Can Apple turn the tables through emerging markets such as India? (Apple FY2023Q2 earnings call)
On the early morning of May 5, 2023 Beijing Time, after-hours trading in the US stock market published the Q2FY23 financial report (as of March 2023) for Apple (AAPL.O).
I. Q2FY23 Financial Report Summary
1. Revenue End: Apple US revenue was $94.8 billion, YoY-2.5%, higher than market expectations (2.42% beat).
2. Gross Profit End: Gross profit was $42 billion, YoY-1.4%; gross profit margin was 44.3%, YoY+0.6ppt, basically in line with market expectations (+0.2ppt inline).
3. Net Income End: Net income was $24.2 billion, YoY-3.4%, higher than market expectations (6.73% beat); net profit margin was 25.5%, YoY-0.2ppt.
4. Q3FY23 Guidance:
(1) Revenue
If the macroeconomic outlook does not deteriorate, Q3 revenue growth will be similar to Q2, and foreign exchange will continue to be a disadvantageous factor. It is expected that the same negative impact on revenue will be 4 percentage points.
Q3 services revenue growth will be similar to Q2, and digital advertising and mobile gaming and other field will continue to face macroeconomic resistance.
(2) Gross Profit Margin
Between 44% and 44.5%.
(3) Operating Profit
Approximately -$250 million, excluding any potential impact of minority investments calculated at market prices, and the tax rate is approximately 16%.
For detailed financial information, please refer to Changqiao Dolphin's commentary "Apple: The Real 'King of Machines' in the Headwind".
II. Management Remarks
(1) Performance Review
In Q2FY23, revenue was RMB 94.8 billion, exceeding the company's expectations. Among them, service revenue reached a historical high, and iPhone revenue reached a historical second quarter high. Good performance in emerging markets, achieving historical best revenue in Mexico, Indonesia, the Philippines, Saudi Arabia, Turkey, and the UAE, and achieving historical best second-quarter revenue in markets such as Brazil, Malaysia, and India.
Q2FY23 continue to face the headwind of foreign exchange (impact exceeding 500 basis points), as well as continuous challenges related to the macroeconomic environment, therefore, revenue decreased by 3% YoY. On the basis of fixed exchange rates, total revenue and the vast majority of markets are growing. Despite the challenges, we will continue to conduct long-term management and always represent customers who rely on Apple products.
- iPhone
Apple’s iPhone series set a new Q2 revenue record with $51.3 billion. The long battery life and advanced camera of the iPhone 14 and 14 Plus continue to win over users, while pro users continue to praise the strongest camera system ever in an iPhone. In March of this year, satellite emergency rescue services were expanded to six new countries, currently offering this important service in 12 countries and regions.
- Mac
Revenue of $7.2 billion met the company’s expectations. As with other product lines, the Mac also faces macroeconomic and forex headwinds. Last year’s successful promotion of the M1 chip in the Mac product line made for a high base effect in the year-over-year comparison. Progress in energy efficiency and performance continues to surprise users. Many customers are raving about the professional-grade power packed into an ultra-compact design. Users are amazed by the core power and speed of the MacBook Air and MacBook Pro powered by the M2, which can handle the most demanding workloads.
- iPad
Revenue of $6.7 billion met the company’s expectations. Like the Mac, iPad revenue was impacted by macroeconomic challenges, forex headwinds, and a high year-over-year base effect from last year’s introduction of the M1-powered iPad Air. The versatility of the iPad remains its biggest advantage, for example, students can learn on the same series of devices.
- Wearables, Home and Accessories
Revenue of $8.8 billion.
With its special health and safety features, the Apple Watch attracts athletes and daily users alike. As summer travel season approaches, there is no better airborne or on-the-go companion than AirPods.
- Services
Revenue of $20.9 billion set a new record.
Historic revenue records were achieved in the App Store, Apple Music, iCloud, and payment services, with more than 975 million paid subscriptions.
In terms of Apple TV+, last quarter saw continued critical success with shows like Shrinking, The Big Door Price, Ted Lasso S3, Tetris, and the upcoming Killers of the Flower Moon directed by Martin Scorsese. Since its launch three years ago, Apple TV+ has received widespread international acclaim, with more than 1,450 nominations and over 350 awards. The Boy, the Mole, the Fox and the Horse won Best Animated Short at the 95th Academy Awards. Apple TV+ has successfully completed its first season of 10 years of cooperation with the Major League Soccer, providing fans with the ability to watch every game. As the baseball season unfolds, Apple TV+ users can watch their favorite teams' games on Friday evenings, whether on AirPods or HomePod, offering high-quality sound experiences that can truly immerse users in the symphony of live concerts.
