Apple (AAPL.US) released its first quarter report for fiscal year 2024. The financial report shows that Apple’s Q1 revenue was US$119.58 billion, a year-on-year increase of 2%, higher than analysts’ expectations of US$117.9 billion, and the first growth since the fourth quarter of fiscal year 2022, ending the decline in total revenue for four consecutive quarters of year-on-year decline in fiscal year 2023. Last year was the first time since 2001 that Apple’s revenue experienced negative growth in four consecutive quarters.
Adjusted EPS was US$2.18 per share, or a year-on-year increase of 16%, higher than the expected US$2.10 and a record high. Net profit increased 13% year-on-year to US$33.92 billion, higher than the expected US$32.6 billion, at least the highest in two years since the first quarter of fiscal 2022. Gross profit margin was 45.9%, higher than the 45.3% expected and 45.2% last quarter.
It is worth noting that although iPhone sales exceeded expectations and Apple's overall revenue increased, its downturn in the Chinese market intensified. Specifically, iPhone revenue was $69.7 billion, higher than the $68.55 billion expected. However, revenue in Greater China was US$20.82 billion, a year-on-year decrease of 13%, far lower than the expected US$23.5 billion, and was Apple's weakest performance in the Asian country in the December quarter since the first quarter of 2020.
In response, Apple Chief Financial Officer Luca Maestri said: "We are not satisfied with this decline, but we know that China is the most competitive market in the world."
iPhone sales and services revenue drive Apple's revenue back to growth
It is understood that some analysts say that Apple's revenue can return to growth, thanks to the rebound in sales of the iPhone 15 series launched last year, as well as the high-margin service revenue that maintains double-digit percentage growth. The improvement in demand for personal computers and PCs also drove Mac revenue to significantly increase compared with the previous quarter. In addition, overall operating expenses for the quarter were $14.48 billion, weaker than analysts' expectations of $14.62 billion.
Apple CEO Cook said in the financial statement that record iPhone sales and service revenue both pushed up total revenue in the December quarter. The active device installed base has exceeded 2.2 billion units, setting new record highs across all products and geographical divisions. Cook also emphasized that the background to the record high earnings per share is that the first quarter of fiscal year 2024 has one less trading week than the same period last year, which shows that the company's growth has achieved a "huge acceleration" compared with the third quarter of 2023.
Among other hardware, Mac computer Q1 revenue was US$7.78 billion, accounting for 10% of total revenue, a year-on-year increase of 0.6% and slightly higher than expected. As Apple warned in November, the iPad became a weak product this quarter. The product's Q1 revenue was US$7.02 billion, a year-on-year drop of 25% or more than US$2.3 billion, which was also weaker than expected. Revenue from wearable devices, home furnishings and accessories, including Apple Watch, AirPods and smart speakers, was US$11.95 billion, down 11% year-on-year, but better than market expectations of US$11.5 billion.
Overall, these products haven't received major upgrades this year, which may have hurt sales. It is worth mentioning that Apple was also banned from selling its latest smartwatch in the United States due to a patent dispute, but this happened after the Christmas shopping season. The company eventually had to pull the blood oxygen feature from these devices.
In terms of services revenue, the segment brought in $23.1 billion in the quarter, an increase of 11% from the same period last year. However, that was slightly below Wall Street estimates of $23.4 billion. Although the growth rate is weaker than the 16.3% last quarter and lower than expected, it has reached a new high for four consecutive quarters and continued the double-digit percentage growth trend of the previous quarter. Before the third quarter of 2023, it had achieved single-digit percentage growth for four consecutive quarters.
It is reported that services include the AppStore application store, audio and video streaming AppleMusic and AppleTV+, iCloud storage, AppleCare warranty, advertising revenue from the Google search engine license agreement, payment fees for ApplePay and other products, etc. After the iPhone has become a more mature product, services are an important area for Apple's business diversification, reflecting consumer demand trends even earlier.
Some analysts said that service revenue benefited from the increasing number of users of the Apple AppStore application store, the significant increase in AppleTV+ ratings, and the continued expansion of the device installation base. As of the end of fiscal year 2023, Apple's service portfolio has more than 1 billion paying users, and media industry reports show that AppleTV+ consumption has doubled in 2023, with total viewing ratings soaring 42% year-on-year.
Cook today also attributed the growth in services to products such as advertising, cloud services, payments and app stores. Apple has more than 1 billion paid subscribers, including subscribing to apps through the AppStore.
Apple is about to launch the VisionPro head-mounted display, and the outlook for the AI field is eye-catching
On the eve of the release of this financial report, Apple is about to launch the VisionPro headset. The device launches the company into its first major new category since 2015, while taking Apple into unfamiliar territory: virtual and augmented reality. The $3,499 headset allows people to watch 3D videos, play games and have more immersive meetings.
Market expectations are that the Vision Pro, which starts at $3,500, will not bring in a lot of initial revenue. UBS predicts that Apple will ship about 400,000 head-mounted display devices this year, with revenue of only a "relatively inconsequential" $1.4 billion, and it will not have a significant impact on profitability.
