Guangda Overseas: New products drive Apple Mac performance beyond expectations, focusing on AI progress at WWDC in June

According to the information from Wisdom Finance APP, Guotai Overseas released a research report stating that Apple (AAPL.US) may focus on "edge AI", and is expected to gradually integrate AI capabilities into new Mac/iPad models, as well as the iPhone 16 to be released in the second half of the year. This move is expected to stimulate replacement demand and drive hardware product revenue growth. It is recommended to pay attention to Apple's Worldwide Developers Conference (WWDC) in June, where they may announce a new operating system and generative AI features. Additionally, looking ahead to FY3Q24, Apple will hold a special event on May 7th Beijing time, with expectations of focusing on the release of new iPad models and accessories based on the Apple Pencil element in the poster. The iPad Pro and Air series are likely to receive major updates, and the company's iPad business is expected to revive with the launch of new products, leading to double-digit year-on-year growth in iPad revenue in the next fiscal quarter according to the company's guidance.

In terms of investments, it is recommended to continue to focus on related companies in the Apple supply chain such as GoerTek (01415), and pay attention to Lens Technology (002475.SZ), Sunny Optical Technology (02382), BYD Electronics (00285), AAC Technologies (02018), Foxconn Industrial Internet (601138.SH), and Hongteng Precision (06088).

Event: Apple (AAPL.US) announced its FY2Q24 (CY1Q24) earnings on May 3rd Beijing time. In terms of revenue, the quarterly revenue was $90.75 billion (yoy-4.3%), higher than Bloomberg's consensus expectation of $90.33 billion (yoy-4.8%), mainly driven by better-than-expected performance in Mac and services revenue, with revenue in Greater China region outperforming market expectations. Regarding performance, FY2Q24 gross profit was $42.27 billion (yoy+0.7%), with a gross margin of 46.6% (yoy+2.3pct, qoq+0.7pct), mainly benefiting from improved revenue structure and cost savings; achieving a net profit of $23.64 billion (yoy-2.2%), higher than Bloomberg's consensus expectation of $23.29 billion by 1.5%; diluted EPS reached $1.53, setting a historical high for the quarter in March.

Key points from Guotai Overseas:

Continued increase in capital return, guiding for year-on-year revenue growth in the next quarter: During the FY2Q24 earnings call, Apple announced its largest ever stock buyback plan of $110 billion and raised quarterly dividends by 4% to $0.25 per share, marking the twelfth consecutive year of dividend increases. Looking ahead to FY3Q24, Apple expects total revenue in the next quarter to grow by low single digits year-on-year (with an estimated negative impact of 2.5% from exchange rates), with iPad and services revenue expected to achieve double-digit year-on-year growth; gross margin is expected to be between 45.5% and 46.5%, with operating expenses ranging from $14.3 billion to $14.5 billion iPhone revenue slightly exceeds expectations, with significant revenue in Greater China surpassing market expectations.

In FY2Q24, iPhone revenue was $45.96 billion (yoy-10.5%), slightly higher than the market's expected $45.76 billion (yoy-10.9%). According to IDC, iPhone global shipments in 1Q24 were 50.1 million units, down by 9.6% year-on-year, which was a major factor contributing to the revenue decline. However, the management stated that excluding the $5 billion high base effect from demand release in the same period last year, iPhone revenue for this quarter remained relatively stable. Additionally, addressing previous market concerns about the impact of intensified market competition on iPhone shipments in China, this quarter showed better-than-expected performance. In FY2Q24, Apple achieved revenue of $16.37 billion in Greater China, only an 8.1% year-on-year decline, surpassing Bloomberg's consensus expectation of a 10.9% decline. This judgment is mainly attributed to: 1) iPhone still maintains customer stickiness in the high-end market, with the iPhone 15/15 Pro being the top two best-selling smartphones in Chinese cities; 2) Apple has implemented diversified promotional strategies to lower the consumption threshold, such as installment payments and trade-in programs. According to the earnings call, Cook mentioned that the newly opened retail store in Shanghai has received positive sales feedback, and the company remains optimistic about the long-term prospects of the Chinese market.

