Apple's Q3 revenue has declined for four consecutive quarters, the longest in 22 years. The outlook for the next quarter is not optimistic, with a 4% drop in after-hours trading. | Earnings Report

After the US stock market closed on Thursday, November 2nd, Apple, the world's largest publicly traded company with a market value of nearly $2.8 trillion, and a consumer electronics and technology giant, released its fourth-quarter earnings report for the 2023 fiscal year (i.e., the third quarter of the 2023 calendar year), marking the end of the earnings season for large technology stocks.

Analysts pointed out that its massive market value accounts for about 7% of the weight of the S&P 500 index, and changes in its stock price can have an impact on the overall market performance. As a consumer electronics giant, this earnings report and comments on the year-end shopping season can reflect clues about the overall economic health and consumer spending intentions.

Apple's iPhone and services revenue reached new highs in the quarter, and although total revenue declined year-on-year for four consecutive quarters, it met market expectations. Except for the iPhone, every hardware revenue declined year-on-year. After the market closed, the stock price briefly rose by more than 2%, but it fell more than 4% during the earnings conference call.

This is because company executives predicted that iPad and wearable devices may experience a "significant decline" in the current quarter (the first quarter of the 2024 fiscal year), although Mac revenue is expected to accelerate growth and iPhone revenue is expected to continue to grow year-on-year, with a growth rate similar to the same period last year.

Apple also stated that total revenue for the December quarter will be comparable to the same period last year, when it declined by 5% year-on-year. However, Wall Street believes that within the three months including the heaviest holiday shopping period, total revenue may recover year-on-year to $123.1 billion, which represents poor guidance.

Apple's revenue declined year-on-year for four consecutive quarters for the first time since 2001, but EPS achieved double-digit growth and stopped declining for two quarters

As of the end of September, Apple's total revenue for the fourth quarter was $89.5 billion, slightly better than the market's expected $89.3 billion. It declined by 0.7% year-on-year, slightly better than the 1.4% decline in the previous quarter, and increased by 9.4% quarter-on-quarter. This is the first time since 2001 that Apple's revenue has declined year-on-year for four consecutive quarters.

After experiencing a year-on-year decline in profitability for two consecutive quarters, Apple's EPS for the fourth quarter was $1.46 per share, exceeding the expected $1.39 per share. It increased by 13% compared to the same period last year, with a net profit of $22.96 billion, better than the expected $21.8 billion. The gross margin was 45.2%, higher than the expected 44.5% and the previous quarter's 44.5%.

In addition, in the 2023 fiscal year, Apple's total revenue was $383.29 billion, slightly exceeding the market's expected $382.9 billion. It declined by 3% year-on-year, and the earnings per share was $6.13, exceeding the expected $6.06. It increased by 0.3% compared to last year's $6.11.

Record high revenue from iPhone in the fourth quarter, historic high in service revenue, decline in other hardware revenue, and a significant drop of 34% in Mac sales.

In the fourth quarter, the sales of the "flagship product" iPhone, which accounts for half of Apple's total revenue, reached $43.81 billion, in line with expectations, with a MoM increase of 10.4% and a YoY increase of 2.8%. The service revenue, which has the highest profit margin and accounts for a quarter of the total revenue, reached $22.31 billion, surpassing the expected $21.35 billion, with a YoY increase of 16.3%. iPhone revenue reached a record high in the fourth quarter, and service revenue reached a historic high.

However, the revenue from Mac computers, which accounts for 10% of the total revenue, was $7.61 billion, far below the expected $8.63 billion, with a YoY drop of 33.8%. The revenue from iPad tablets was $6.44 billion, better than the expected $6.07 billion, with a YoY decline of 10.2%. The revenue from wearable devices, home and accessories, including wireless headphones, smartwatches, and smart speakers, was $9.32 billion, lower than the expected $9.43 billion, with a YoY decline of 3.4%.