This quarter, the Apple Music Classical service has been launched for classical music enthusiasts, with special music packages that can be enjoyed on both AirPods and HomePod, providing users with a high-quality sound experience that makes them feel like they're actually attending a symphony performance.
In March, Apple Pay Later was launched with users' privacy and financial health in mind and allows purchases to be split into multiple payments with no interest or additional fees. Last month, the company launched the Apple Card Savings account, allowing users to get more value from their Apple Cards.
6. Retail Store
In the United States, the Shop With a Specialist Over Video service was launched for video shopping. In addition, the first Apple stores were recently opened in Mumbai and Delhi, India.
7. Sustainable Development
Investing in education to provide students with the skills needed to shape the future. Creating opportunities for communities of color through racial equality and justice initiatives.
In April, Earth Day was celebrated, and the company's global manufacturing partners now support over 13 GW of renewable energy, a nearly 30% increase from last year alone, which is equivalent to avoiding 17.4 million tons of carbon emissions and reducing nearly 3.8 billion cars on the road. Additionally, a $200 million investment was made in the Restore Fund, which supports innovative, scalable, and nature-based carbon removal projects that aim to remove 1 million tons of carbon each year. These are just the latest steps taken by the company to achieve its 2030 goals of achieving carbon neutrality in the supply chain and device lifecycle. Additionally, renewable energy is being promoted throughout the supply chain, and more recycled materials are being procured. Last month, it was announced that by 2025, all Apple-designed batteries will contain 100% certified recycled cobalt, still committed to using only recycled and renewable materials in products in the future.
(II) Q3FY23 Outlook
1. Revenue
If the macroeconomic outlook does not deteriorate, Q3FY23 revenue growth is expected to be similar to Q2FY23, and foreign exchange will continue to be a negative factor, with a projected 4 percentage point negative impact on year-on-year revenue.
Q3FY23 service growth is expected to be similar to Q2FY23, while digital advertising and mobile gaming sectors continue to face macroeconomic obstacles.
2. Gross Margin
Between 44% and 44.5%.
3. Operating Expenses
Between US $13.6 billion and US $13.8 billion. 4. Operating profit
The operating profit is approximately negative 250 million US dollars, excluding any potential impacts from minority investments measured at fair value, with a tax rate of about 16%.
5. Dividends
A cash dividend of 0.24 US dollars per ordinary share has been declared and will be paid to registered shareholders as of May 15, 2023, on May 18, 2023.
III. Q&A Session
Q: Q1FY23 supply chain disruption led to reduced demand, while Q2FY23 iPhone business experienced a strong YoY growth of 2%. Does this mean that demand from users has been postponed until 2-3Q?
A: It is difficult to quantify, but it was able to regain part of its sales in Q2FY23. The iPhone Q2FY23 performance accelerated compared to Q1FY23, and the entire Q2FY23 production level reached the company's expectations, with no supply issues in Q2FY23.
Q: The significance and strategy of the Indian market
A: The company set a quarterly record in India with strong double-digit YoY growth.
India is one of the company's main focuses, and the business has been expanding over time to serve more customers: three years ago, the online Apple Store was launched; a few weeks ago, offline Apple Stores were opened in Mumbai and Delhi; and there are channel partners in the country as well. Overall, India has many people entering the middle class, which is currently a turning point.
In other emerging markets, despite facing forex headwinds, many different places have set historical records, such as in Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, and the UAE, as well as setting records for the best quarter in Brazil, India, and Malaysia.
Overall, considering low market share and demographic dynamics in emerging markets, the company has great opportunities in these markets.
Q: iPhone installation volume
A: In January, it was announced that the active device installation base has exceeded 2 billion. In Q2FY23, new records were set in every regional division and major product category, despite a decrease in sales (especially in Mac and iPad), proving overall customer satisfaction, engagement, and loyalty.
The iPhone has a base of over 1 billion active devices, so changes between quarters such as upgrade rates depend on macroeconomic factors, but the scale and growth rate of installations are good.
Q: How to increase the number of Apple devices per iPhone user?
A: Design products to work seamlessly, so you can start something on one device and finish it on another.
Many people have multiple Apple devices, which is evidence of customer satisfaction and loyalty to product design.
Q: Opinion on Generative AI
A: No comments on the product roadmap.
Significant progress has been achieved in integrating artificial intelligence and machine learning into the Apple ecosystem, weaving AI with products and functionality for years. Fall detection, collision detection, and electrocardiogram are great life-saving features, so AI is of great significance, and we will continue to cautiously integrate products and AI.
