Apple's iPhone revenue declined in the third quarter, with the Greater China region being the only region to decline. However, iPad and services showed strength, with the stock falling more than 1% after hours

Apple has exceeded revenue and profit expectations for six consecutive quarters, setting a record high for total revenue and EPS in the June quarter, with service revenue hitting a six-quarter high along with iPad revenue, driving total revenue growth beyond expectations. Although iPhone revenue declined year-on-year, the total amount was better than expected, with Greater China being the only geographic region to experience a year-on-year decline that exceeded expectations.

After the U.S. stock market closed on Thursday, August 1st, consumer electronics and tech giant Apple released its performance for the third quarter of the 2024 fiscal year (i.e., the second quarter of the 2024 calendar year), wrapping up the earnings season for large tech stocks along with Amazon.

1) Key Financial Figures

Quarterly Revenue: Increased by 4.9% to $85.78 billion, higher than the market's expected $84.46 billion.

Diluted EPS: Increased by 11% to $1.40, higher than the market's expected $1.35.

Net Profit: Increased by 7.9% to $21.45 billion.

Overall Operating Expenses: Increased by 6.8% to $14.33 billion, slightly lower than the market's expected $14.39 billion.

Gross Margin: 46.3%, higher than the market's expected 46.1%.

2) Segment Data

Q3 iPhone Revenue: Decreased by 0.9% to $39.3 billion, higher than analysts' expected $38.95 billion.

Q3 Mac Revenue: Increased by 2.5% to $7.01 billion, higher than analysts' expected $6.98 billion.

Q3 iPad Revenue: Increased by 23.7% to $7.16 billion, far exceeding analysts' expected $6.63 billion.

Q3 Wearables, Home, and Accessories Revenue: Decreased by 2.3% to $8.1 billion, higher than the expected $7.79 billion.

Q3 Services Revenue: Increased by 14% to $24.213 billion, higher than the market's expected $23.96 billion.

Q3 Product Revenue: Increased by 1.6% to $61.56 billion, higher than the market's expected $60.63 billion.

3) Geographic Segmentation Data

Revenue in Greater China for the third quarter: Decreased by 6.5% year-on-year to USD 14.73 billion, lower than analysts' expectations of USD 15.26 billion.

Revenue in the largest market, the Americas: Increased by 6.5% year-on-year to USD 37.68 billion.

Revenue in the second largest market, Europe: Increased by 8.3% year-on-year to USD 21.88 billion.

Revenue in Japan: Increased by 5.7% year-on-year to USD 5.1 billion.

Revenue in other Asia Pacific regions: Increased by 13% year-on-year to USD 6.39 billion.

4) Capital Return

The company's board of directors has announced a cash dividend of USD 0.25 per share, payable on August 15, 2024, to shareholders registered as of the close of business on August 12, 2024.

The company's CFO, Luca Maestri, stated that the operating cash flow for the quarter was close to USD 29 billion, returning over USD 32 billion to shareholders.

Cash and cash equivalents: USD 25.57 billion, lower than the market's expectation of USD 28.98 billion.

Apple has exceeded revenue and profit expectations for six consecutive quarters, setting a record high for total revenue and EPS in the June quarter (the company's third fiscal quarter). Service revenue hit a new high for six consecutive quarters, rising along with iPad revenue to drive total revenue above expectations. Although iPhone revenue declined year-on-year, the total amount also exceeded expectations, with the stock rising 1.3% after hours and then briefly falling 2%.

Renowned tech journalist Mark Gurman commented that financially, Apple is doing well, but the company has significantly lost its pace of innovation, potentially missing out on the latest major new products. Apple has also canceled future growth drivers such as in-house screen technology and autonomous driving cars. "I believe that there won't be any game-changing blockbuster products in Apple's product roadmap for the next two to three years. Any new breakthrough products will likely not appear until around 2027."

Before the financial report was released, Apple initially rose by 1% on Thursday but then fell by 1.7%. Year-to-date, it has risen by nearly 14%, roughly in line with the S&P 500's gain of 14% and the Nasdaq's gain of 15%. As a component of the Dow, Apple has risen by nearly 7% this year.

Wall Street's consensus on Apple remains "moderate buy" and relatively optimistic, with 25 analysts rating it as "buy," 9 as "hold," and 1 recommending "sell." The average target price of USD 240.61 represents a further 10% upside potential

Cook: Artificial Intelligence is another reason people buy new iPhones, still confident in the Chinese market in the long term

Since the COVID-19 pandemic, Apple has stopped issuing formal performance guidance, but often reveals some information during earnings conference calls. Today, company executives stated that the total revenue growth in the fourth quarter will be similar to the third quarter, with services revenue expected to see double-digit percentage growth. Artificial Intelligence (AI) is another reason people buy new iPhones, and the company remains confident in the Chinese market in the long term.