This indicates a significant improvement in the YoY decline of iPhone revenue in the fourth quarter compared to the previous quarter, showing that the release of the iPhone 15 new model about a week ago has brought some boost to the overall performance. As a result, the quarterly revenue increased by 10% MoM, and the earnings per share increased by nearly 16% MoM. At the same time, service revenue performed significantly better than the single-digit percentage growth in the previous four quarters and reached a new high for three consecutive quarters.

Services include the App Store, audio and video streaming services Apple Music and Apple TV+, iCloud storage, AppleCare warranty, advertising revenue from the licensing agreement with Google search engine, Apple Pay, and payment fees for other products. As the iPhone has become a more mature product, services have become an important area of diversification for Apple's business and even an earlier reflection of consumer demand trends.

At the same time, this also indicates that iPad revenue has declined YoY for the seventh time in eight quarters, and Mac revenue has declined for the fourth consecutive quarter and the fifth time in six quarters. This echoes the comments made by Apple CFO Luca Maestri during the August earnings report, stating that the revenue trend for the September quarter is similar to the 1% YoY decline in the June quarter. iPhone and service revenue will accelerate from the June quarter, but Mac and iPad sales will decline by double-digit percentages compared to the same period last year. The gross margin for the September quarter is expected to be 44% to 45%. Only revenue in the Americas market increased YoY, while revenue in Greater China dropped by 2.5%. Cook stated that Q3 revenue from mainland China reached a new high for iPhone.

By region, revenue from Greater China, which contributes 20% of Apple's annual revenue, was $15.08 billion in the fourth quarter, lower than the expected $17 billion, a YoY decrease of 2.5% and a MoM decrease of 4.3%, significantly weaker than the YoY growth of 7.9% in the previous quarter.

This shows that there are challenges in the sales prospects of Apple products in its third-largest market. Morgan Stanley analyst Samik Chatterjee pointed out this week that in recent days, as concerns about the loss of market share of iPhone 15 in China and the weakening momentum of global consumer spending have intensified, the sentiment towards Apple's stock has become more challenging.

Revenue from the largest market, the Americas, in the quarter was $40.12 billion, a YoY increase of 0.8%, better than the YoY decrease of 5.6% in the previous quarter; revenue from the second-largest market, Europe, was $22.46 billion, a YoY decrease of 1.5%; revenue from Japan was $5.5 billion, a YoY decrease of 3.4%; revenue from other Asia-Pacific regions was $6.33 billion, a YoY decrease of 0.7%. In other words, only the sales volume in the Americas market increased in the past quarter.

However, Apple CEO Cook expressed optimism about Asian demand during the earnings conference call, stating that iPhone revenue in mainland China reached a historical high in the third quarter of this year, and the company's overall revenue in India also reached a new high. He also praised the performance of the latest Mac computers released this week, stating, "We now have the strongest product lineup for the year-end holiday shopping season," and that each major service revenue has broken records.

Cook also stated earlier that the performance of iPhone 15 in the quarter was better than that of iPhone 14 in the same period last year. He also acknowledged that the supply of the more expensive iPhone 15 Pro and Pro Max models was limited due to strong demand.

The sharp decline in Mac computer revenue was due to the comparison with the "historical record high" in the same period last year, when sales for the second quarter of 2022 were postponed to the third quarter due to a significant supply interruption. He believes that Mac will perform better in the December quarter, but also acknowledges that the PC personal computer market is still "challenging." In addition, Apple did not release a new iPad before the heavy holiday season.

Cook also stated that Apple is "heavily" investing in its generative AI program.

Apple's CFO stated in the earnings statement that thanks to a strong ecosystem and customer loyalty, the company achieved a double-digit growth in EPS for the fourth quarter, with "active device installations for all products and all geographic regions" reaching a new high, driving future growth in service revenue, according to some analysts who view the active device installation base, i.e., the number of hardware devices currently in use, as an indicator of future growth in service revenue. In addition, the company's overall operating expenses for the fourth quarter were $13.46 billion, slightly lower than the expected $13.6 billion. It announced a cash dividend of $0.24 per share and spent $25 billion on stock repurchases and dividend distributions in the fourth quarter. At the end of the quarter, it held $162.1 billion in cash and equivalents, slightly lower than the $166.5 billion at the end of the previous quarter, also the lowest since June 2014.