Q: The impact of production relocation to areas outside China
A: Supply chains are globalized and investing is taking place all over the world, and we will continue to look for ways to optimize supply chains to ensure the best possible products and services for customers.
Despite the repeated outbreak of the pandemic, chip shortages, and macroeconomic downturns, supply chains have shown incredible resilience over the past three years.
Q: Has the sales ratio of Q2FY23 Pro recovered to normal, and what is the level of channel inventory for iPhone?
A: It is difficult to quantify, but Q2FY23 has indeed won back some of the sales.
Satisfied with the current level of iPhone channel inventory.
Q: What is the expansion boundary of the payment ecosystem? Is the payment ecosystem seen as an independent revenue opportunity or as a way to make devices more closely integrated with users?
A: What we are trying to do in the payment process is to focus on helping people live healthier lives. For example, the savings account interest rate is very attractive. The company is very user-focused, actively listens to their opinions, and coordinates roadmap around "buy now, pay later."
Q: I heard that the upgrade demand of operators in Q2FY23 is weak, can you share the latest situation of demand?
A: We do not discuss what we saw in 3Q other than the Q3FY23 guidance.
The operator you mentioned should be the American operator. In terms of the geographical distribution of Q2FY23 performance, the Americas (mainly the United States) had a relatively low proportion, mainly due to macroeconomic effects and more promotional activities in the same period last year.
The real star of Q2FY23 is the emerging market, and we are proud of the achievements made there.
Q: In terms of services, what is the impact of the macroeconomic environment on consumer behavior?
A: Of course, the focus is on advertising and mobile gaming.
Outside the fields of advertising and mobile gaming, customer behavior remains fairly consistent. With the launch of new services such as Apple Pay and Apple Card, adoption is growing very strong.
Cloud is a continuously growing area, and users want to store more photos and videos on their devices, so cloud services are being adopted.
The pay-for-subscription model continues to grow strongly around the App Store, with over $975 million in paid subscriptions on the platform, nearly double what it was three years ago.
Q: Measures to resume growth
A: The macro environment primarily affects the digital advertising and mobile gaming areas, while growth rates in other areas are very healthy.
Q: Share of different markets
A: The momentum in emerging markets is strong.
Since the share in emerging markets is relatively low, it provides long-term development opportunities, such as contributing to the growth of the installation base.
Q: Q3FY23 gross margin guidance is 44%-44.5%, even under the background of a decline in sales, why can we maintain high gross margins, and why is the guidance range 50 basis points rather than 100 basis points?
====== A: We are currently guiding towards achieving a stable and high gross margin. We are satisfied with the current gross margin, which is the first time in several quarters. We expect forex to have no impact on gross margin compared to the previous quarter, although forex remains a headwind to our revenue.
Seasonal leverage losses are expected to be offset by cost savings, hence the profit guidance.
The 50 basis point range in guidance is due to the fact that there are 14 weeks in Q1FY23 of this fiscal year, which has been shifted in the calendar year, providing more insight into the 3Q profit margin.
Q: Is the high growth of the Indian market comparable to China 10 years ago?
A: Every country has its own journey. India does have a lot of people entering the middle class and we hope some of them will buy iPhones, and the results have been good so far.
Q: What is the split between enterprise and consumer income, and how does enterprise IT spending affect it?
A: We have made estimations internally.
Enterprise business is growing, but in terms of income currently, it is definitely dominated by a consumer company.
Q: What are the opportunities in India in terms of services?
A: There are comprehensive opportunities.
It is clear that ARPU for TV, movies, music, etc. in India is much lower than other regions, hence there is a great opportunity.
Q: What is the impact after the easing of epidemic prevention measures in China?
A: China's revenue in this quarter was down 3.4% YoY, but actually increased when calculated in fixed currencies and is also faster than 1Q.
According to surveys, iPhone occupies four of the top five best-selling smartphones in China. In all third-party data, Apple has gained market share in the smartphone field in Q2FY23.
In terms of new buyers, about six out of 10 Mac customers are buying Mac for the first time in China; the same is true for iPad; and more than three-quarters of customers are buying Apple Watch for the first time.
This quarter, the service business also achieved a historical record in China.
Q: What is the pricing guidance for components?
A: Component prices decreased in Q2FY23 and are expected to continue to decline in Q3FY23.
Q: Will Q3FY23 sales revenue be below seasonal average levels?
A: The revenue level of Q3FY23 will be similar to that of Q2FY23; the introduction of iPhone SE and iPad Air in Q3FY23 will have a larger YoY base effect.
Q: Is Apple a beneficiary of the chip bill or R&D tax credits?
A: Partners are direct beneficiaries and Apple is an indirect beneficiary.
