apple's current performance, it is still expected to regain growth after adjustment.

As for the current industry situation, Dolphin Analyst still maintains his viewpoint, "Android products that started adjusting earlier may be the first to complete inventory clearance, and Apple will also face inventory digestion later, and take light measures."

For the specific analysis of Apple's financial report, please refer to the following:

I. Overall Performance: Core data is comprehensively declining

1.1 Revenue: In the first quarter of 2023, Apple achieved revenue of 117.2 billion U.S. dollars, a year-on-year decrease of 5.5%, lower than Bloomberg's consensus expectation (121.2 billion U.S. dollars). This is the first time Apple's income has declined since 2019, mainly due to the drag of multiple businesses such as mobile phones, Macs, and wearables.

For the decline in revenue this quarter, the company gave explanations for exchange rates and iPhone supply, but in fact, the demand side of electronic hardware may also be affected by the overall industry downturn.

Dolphin Analyst also warned of the risks in the Apple chain in his previous report "Semiconductor Avalanche? True Resilience Will Only Come After the Most Severe Plunge", and said, "Although Apple still achieved contra-trend growth in the third quarter, the risks in the fourth quarter are hard to ignore."

From the perspectives of hardware and software:

Apple's hardware business growth rate returned to negative territory this quarter (-7.7%). The main reason for the decline in hardware this quarter is the nearly 6 billion U.S. dollars decrease in mobile phone business year-on-year. Dolphin Analyst believes that the decline in this quarter was affected by the interference of the epidemic on the supply side, but we cannot ignore the restriction of the overall market weakness on demand. It was a mutual cause of supply and demand downturn.
Apple's software business grew by 6.2% this quarter, maintaining a single-digit growth rate. In the case of a decline on the hardware side, software services can still achieve growth, and this quarter's performance is better than the previous quarter. However, due to the weakness on the hardware side, it is difficult for the software side to return to high growth in the short term.

From a regional perspective: The revenue of all regions of Apple this quarter has shown a comprehensive decline, especially the American market, which has never declined since 2017, also had a decline this quarter. The revenues of Greater China and Europe declined the most this quarter, by 7.3% and 7%, respectively. There were impacts from the appreciation of the US dollar, as well as disruptions due to regional epidemics.

1.2 Gross Margin: Apple's gross margin for the first quarter of fiscal year 2023 was 43%, down 0.8% YoY, which was in line with Bloomberg's consensus expectation (42.9%). The QoQ increase in the company's gross margin was due to the seasonal impact brought by the new products. The company's gross margin has remained above 42% for eight consecutive quarters.

Dolphin Analyst breaks down the software and hardware gross margins as follows:

Apple's software gross margin this quarter continued to stay above 70%. While the hardware gross margin level, which is still the market's primary concern, rebounded to 37% this quarter. The launch of the iPhone 14 series drove sales of high-priced phones and thus boosted the company's gross margin.

1.3 Operating Profit: Apple's operating profit for the first quarter of fiscal year 2023 was USD 36 billion, down 13.3% YoY. The decline in Apple's operating profit this quarter was mainly due to the decrease in gross profit and the increase in expenses.

Apple's operating expense ratio for this quarter was 12.2%, an increase of 1.9pct YoY. Due to the impact of the decline in revenue this quarter, the sales and administrative expense ratio and the R&D expense ratio have increased YoY. From an absolute value perspective, the company's R&D investment this quarter demonstrated a rigid characteristic with a noticeable increase.

With the company's performance showing weakness and costs still increasing, Apple may also pursue cost reductions to increase profit margins.

II. iPhone: It's Hard to Increase Volume, Only the Price Remains

Apple's iPhone business revenue for the first quarter of the fiscal year 2023 was USD 65.8 billion, down 8.2% YoY, which was lower than Bloomberg's consensus expectation (USD 68.4 billion). This quarter, the overall mobile phone market declined by 17.1%, and at the same time, the company encountered supply-side challenges. Under the dual influences of supply and demand, Apple's smartphone business has also experienced a decline.

