Track Hyper | Apple's Q2 Report: Overall Decent but Lacking in AI

Author: Zhou Yuan / Wall Street News

Apple's good days in the Chinese market are becoming increasingly difficult. Despite Apple CEO Tim Cook expressing confidence in China's long-term development during the third quarter of the 2024 fiscal year (the second quarter of 2024) earnings conference call, Apple has not been able to maintain its absolute dominant position in the face of market pressure from Chinese competitors.

On August 1st, California time, Apple announced its performance for the third quarter ending on June 29th: quarterly revenue of $85.8 billion, a 5% year-on-year increase, higher than analysts' expectations of $84.46 billion; achieving a net profit of $21.448 billion, an 8% increase from the same period last year's $19.881 billion.

However, Apple's performance in the Greater China region in the third quarter continued the trend from the second quarter, with revenue of $14.728 billion, a 6.5% decrease from the same period last year's $15.758 billion (analysts expected a 2.4% decline). In the second quarter, revenue was $16.37 billion, an 8% year-on-year decrease.

Market analysis believes that Apple's revenue decline in the Greater China region in the third quarter is mainly due to strong competition from Chinese manufacturers such as Huawei, putting pressure on Apple's smartphone sales. However, Apple blamed the exchange rate, arguing that the strengthening of the US dollar led to the actual business in the Chinese market being healthier than before.

Apple's CFO Luca Maestri stated, "Excluding the impact of exchange rates, the decline in sales in the Chinese market is less than 3%."

In markets outside of the Greater China region, Apple's revenue remains impressive.

In the Americas (the largest market outside of Greater China), Apple's revenue in the third quarter was $37.68 billion, a 6.5% year-on-year increase; followed by Europe with revenue of $21.88 billion, an 8.3% increase; Japan with revenue of $5.1 billion, a 5.7% increase; and other Asia-Pacific regions with revenue of $6.39 billion, a 13% increase.

Apple's revenue consists of hardware and software: according to the financial report, in the third quarter, net sales of software business reached $24.213 billion, a 14% increase from the same period last year's $21.213 billion.

Wall Street News noted that Apple's software business revenue has been growing since 2015, increasing by 438.88% in proportion to total revenue. In the first quarter of 2015, Apple's software revenue was $4.8 billion, accounting for 6.43% of total revenue. In the third quarter of this year, these figures changed to $24.213 billion/revenue ratio of 28.22%.

Correspondingly, revenue generated by Apple's most prominent iPhone series decreased from $51.182 billion in the first quarter of 2015 to $39.296 billion in the third quarter of 2024, with revenue share decreasing from 68.61% to 45.80%.

The main component of Apple's software revenue is the service fee from App Store software downloads, known as the "Apple tax."

The so-called Apple tax refers to Apple users paying for app downloads through the App Store or purchasing digital goods or services within apps. Users need to first pay the money to Apple's payment system, similar to a cash register, and then Apple "intercepts" a certain percentage of the fee for each transaction, paying the remaining portion to the app developer This ratio is the tax rate for the Apple tax.

Currently, the Apple tax has different charging policies in different countries or regions around the world. In mainland China, the Apple tax rate can be as high as 15%-30%, the highest globally. In comparison, the tax rate set by Apple in the United States is 12%-27%, and in the European Union it is 10%-17%.

How are these upper and lower limits determined?

In the App Store, for apps with annual revenue exceeding $1 million, Apple takes a 30% cut of digital content consumed within the app; for apps with annual revenue below $1 million, Apple's cut is 15%.

What's even more stringent is that Apple prohibits Chinese users from downloading applications from third-party app stores or websites or conducting transactions or using third-party payments outside of the app. This rule prevents Chinese Apple users from enjoying various promotional activities offered by software developers or third-party platforms.

Returning to the third-quarter performance report itself: despite the overall lower sales volume of the iPhone 15 compared to its predecessor, the iPhone series remains Apple's main source of revenue. In the third quarter, iPhone revenue reached $39.296 billion, a 0.9% decrease year-on-year, but higher than analysts' expectations of $38.95 billion.

Historically, the third quarter is a slow season for Apple's smartphones, as Apple typically releases a new generation of iPhones in September or October each year, causing a significant number of users to hold off on purchasing during Apple's third fiscal quarter and wait for the release of the new iPhone.

Apart from the iPhone, how did Apple's other hardware end terminals perform?

In the third quarter, Mac revenue was $7.009 billion, an increase of 2.4% compared to the same period in 2023 ($6.84 billion), but slightly lower than analysts' expectations of $7.02 billion; iPad business grew by 23.7% to $7.162 billion (analysts expected $6.61 billion); wearable, smart home, and related accessories business revenue was $8.097 billion (analysts expected $7.79 billion), a 2.3% decrease from $8.284 billion in the same period in 2023.

Among them, iPad revenue mainly came from the new models iPad Pro (with M4 chip) and iPad Air released in May. According to information revealed by Cook during the earnings call, about half of the customers who purchased these iPads are speculated to be new users, indicating that the iPad market is still growing.

Additionally, in the third quarter, Apple's service revenue was $24.21 billion, a 14% year-on-year increase, higher than analysts' expected revenue of $24.01 billion. This revenue has achieved significant growth for several quarters in a row.

Regarding the still "hot" Apple Intelligence, Cook stated that it is currently impossible to estimate the revenue scale of this segment, but Apple is increasing its spending on AI (referred to by Cook as "significant investments").

Currently, the release date of Apple Intelligence has not been finalized, with reports suggesting that this Apple-style AI has been postponed to October this year and may have a separate launch event. This means that when the iPhone 16 series and iOS 18 are launched in September this year, Apple Intelligence will still be absent For the fourth quarter of 2024 (ending in September), Apple is relatively cautious about its performance outlook, simply stating, "Overall sales are expected to be roughly flat compared to the third quarter."