Q: Can you explain the Q3FY23 performance guidance and Apple's biggest growth opportunities?
A: The YoY situation of Q3FY23 will be better than that of Q2FY23.
Growth opportunities include insufficient growth of active devices and service penetration rates.
Financial Reports Season
May 5, 2023 financial report review "Apple: The Real "Machine King" Who Turns the Tide Against the Wind"
February 3, 2023 financial report review "Apple: The Thunder That has been Wrapped Around It Finally Comes Out"
February 6, 2023 conference call "Limited Impact of Demand Shock, Guidance Restores Confidence (Apple FY2023Q1 Conference Call)"
October 28, 2022 conference call "Apple: The Booming Season is Not Booming, and the "Roller King" Cannot Escape Decline (FY2022Q4 Conference Call)"
October 28, 2022 financial report review "Apple: The Only Giant Who Hasn't Fallen, How Long Can It Last?"
July 29, 2022 conference call "How will the management explain with only iPhone business covering shame (Apple Conference Call)"
July 29, 2022 financial report review "The Slightly Growing iPhone Has Become Apple's Last "Loincloth""
April 29, 2022 conference call "Apple Gives a Soft Guidance Amid Multiple Challenges (Conference Call Summary)"
April 28, 2022 financial report review "Apple Crazy Money Making, Should Worry About Growth Now!｜Financial Reports Season"
January 28, 2022 conference call "Apple: Supply Crisis Eases, Innovation Ignites True Technology (Conference Call Summary)" On January 28, 2022, the financial report commented on "Apple's Hard Power, Sweet and Fragrant | Read Financial Report".
On October 29, 2021, there was a telephone meeting on the business performance expectations falling short, "What did the Apple management team communicate?".
There was a financial report review on October 29, 2021, "Apple's Answer Sheet Embarrassed Due to Expectations Falling Short".
On July 28, 2021, there was a conference call, "Apple's management interpretation (with full Q&A) following the surprise in all five categories.".
There was a financial report review on July 28, 2021, "Apple: An Excellent Definition, Surpassing Expectations in All Five Categories".
There was a telephone meeting on April 29, 2021, "Apple's 2021Q2 Business Performance Summary".
On April 29, 2021, there was a financial report review, "Excellent companies always surpass expectations, and the new financial quarter's Apple is hard enough!".
On April 25, 2021, there was a preview of the financial report, "After revealing its dominance in the first quarter, will Apple continue to perform brilliantly in the new quarter?".
Depth
On December 29, 2022, "After the most severe drop, will there be real elasticity in the semiconductor avalanche?".
On November 11, 2022, "Is Apple really sweet, even if its performance is good, it still falls?".
On June 17, 2022, "Consumer electronics are at their peak, Apple is strong, and Xiaomi is struggling".
On June 6, 2022, "Did the US stock market experience a huge shock, and were Apple, Tesla, and Nvidia wrongfully killed?". On February 28, 2022, "Apple: Praise for Passing on Cost Pressures!" (https://longbridgeapp.com/news/56609825)
On December 6, 2021, "Apple: Dual-Drive Weakness Becoming Apparent, Urgent Need for Strong Standalone Hardware" (https://longbridgeapp.com/news/51510803)
Live:
On September 8, 2022, "Apple 2022 Fall Launch Event" (https://longbridgeapp.com/lives/115957?channel=n115957)
On April 29, 2022, "Apple Inc. (AAPL.US) 2022 Second Quarter Earnings Conference Call" (https://longbridgeapp.com/lives/6757?channel=n6757)
On January 28, 2022, " Apple Inc. (AAPL.US) 2022 First Quarter Earnings Conference Call" (https://longbridgeapp.com/lives/6757?channel=n6757)
On October 29, 2021, "Apple Inc. (AAPL.US) 2021 Fourth Quarter Earnings Conference Call" (https://longbridgeapp.com/lives/3097?channel=nl3097&invite-code=032064)
On October 19, 2021, "Apple October Product Launch Event" (https://longbridgeapp.com/lives/2794?channel=nl2794&invite-code=032064)
On September 15, 2021, "Apple 2021 Fall Launch Event" (https://longbridgeapp.com/lives/2429)
On July 28, 2021, "Apple Inc. (AAPL.US) 2021 Third Quarter Earnings Conference Call" (https://longbridgeapp.com/lives/747)
On April 29, 2021, "Apple Inc. (AAPL.US) 2021 Second Quarter Earnings Conference Call" (https://longbridgeapp.com/lives/28)
On April 21, 2021, "Apple Spring Product Launch Event" (https://longbridgeapp.com/lives/21)
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