The earnings conference call will focus on the management's forecast for the next quarter. The market is particularly interested in the "unofficial guidance for next quarter's performance" released by the management during the earnings conference call. It is currently believed that iPhone revenue will accelerate to $69.8 billion in the three months ending in December, including the heavyweight holiday shopping period at the end of the year, a year-on-year increase of 6.4%.

Although this will be the largest increase since the beginning of the year, it will be much lower than historical levels. Excluding the period of limited production caused by the epidemic in the fourth quarter of 2022, the average sales growth rate of iPhone during the year-end holiday season in the past four years should be 9.2%.

Wall Street expects service revenue in the December quarter to increase by 10%, maintaining double-digit growth and reaching nearly $23 billion. The company's total revenue is expected to recover year-on-year growth to $123.1 billion, a 5% increase from $117.2 billion in the same period last year, with earnings per share of $2.09.

Toni Sacconaghi, an analyst at Bernstein, pointed out that Apple's performance in the first quarter of the fiscal year usually determines the strength of the latest iPhone demand cycle. If the company's total revenue returns to year-on-year growth, it will undoubtedly leave a deep impression on investors in a challenging macroeconomic environment, as it indicates that its new products are popular among users.

However, despite the improving trend of Apple's revenue, the pace is slow (for example, the growth forecast for the year-end holiday shopping season is still in the low single digits), highlighting Wall Street's nervousness and to some extent pessimism about the company's prospects.

Amit Daryanani, an analyst at Evercore ISI, pointed out that the target threshold for the December quarter is a bit high, but considering the weaker year-on-year comparison, strong service business, and moderate increase in the average selling price of iPhones, it is not impossible to achieve. As for the average selling price, the cancellation of the cheapest memory configuration for the iPhone 15 Pro Max, the highest-end phone, effectively increases the starting price and is beneficial to pricing strategy.

How does Wall Street view it? Concerns about iPhone sales and market share challenges in Greater China

Overall, as the holiday shopping season approaches, which is usually the biggest and most important revenue period for Apple, investors are most concerned about three topics: the sales of the new iPhone 15, whether service revenue can reach new highs, and the competitive challenges from local brands in the Chinese market. Wedbush analyst Dan Ives believes that there are over 100 million iPhones in China that are due for an upgrade, which presents an opportunity for Apple.

In general, Barclays analyst Tim Long is concerned that weak global demand and a lengthening replacement cycle are not good signs for iPhone 15 sales in the fiscal year 2024. The supply of components for the higher-end and more expensive Pro and Pro Max models may also delay some sales from the December quarter to the second quarter of the fiscal year 2024, ending in March.

Bernstein predicts that iPhone 15 sales will be "sluggish" due to a lack of new features, tight consumer spending, and competition from Huawei. Market research firm Counterpoint reported last week that Huawei's market share in China increased by nearly 4 percentage points in the third quarter of 2023, while Apple lost 1 percentage point during the same period, mainly because "the initial sales of iPhone 15 were lower than the iPhone 14 series."

Morgan Stanley analyst Erik Woodring is concerned that due to iPhone supply constraints and uneven consumer spending, he is more cautious about the December quarter, and Apple's revenue guidance may be lower than normal seasonal levels and the general expectations of Wall Street. There are four factors in the fourth quarter of the year-end that are unfavorable to Apple: the pressure of year-on-year comparison base effect, a strong US dollar, iPhone supply issues, and cautious consumers.

What does the future hold? Challenges of mixed reality headsets, AI competition, and regulatory challenges in the service business

In Apple's fourth fiscal quarter, which ended on September 30th, the company released the iPhone 15, Plus, Pro, and Pro Max models, which should contribute to sales growth compared to the phased release of the iPhone 14 new products in the same period last year.

