Apple Earnings Call: Remains Cautious on AI, Vision Pro is an "Engineering Marvel," Expects Double-Digit Decline in Q3 iPad and Mac Revenue

Apple hinted that its Q3 revenue may continue to decline compared to the same period last year, contrary to Wall Street's expectations of a recovery. While iPhone and services revenue are expected to grow faster in Q3 compared to Q2, iPad and Mac may experience double-digit percentage declines. As for artificial intelligence, which is a key focus for Wall Street, Apple has yet to provide any valuable information.

- Apple Q2 (third quarter of fiscal year 2023) report card is mixed,* * revenue and EPS both exceeded expectations and service revenue reached a record high, but total revenue fell year-on-year for the first time since 2016 for three consecutive quarters, with all hardware product lines except Mac computers falling and iPad revenue plummeting 20%. On the morning of August 4, Apple held a Q2 earnings call. CEO Apple and Apple CFO Luca Mestre shared information about recent product sales and service business, as well as Q3 performance guidelines. At the conference call, Apple hinted that * * Q3 revenue may continue to decline year-on-year, which is different from Wall Street's expected recovery of growth. Q3 revenue of Apple and service business will accelerate year-on-year growth compared with Q2, but iPad and Mac may see double-digit percentage declines. For Wall Street focus on artificial intelligence, Apple has not yet given more valuable information. * * * * The following are the eight key points of Wall Street's experience and news: * * ## Artificial Intelligence-Crucial Cook's attention to artificial intelligence in this conference call is as little as ever, and he is more independent than his peers such as Microsoft and Alphabet. When asked by analysts, Cook said that Apple has been working on generative artificial intelligence and other models for many years:> **We regard artificial intelligence and machine learning as core basic technologies. **They are embedded in almost every product we manufacture and are an indispensable part.>> This is absolutely crucial for us. ** > > Based on research, we have been studying artificial intelligence and machine learning, including generative artificial intelligence, for many years. Cook also said that he will continue to use these technologies to advance Apple products "responsibly", and Apple tends to "announce products when they are on the market". ## Vision Pro-an engineering miracle Apple's first generation of mixed reality head show Vision Pro-hailed as the most important product since Apple was released in June and is expected to go on sale next year. At the Q2 earnings call, Cook did not hesitate to express his praise for the product.> The Apple Vision Pro is an engineering marvel built on decades of innovation that only Apple can achieve.>> It is the most advanced personal electronic device ever, and we are excited by the response from media, analysts, developers and content creators who have the opportunity to try it out.>> Everyone who went through the demo was blown away. ## Paid subscriptions exceeded 1 billion, and service revenue hit a record high. The service business was the biggest highlight of Apple's Q2 earnings report. According to Maestri, the number of paid subscriptions for all services on Apple's Q2 platform exceeded 1 billion, and the number of paid subscriptions increased by 0.15 billion in the past 12 months, almost double the number of paid subscriptions 3 years ago. In addition, Q2 saw double-digit percentage increases in the number of Apple trading accounts and paid accounts, both at record highs. Driven by strong paid subscriptions, Apple's Q2 services business revenue reached a record high of $21.21 billion billion, up 8.2 percent from a year earlier, exceeding market expectations and rising to 26 percent of total revenue. Among them, cloud, video, AppleCare and payment business revenue set a record, including App Store, advertising and Apple Music's June quarterly revenue record set a new record. ## Apple, iPad and Mac revenue from sales of Apple, iPad and Mac products all declined in Q2. Among them, Apple's revenue was $39.7 billion, down 2% year-on-year, while iPad's revenue was $5.8 billion, down 20% year-on-year. According to Maestri, most of Apple is currently sold through some kind of process, trade-in, installment or some kind of financing, accounting for much more than 50% of total sales, with very similar performance in developed and emerging markets. Maestri said that the reason for the decline in **iPad sales is that Apple launched a new iPad Air in the current quarter compared to last year. * * Mac Q2 revenue of US $6.8 billion exceeded expectations, but it was down 7.3% year-on-year. Almost half of Q2 Mac buyers were new users. ## Wearable Devices Maintain Growth, Apple Watch Accelerates Expansion Apple Achieved Growth in Wearables, Home and Accessories Categories, Q2 Revenue Up 2.5 to $8.28 billion Year-on-Year, Slightly Below Market Expectations. Apple said that the Apple Watch business continues to expand, * * Q2 the product 2/3 buyers are new users. ## The Greater China market has accelerated significantly, and the U.S. market is full of challenges. Cook said that Apple's performance in emerging markets last quarter was very good, especially in the Greater China market, where revenue reversed negative growth, there was a "significant acceleration" * *. Revenue in Greater China was $15.76 billion, up 7.9 per cent from a year earlier, significantly higher than analysts' expectations of $14.6 billion. Revenue in the Americas region fell 5.6 percent year-on-year, significantly weaker than expected. Cook pointed out that the main reason is that the current smart phone market in the United States is full of challenges. To date, Apple's R & D spending this fiscal year has reached $22.61 billion, about $3.12 billion higher than the same period last year. In an interview with the media earlier, Cook said that the increase in research and development spending is partly driven by the work of generating AI. Apple's R & D spending has grown more slowly than in previous years, Maestri said in a conference call that the reason behind this is that Apple has been more cautious in controlling spending during "uncertain times" in the past few quarters. Apple has succeeded in slowing some of its fee growth by slowing hiring and plans to continue to "manage prudently". Maestri said that even with the economic slowdown, R & D costs are still growing faster than other parts of the company.> **Our focus remains on innovation and product development. * * ## Q3 revenue is expected to decline 2% year-on-year, iPad and Mac may see double-digit percentage declines. Looking forward to the future, Maestri said that if the macro outlook does not deteriorate, Q3 performance will be similar to Q2 year-on-year, implying that Q3 revenue will continue to decline year-on-year. In contrast, Wall Street expects Q3 revenue to resume growth.> FX will continue to be a headwind, and we expect revenue to be negatively impacted by more than 2% YoY. In terms of breakdown, Maestri expects that * * Apple and services Q3 revenue will accelerate year-on-year compared with Q2, but iPad and Mac may see double-digit percentage declines. **It is worth mentioning that there are rumors that there will be no major updates to the iPad or Mac, and Apple has no plans to update the iPad Pro or Mac before 2024. Apple expects Q3 gross margins of 44% to 45%, and Maestri said a strong product portfolio, reduced costs and services will help achieve this goal. The latest financial report shows that Apple's Q2 gross margin is 44.5 percent, the best Q2 in Apple's history. In addition, Apple expects Q3 operating expenses to be between $13.5 billion and $13.7 billion.