In addition, Ming-Chi Kuo of Tianfeng International, "Apple's most accurate analyst", said that the delivery time remains stable after 48 hours, indicating that VisionPro is still "a very niche product" and the seemingly explosive demand may "quickly decrease" after die-hard fans place orders.
But as Apple's first new product category in nearly a decade since the launch of smartwatches in 2015, Vision Pro may improve market confidence in Apple and confirm the company's status as a leading technology innovator in AR/VR, which will help drive stock prices.
In terms of AI technology, Apple has not specifically announced the launch of generative artificial intelligence products, but is focusing on machine learning to improve the accuracy of its auto-complete functions. There have been previous reports that Apple is working hard to integrate AI technology into future products. In its last financial report, Cook admitted that it was "investing a lot of money" in generative AI, but refused to disclose details, saying only that "it will be researched and developed responsibly."
Cook also said that Apple will make an announcement on artificial intelligence capabilities this year, confirming a previous report by Bloomberg. With Apple's tech peers currently investing heavily in artificial intelligence, investors have been eagerly anticipating the company's latest news on the subject.
Apple's revenue decline in Greater China draws concern
After Apple's latest financial report was released, the company's stock price fell more than 3% in after-hours trading. The main reason was that the decline in Apple's revenue in Greater China triggered market concerns. It is understood that Greater China’s revenue, which contributed 20% of Apple’s annual revenue, was US$20.82 billion in the first fiscal quarter, which was the worst December quarter performance since the beginning of 2020. It fell 12.9% year-on-year from US$23.9 billion in the same period last year, and was lower than market expectations of US$23.5 billion. It had declined 2.5% year-on-year in the previous quarter.
In contrast, Apple's largest market, the Americas, had revenue of US$50.43 billion in the quarter, a year-on-year increase of 2.3%, and a month-on-month increase of nearly 26%, or an increase of more than US$10 billion; the second largest market, Europe, had revenue of US$30.4 billion. A year-on-year increase of 9.8% and a month-on-month increase of 35%; Japan's revenue was US$7.77 billion, a year-on-year increase of 15% and a month-on-month increase of 41%; other Asia-Pacific revenue was US$10.16 billion, a year-on-year increase of 6.6% and a month-on-month increase of more than 60%.
Since Greater China is Apple's third largest sales market after North America and Europe, and as its core business with sales far exceeding that of other hardware products, the iPhone sales trend in Greater China will be of particular concern.
In this regard, Apple's chief financial officer said that although he is not satisfied with the current performance in China, in the long term, the company is still optimistic about the Chinese market and believes that there are huge opportunities here.
However, analyst Ming-Chi Kuo’s latest research report is pessimistic about the iPhone’s future sales performance. He predicted that due to structural challenges, iPhone shipments this year may drop by up to 15% year-on-year, and may lag behind foldable phones that introduce AI technology. In China, weekly iPhone shipments have dropped by 30% to 40% year-on-year.
Due to concerns about iPhone sales in Greater China, a number of mainstream investment banks, including Barclays, Piper Sandler and Redburn Atlantic, downgraded Apple's stock ratings at the beginning of the year. Among them, Barclays is worried about weak Apple hardware sales, and Piper Sandler is worried about regulatory resistance such as patent disputes surrounding Apple smartwatches and antitrust lawsuits. They both pointed out Apple's potential weaknesses in the iPhone and services areas.
UBS said that China's iPhone inventory increased by 2 million to 3 million units, which helped Apple's December quarter revenue exceed expectations, but this shifted the sales risk to the March quarter, and inventory may be 15% to 20% higher than demand.
In the bullish camp, Bank of America raised Apple's rating and target price two weeks ago, saying that the VisionPro head-mounted device gives the company a promising artificial intelligence product roadmap and will be a catalyst for future growth, and the outlook for the service sector has also improved.
Morgan Stanley also believes that its fundamentals are recovering and may bring huge improvements in 2024, because this will be "the year when Apple's edge artificial intelligence (EdgeAI) opportunities may be realized." "Siri2.0 supported by the LLM large language model and an operating system supported by broader generative AI may promote the iPhone replacement upgrade cycle."
Apple faces major challenges: regulatory pressure, patent disputes and uncertainty in the Chinese market
Apple is facing its most tumultuous period since Cook became CEO more than a decade ago, including the greatest regulatory pressure ever and new EU laws forcing changes to its App Store policies. At the same time, the company's patent dispute with medical device manufacturer Masimo has caused it to stop selling smartwatches Apple Watch Series 9 and Apple Watch Ultra 2 that use blood oxygen sensors many times, which may affect Apple's profits and wearable device revenue, which accounts for more than 10% of total revenue.
Although Apple achieved sales growth last quarter, growth in many of its key markets is also gradually slowing. Because there are already many existing users in the market, the market potential is becoming saturated. VisionPro may open up a new opportunity, but the first version of the product may be too expensive and bulky for most consumers.
Finally, before the financial report is announced, the Chinese market is the biggest uncertainty facing Apple. Although Apple gained market share in China last year, sales continued to decline. In addition, China is also a major manufacturing center for Apple, which increases the importance of the Chinese market to Apple.