The company also launched the ninth-generation smartwatch Apple Watch Series 9, the second-generation high-end outdoor smartwatch Apple Watch Ultra 2, and the wireless earphones AirPods Pro and EarPods with a charging case equipped with a USB-C port.

Apple's first fiscal quarter of the 2024 fiscal year runs from October 1st to December 30th. So far, Apple has released the Apple Pencil with a lower price and a USB-C port, the iMac desktop computer with the M3 chip, and the 14-inch and 16-inch MacBook Pro laptops with the latest M3, Pro, and Max chips. The price of the entry-level 14-inch MacBook Pro has also been lowered. In order to stimulate sales.

According to the analysis, it is widely believed that Apple's "unusual" release of a new computer with the most powerful chip and the ability to perform artificial intelligence tasks three days before the earnings report is intended to take advantage of the overall trend of the personal computer market rebounding after more than two years of decline, while paving the way for a rebound in Mac sales in the next quarter.

According to research firm IDC, the decline in global PC shipments slowed for the third consecutive quarter from July to September, indicating that the market has bottomed out. Another institution, Counterpoint, stated that the global smartphone market shrank by 8% during the same period. However, Apple's 5G smartphone chip supplier Qualcomm stated that new orders from smartphone manufacturers have increased, and overall demand will rebound in the coming quarters.

In addition to focusing on the sales of the Vision Pro mixed reality headset next year, investors will also focus on whether Apple can narrow the gap with competitors in the AI "arms race". However, Bradon Nispel, an analyst at KeyBanc Capital Markets, said that Apple's capital expenditure on AI could have a negative impact and could lead to a decline in free cash flow in the 2024 fiscal year, despite its solid AI foundation in products and services.

Concerns about antitrust regulatory risks have grown regarding Apple's new generation of growth engine, service revenue, especially whether the exclusive agreement with Google's lucrative search engine can continue. Google CEO Sundar Pichai admitted this week that Google paid $18 billion in 2021 to become the default search engine on Apple devices, accounting for nearly 17% of Apple's earnings per share that year. This year, this revenue may reach $19 billion.

Since the last earnings report, Apple's stock has fallen by 7%, and some people are worried that if this time it triggers a major decline, its position as the largest market value may not be guaranteed.

Apple rose 2.1% on Thursday, rising for five consecutive days to a two-week high. It has risen more than 36% so far this year, outperforming the S&P 500's cumulative increase of 12%, the Nasdaq's cumulative increase of 27%, and the Dow Jones Industrial Average, of which Apple is a component, which has risen 2%.

However, since the announcement of its third-quarter results on August 3, Apple's stock price has fallen by 7%, evaporating nearly $300 billion in market value, almost equivalent to the total valuation of Oracle, the 19th largest company in the US stock market. During the same period, the Dow Jones Industrial Average fell by 3.9%. This is also the first time since 2015 that Apple's stock has fallen between the June Global Developers Conference and the fourth-quarter earnings report released at the end of October.

Some analysts believe that on the one hand, this is due to the high interest rates leading to a significant pullback in technology stocks. The Nasdaq has also fallen by nearly 5% since early August. At the same time, the market is also concerned about Apple's weak revenue growth and the negative impact of factors such as the global macroeconomic downturn, weak consumer spending, and escalating geopolitical frictions on the demand for the latest iPhone 15 series.

Apple's stock price has currently fallen by 10.4% from the 52-week high of $198.23 reached at the end of July, entering a technical correction range. Some even worry that if this earnings report is not good and Apple's stock price repeats the decline after the third-quarter results, its position as the largest market value in the US stock market will be replaced by Microsoft, the "new darling" of AI that follows closely. Before the release of Apple's fiscal fourth-quarter report, approximately half of the approximately 40 Wall Street analysts surveyed by multiple institutions (about 23 analysts) gave a buy or hold rating, while three analysts recommended selling. The average target stock price is slightly lower than $198, indicating a 14% potential increase in the next year, which suggests limited further upside potential despite the increase from the expected $170 at the beginning of the year.