Apple CEO Cook stated in the earnings statement that in the second quarter of the 2024 fiscal year, the company announced "amazing updates" to its software platform at the global developers conference, including the breakthrough personal intelligence system Apple Intelligence, which places powerful and private generative AI models at the core of iPhone, iPad, and Mac.

Company executives also mentioned that due to very high customer satisfaction and loyalty, the active device install base has reached historic highs in all geographic regions. In February of this year, Apple stated that its global active device count had reached 2.2 billion. Apple also mentioned that the number of paid subscribers has reached 1 billion, including data from iPhone applications subscribed through the Apple App Store.

In an interview with the media, Cook mentioned that although iPhone sales in the third quarter declined by about 1% year-on-year, when calculated at fixed exchange rates, the phone business grew year-on-year. "From an operational perspective, this is how we view the issue."

In addition, in the second quarter of the fiscal year, iPhone set records in the UK, Spain, Indonesia, the Philippines, and several other markets.

He also stated that although Apple did not know what positive impact its newly released Apple Intelligence service would have on sales until later in the fall when it begins shipping to customers, the company has been increasing spending to prepare for the promotion of this service:

"We have moved many people from other jobs to the AI department. From the perspective of data centers, we use a hybrid approach, where we use both our own data centers and partner data centers.

Therefore, the capital expenditure (capex) in this area is included in the financial statements of partners, and we will pay the expenses. However, the latest Apple financial report certainly reflects our year-on-year increase in spending on AI and Apple Intelligence."

Cook also mentioned that about half of iPad buyers had never owned an iPad before, indicating that the tablet market is not yet saturated. Apple released the first new version of the iPad since 2022 during the reporting period, leading to the strongest sales growth in this department among all product lines. At the same time, up to two-thirds of Apple Watch buyers are first-time purchasers of the product, significantly increasing the user base.

When evaluating the performance in the Greater China region, Cook mentioned:

"The installed base of iPhones in mainland China and the Greater China region has actually reached a record high. Market research and consulting firm Kantar tells us that Apple smartphones rank among the top three in sales in Chinese cities, and the performance in the Chinese market has been accelerating since the first half of the fiscal year."

Market Expectations Before Financial Report

Wall Street expects Apple's revenue in the third quarter to increase by 3.2% year-on-year to $84.4 billion, better than the 4.3% decline to $90.75 billion in the first quarter and the 1.4% decline year-on-year in the same period last year.

Adjusted earnings per share (EPS) are expected to increase by 6.3% year-on-year to $1.34 from $1.26 in the same period last year. In the previous quarter, adjusted EPS was $1.53, setting a historical high for the March quarter.

Since the outbreak of the COVID-19 pandemic, Apple no longer provides official performance guidance. However, the management will provide clues on overall business or specific areas during the earnings conference call. Analysts expect fourth-quarter revenue to be $93.36 billion, with earnings per share of at least $1.55.

Looking at different business segments, the sales of iPhones, which account for 60% of Apple's total revenue, are expected to decline by 2.6% to $38.64 billion from $39.67 billion in the same period last year. The highest profit margin and 20% of total revenue from services are expected to increase by 12.7% to $23.9 billion from $21.2 billion in the same period last year, marking a new high for the sixth consecutive quarter. In the previous quarter, it increased by 14.2% to $23.87 billion year-on-year.

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

Among the remaining 20% of Apple's total revenue from other hardware, iPad tablet revenue is expected to achieve the fastest growth, increasing by nearly 14% to $6.6 billion from $5.8 billion in the same period last year, although it decreased by nearly 17% to $5.56 billion in the previous quarter; Mac computer revenue is expected to increase by over 2% to $7 billion from $6.84 billion, having increased by 3.9% to $7.451 billion in the previous quarter; revenue from wearables, home, and accessories is expected to decrease by 6% to $7.8 billion from $8.28 billion, having dropped by 9.6% to $7.913 billion in the previous quarter.

In the same period last year, iPhone revenue declined by 2.4%, iPad revenue plummeted by nearly 20%, Mac revenue dropped by over 7%, wearable device revenue grew by 2.5%, and service revenue increased by over 8% to a new high.

In this financial report, iPad and Mac revenue may return to growth, related to Apple's release of new iPad Pro with M4 chip, iPad Air with M2 chip, and the new MacBook Air series with M3 chip released in March Wearable device sales continue to decline month-on-month, which may reflect that the Vision Pro mixed reality headset has not effectively boosted revenue. In the third quarter, Apple released the new Apple Pencil Pro and launched Vision Pro pre-orders in an additional eight countries/regions.