New products drive Mac performance beyond expectations, guiding FY3Q24 iPad revenue to return to growth.

In FY2Q24, Mac revenue was $7.45 billion (yoy+3.9%), exceeding the market's expected $6.79 billion (yoy-5.3%). This was mainly due to the release of the new MacBook Air equipped with the M3 series high-performance chip in 3M24. Apple described it as the "world's best consumer-grade AI PC" and mentioned that half of the MacBook Air consumers this quarter were new users to the Mac series, driving the number of Mac device users to a historical high. FY2Q24 iPad revenue was $5.56 billion (yoy-16.7%), lower than the market's expected $5.91 billion (yoy-11.4%), mainly due to the lack of new product releases affecting shipment performance. Looking ahead to FY3Q24, Apple will hold a special event on May 7th, Beijing time. Based on the Apple Pencil elements in the poster, it is expected that this event will focus on the release of new iPad models and accessories. The iPad Pro and Air series may undergo significant updates, and the company's iPad business is expected to see a recovery with the launch of new products. As per the company's guidance, iPad revenue in the next quarter is expected to achieve double-digit year-on-year growth.

Half of the Fortune Global 500 companies have purchased Vision Pro, with a focus on AI developments at WWDC in June.

In FY2Q24, revenue from other hardware such as wearables was $7.91 billion (yoy-9.6%), slightly lower than Bloomberg's consensus expectation of $8.29 billion. This was mainly due to the lack of updates for AirPods and Apple Watch, as well as Vision Pro not being available for sale outside the United States In this earnings call, Apple has not disclosed the sales figures for Vision Pro yet, but indicated that the device is attracting interest from enterprise customers. Over half of the Fortune 100 companies have purchased Vision Pro and started experiencing spatial computing. Apple is very optimistic about the future of AI and is making significant investments in this field. The seamless integration of hardware, software, and services, along with self-developed high-performance chips, and a strong emphasis on user privacy and security will be core advantages for the company in AI competition. It is recommended to pay attention to the progress of Apple's AI strategy at the WWDC conference in June.

Service revenue has achieved continuous growth for 6 consecutive quarters, with gross margin continuing to improve.

In FY2Q24, service revenue was $23.87 billion (YoY +14.9%), exceeding market expectations of $23.28 billion (YoY +11.4%), reaching a new high for the sixth consecutive quarter. This is mainly attributed to a diverse range of services and a growing base of active devices. According to the company's earnings call, this quarter saw record-high active device numbers for all products and regions, laying a solid foundation for the continuous growth of Apple's ecosystem. The gross margin for service business in FY2Q24 reached 74.6%, an increase of 1.8 percentage points QoQ, mainly due to a more favorable mix of service categories. The company expects service revenue in FY3Q24 to maintain double-digit YoY growth similar to FY1H24 (service revenue YoY +12.7% in FY1H24).

Investment recommendation: In a previous review of FY1Q24, it was mentioned that the market may have exaggerated the impact of iPhone shipment pressure in China, and the announced results to some extent confirm this view. Looking ahead, it is believed that:

1. Apple's core competitiveness lies in its continuous innovation, strong brand power and user stickiness, and the highly synergistic ecosystem of Apple OS. With the continuous growth of the hardware base within the Apple ecosystem, the service business with higher profit margins is expected to further penetrate, providing the company with robust profitability.

2. The company announced this quarter that it will stop making cars and focus more resources on AI investments. Therefore, the progress of Apple's layout in generative AI will be a key focus of market attention in the short term. The bank believes that Apple may focus on "edge AI" and gradually integrate AI capabilities into new Mac/iPad models and various hardware products to be released in the second half of the year, such as the iPhone 16, stimulating upgrade demand and driving hardware product revenue growth. It is recommended to pay attention to Apple's Worldwide Developers Conference (WWDC) in June, where new operating systems and generative AI features may be announced.

3. Apple has consistently pursued large buybacks and dividends over the years. This quarter, it announced a $110 billion buyback plan, further increasing shareholder capital returns. From the perspective of asset investment allocation, it remains attractive Risk Warning: Hardware product sales below expectations, slowing growth in service subscription business, MR business development below expectations, technology upgrades below expectations, etc