From the perspective of quantity and price, Dolphin Analyst looks at the major growth sources of iPhone business in this quarter:

iPhone shipments: Before this quarter's financial report was released, IDC had already disclosed the shipment data for each brand in the quarter. Affected by factors such as the epidemic and inflation, the global smartphone market in the fourth quarter of 2022 decreased by 17.1% year-on-year. With its own product strength, Apple's market share continued to increase from 23.4% to 24.1%. However, there was still a double-digit (14.8%) decline in this quarter.
iPhone average selling price: Due to the release of IDC data, this quarter's iPhone shipments have been digested by the market. Combined with iPhone business revenue and shipment volume calculation, this quarter's iPhone average selling price continues to grow year-on-year, reaching around 900 US dollars. The increase in iPhone's average selling price this quarter was mainly due to the increase in the proportion of relatively high-priced iPhone 14 Pro series shipments, bringing structural growth.

Other hardware apart from iPhone: Lack of innovation and weak demand

3.1 Mac business

In the first quarter of the 2023 fiscal year, Mac business revenue was 7.7 billion US dollars, a year-on-year decrease of 28.7%, lower than Bloomberg's consensus expectation (9.72 billion US dollars). Regarding the significant lower-than-expected Mac business this quarter, Dolphin Analyst has already pointed out in the previous financial report evaluation "Apple: The Only Giant That Didn't Fall, How Much Longer Can It Last?" that "such high growth in this quarter is unsustainable, and Apple will also be dragged down by the overall market downturn after the supply-side capacity is released."

According to IDC's report, the global PC market's shipment volume in this quarter decreased by 27.5% year-on-year, and Apple's shipments in this quarter only decreased by 1.3%, far better than its peers. The larger sequential decline in shipments is mainly due to the fact that the Mac products have had a short-term surge in demand due to some inventory replenishment needs in the previous quarter. This part of demand weakened after the inventory was replenished this quarter. 3.2 iPad Business

In Q1 of FY2023, the iPad business revenue was $9.4 billion, a year-on-year increase of 29.6%, exceeding Bloomberg's expectations of $7.78 billion. The iPad business was the only hardware project that exceeded expectations this quarter, and the release of the new iPad product in October boosted the business.

3.3 Wearables and Other Hardware

In Q1 of FY2023, the revenue of the wearable and other hardware business was $13.5 billion, a year-on-year decrease of 8.3%, lower than Bloomberg's expectations of $15.3 billion. Apple's wearable and other hardware business saw negative growth again in this quarter, mainly due to a soft demand for wearable hardware in the market. Even though the company launched some new products in the second half of the year, the market response was not optimistic, and there were rumors of order adjustments.

Other hardware products such as wearables, home use, and accessories are optional consumption mainly driven by innovation. The macroeconomic environment has a significant impact on optional consumption. However, the lack of innovation in wearable and other hardware products now hinders the continued growth of demand. Although Apple has released new products this time, no explosive products have appeared. It's hard for the wearable and other hardware business to return to its high growth before the next explosive product/innovation appears.

4. Software Services: Turning from High Growth to Stability

In Q1 of FY2023, software services revenue was $20.8 billion, a year-on-year increase of 6.2%, slightly exceeding Bloomberg's expectations of $20.47 billion. Although the growth of software services was only single-digit, it is still the most stable part of the company.

Dolphin Analyst believes that the slowdown in Apple's software service revenue growth is mainly due to the dual impact of volume and price. ①Volume aspect: This is because Apple has an integrated model of hardware and software, and when the high growth of hardware in the previous quarter is no longer sustained, it will also affect the growth rate of Apple's software service users, and Apple's software service growth rate has shown continuous decline; ②Price aspect: Under the influence of the macroeconomic background, consumer willingness to pay for services has been affected to some extent.