In addition, Wall Street expects that the highly anticipated Greater China region, which contributes about 20% of Apple's revenue, generated $15.2 billion, a 3.1% year-on-year decrease from $15.76 billion in the same period last year, when it had increased by 7.9% year-on-year. In the previous quarter, revenue in Greater China had declined by 8.1% year-on-year to $16.37 billion, but it exceeded market expectations of a double-digit percentage decline.

Greater China is Apple's third-largest sales market after North America and Europe. As the core business with sales far exceeding other hardware products, the health of the iPhone, especially sales trends in Greater China, will be of particular interest.

Why is it important and what to focus on?

In July, tech stocks were generally under pressure, with the Nasdaq falling by 0.8% for the month, being one of the only major indices to decline along with the chip stock index. However, Apple's stock price rose against the trend by 5%, partly due to the boost from the demonstration of the Apple Intelligence AI software at the global developer conference in June.

With a current market value of $3.3 trillion, Apple is the largest company in the U.S. stock market, and its financial report is crucial for the future trend of the stock market. As a consumer electronics giant, Apple's performance can also reflect the overall economic health and provide clues to consumer spending willingness.

Investors will closely watch the management's sales expectations for the latest iPhone 16 series to be released in the fall, Apple's sales in Greater China and the current competitive situation, comments on the AI feature test version launched to developers this week, and the scale of spending in the generative AI plan.

When Apple released its last quarterly report in early May, it had fallen by 10% year-to-date and ranked second to last among the "Seven Sisters of Tech" in terms of stock performance. Therefore, the progress in deploying AI technology is particularly important for the company to reverse its decline. The Apple Intelligence software is expected to be at least for the newer models of the iPhone 15 high-end series, which may kick off a new super cycle of iPhone sales.

How does Wall Street view it?

On one hand, Wall Street hopes to glean clues about when the iPhone 16 series will be released from the earnings call, although Apple usually launches new products in September, there have been delays until October in the past.

Both Bank of America and Evercore ISI believe that the quarter in September will include a full week of performance after the launch of the new iPhone, and strong early signs of demand will lead to a year-on-year growth in iPhone revenue. The market currently expects fourth-quarter iPhone revenue to be $44.18 billion, higher than $43.81 billion in the same period last year.

Evercore ISI stated that comments on the iPhone will be a key catalyst for this earnings report, and "optimistic remarks about the expectations for the iPhone 16 and stabilization of the Chinese market could drive the stock price higher." Renowned technology analyst Dan Ives from Wedbush pointed out that 270 million iPhones have not been replaced with new ones in over four years, and the AI-driven super cycle will ignite suppressed demand.

At the same time, it is widely believed in the market that new AI features will become the main driving force behind the "super cycle" of upgrading hardware products across Apple's entire family, led by the iPhone, although reports suggest that AI features for mass consumers will be delayed until October. Some concerns have been raised about the negative impact of heavy investment in developing AI technology on Apple's profitability.

TD Cowen analyst Krish Snakar warned that Apple's performance still faces some unfavorable factors, such as the continuous market share of local brands in the Greater China region, global consumer demand being affected by macroeconomic disruptions, and foreign exchange trends.

The latest data from research institutions IDC and Canalys both show that domestic leading smartphone brands surpassed Apple in shipment volume in the second quarter, leaving Apple out of the top five. Some have also pointed out regulatory risks, such as Google paying Apple to become the default search engine or posing litigation threats.

Unlike JP Morgan, which is optimistic about the possibility of year-on-year sales growth in the Greater China region in the third quarter, David Vogt, an analyst from UBS Global Research, believes that sales in the region for the quarter may decline by 6%, which is more pessimistic than market expectations. He rates Apple as "hold" with a target price of only $190, reflecting "Apple's challenging growth prospects and unclear artificial intelligence strategy":

"Apple has risen 38% from its low point in April, and the AI frenzy surrounding its stock is misguided, as the iPhone super upgrade cycle may be difficult to achieve.

After WWDC in June, confidence in the AI super cycle for the iPhone in the 2025 fiscal year has peaked. The most optimistic expectations suggest that iPhone sales in the next fiscal year could exceed 250 million units, with some forecasts going as high as 260 million units.

However, our analysis of smartphone demand in various regions, past upgrade cycles, income demographics, and carrier subsidies indicates that the cycle next year will be more moderate. Therefore, we predict an iPhone revenue growth rate of 2.4%, about 400 basis points lower than Wall Street's consensus expectations and nearly 1000 basis points lower than the most optimistic forecasts."