In software services, the gross profit margin level of software services is the most concerning. In Q1, the gross profit margin of software services achieved 70.8%, stabilizing above 70%. In the overall downturn of the Internet advertising industry, Apple can still achieve a gross profit margin of more than 70%, indicating the importance of the hardware entry.

Dolphin Apple Historical Article Review:

Financial Report Season

Oct 28, 2022 Phone Meeting: "Apple: Not So Busy High Season, Can The Roll King Escape The Decline? (FY2022Q4 Phone Meeting)"

Oct 28, 2022 Financial Report Review: "Apple: The Only Giant Who Didn't Fall, How Much Longer Can They Keep It Up?"

Jul 29, 2022 Phone Meeting: "With Only iPhone Business as a Cover, How Will Management Explain? (Apple Phone Meeting)"

Jul 29, 2022 Financial Report Review: "Slightly Gaining iPhone, Unexpectedly Became Apple's Last "Fig Leaf""

Apr 29, 2022 Phone Meeting: "Multiple Factors Trouble, Apple Gives Weak Guidance (Phone Meeting Summary)"

Apr 28, 2022 Financial Report Review: "Apple That Earns Crazy Money, Should Worry About Growth！| Financial Report Season"

Jan 28, 2022 Phone Meeting: "Apple: Supply Chain Crisis Eases, Innovation Ignites True Technology (Phone Meeting Summary)"

Jan 28, 2022 Financial Report Review: "Apple's Hard Strength, Sweet and Fragrant Again | Reading Financial Reports"

Oct 29, 2021 Phone Meeting: "After Failing Performance Expectations, What Did Apple's Management Talk About?"

Oct 29, 2021 Financial Report Review: "[Expectations Falling Through, Apple's Answer Was Embarrassing](https://longbridgeapp.com/topics/1263392? invite-code=032064)》

On July 28th, 2021, Telephone Conference "Apple's Five-A-Day Super Expectations" and Review of Financial Results "Apple: Definition of Excellence, Five-A-Day Super Expectations".

On April 29th, 2021, Telephone Conference "Apple 2021Q2 Performance Meeting Minutes" and Review of Financial Results "Excellent companies always exceed expectations, and Apple in the new quarter is tough enough!".

On April 25th, 2021, Financial Results Preview "After the first quarter report with domineering, will Apple's new quarterly financial report continue to erupt?".

Depth

On December 29th, 2022, "Semiconductor Avalanche? True Elasticity Only After the Most Severe Decline".

On November 11th, 2022, "Good Performance Still Falls, Is Apple Really Sweet?".

On June 17th, 2022, "Consumer Electronics "Mature", Apple Hard To Survive, Xiaomi Endure".

On June 6th, 2022, "Is the US Stock Market Shaken, and are Apple, Tesla, and NVIDIA Being Misunderstood?".

On February 28th, 2022, "Apple: Passing on Cost Pressures, We Only Serve You!".

On December 6th, 2021, "Apple: Double-Wheeled Drive Gradual Weakness, "Limp" Hardware Urgently Needs Large-Scale Renewal".

Live

On September 8th, 2022, "Apple Autumn 2022 Release Conference". 2022 April 29, "Apple Inc. (AAPL.US) 2Q 2022 Earnings Conference Call"

2022 January 28, "Apple Inc. (AAPL.US) 1Q 2022 Earnings Conference Call"

2021 October 29, "Apple Inc. (AAPL.US) 4Q 2021 Earnings Conference Call"

2021 October 19, "Apple October New Product Launch Event"

2021 September 15, "Apple 2021 Autumn Product Launch Event"

2021 July 28, "Apple Inc. (AAPL.US) 3Q 2021 Earnings Conference Call"

2021 April 29, "Apple Inc. (AAPL.US) 2Q 2021 Earnings Conference Call"

2021 April 21, "Apple Spring New Product Launch Event"

Risk Disclosure and Statement in This Article: Dolphin Investment Research Disclaimer and General Disclosure.