Apple’s latest earnings results show the power of shrewd management

Apple’s latest earnings results, released Tuesday, show three bright spots that helped keep Apple’s business buoyant in the last quarter: accessories, services, and investments in emerging markets.

The company reported $19.8 billion in net income on $81.8 billion in net sales during the three-month period. A roughly 4% decline in product sales was offset by services adoption, and weaknesses in some markets were mitigated by sales records elsewhere.

However, while revenue actually grew year-over-year, foreign exchange fluctuations reduced that number by 4%, the company said.

Perhaps more telling, the company said its gross margin hit 44.5%, a new record for the June quarter that also reflects the growing contribution of the company’s high-margin (70.5%) services business.

Apple, a company with better leadership

Frankly, the results testify to spookily great management with excellent foresight.

On the strength of the Apple Watch, AirPods, and other accessories; the launch of Apple Music and other services; and the company’s major investments of time and energy in India and other emerging markets, Apple has built a moat to protect it in challenging times.

The “tough compares” company execs talked about during the post-results news analyst call would seem a great deal tougher if the company had not made those investments. They account for the following bright spots:

1. Emerging markets are growing for Apple

June quarter revenue hit records in India, Indonesia, Mexico, the Philippines, Poland, Saudi Arabia, Turkey, the UAE, France, the Netherlands, and Austria. It also set records in Greater China. The company said sales performance at its new retail stores in India have exceeded expectations.

“I think if you look at it, it’s the second largest smartphone market in the world,” said Apple CEO Tim Cook about India. “And we ought to be doing really well there and where I’m really pleased with our growth there, we still have a very, very modest and low share in the smartphone market. And so, I think that it’s a huge opportunity for us. And we’re putting all of our energies in making that occur.”

Most recently, Morgan Stanley analyst Erik Woodring predicted India may generate $40 billion in revenue for Apple in the coming five years.

2. Services support the entire business

Apple said it now holds 1 billion paid subscriptions and 2 billion active devices. Services generated $21.2 billion, up 8% year-on-year.

Don’t neglect that services are one of the flagship strategies to emerge from Apple since Cook took the helm. In 2017 he promised to double the size of that part of its business by 2021, and in fact exceeded that. In 2016, services accounted for $24.3 billion for the entire year; it now nearly hits that number in three months.

Cook confirmed that some Apple services set new revenue records during the quarter and pointed to the $10 billion saved in Apple Card Savings since launch a few weeks ago.

Engagement is what matters. “We see increased customer engagement with our services,” said CFO Luca Maestri.

He confirmed that the number of paid subscriptions grew 150 million in the last 12 months and noted that customers with more than one Apple product are more likely to also purchase services.

“I would say the biggest opportunity is that we know that there’s a lot of customers that we have that are very familiar with our ecosystem, that are engaged in the ecosystem. But still today, they’re using only the portion of the ecosystem that is free. And so, we think that by offering better content and more content over time, we’re going to be able to attract more of them as paid customers,” said Maestri.

3. Accessory, accessories, accessorize

Wearables, home, and accessories revenue generated $8.3 billion, up 2%. They set new records in China with around two-thirds of customers purchasing an Apple Watch in the quarter being new to the product.

“It’s become a very large business for us. In wearables home and accessories in the last 12 months we’ve done $40 billion of business, which is nearly the size of a Fortune 100 company,” Maestri said.

Apple also shared a little more detail concerning why accessories have been such a shrewd strategic focus. Confirming its installed base reached an all-time high across all geographic segments, the company noted that a high number of customers were purchasing Macs, iPads, and Apple Watch for the first time.

“We know that customers that own more than one device are typically more engaged in our ecosystem. And so obviously they tend to also spend more on the services front,” said Maestri.

Apple is not a one-trick pony

Apple’s product range might still fit on a large table, but the diversity of that range means that even when it experiences slowness in one product category it usually has another to help keep its business buoyant.

That’s why, despite iPhone revenue coming in at $39.7 billion (down 2% on last year), the company still had good news. Yes, the decline is real, but comparatively much better than others in the industry, and, more importantly given the company’s focus on services and accessories, the number of active iPhone users hit a new all-time high thanks to a record number of June quarter switchers from Android.

“We continue to try to convince more and more people to switch because of our experience and the ecosystem that we can offer them. And so, I think switching is a huge opportunity for us,” said Cook.

Despite the introduction of what I see as the superb 15-inch MacBook Pro during the quarter, Mac sales fell 7% compared to last year for $6.8 billion.

iPad revenue also fell, this time by 20% to $5.8 billion. Apple did point out that the highly popular iPad Air was introduced during the year ago quarter, which may help account for some of this decline.

On AI and Vision Pro

Responding to questions from Sidney Ho at Deutsche Bank, Cook stressed the importance of artificial intelligence to the company. “If you take a step back, we view AI and machine learning as core fundamental technologies that are integral to virtually every product that we build,” he said.

He also stressed that Apple has been researching numerous AI technologies, including generative AI. “We’ve been doing research across a wide range of AI technologies, including generative AI, for years,” he said. “We’re going to continue investing and innovating and responsibly advancing our products with these technologies with the goal of enriching people’s lives.”

Apple also confirmed it intends extending its Apple Learning Coach scheme to help educators get more from digital tech to 12 more countries in the coming year.

The company will also be letting customers take a look at its new Vision Pro in Apple retail stores once the device ships next year. “I’m using the product daily,” said Cook.

To see the future, consider the past

Of course, ultimately the success of Apple’s future products rests on how happy customers are with its existing ones. With that in mind, the company confirmed the following US customer satisfaction levels:

• Mac: 96% customer satisfaction.
• iPhone: 96% customer satisfaction.
• iPad: 96% customer satisfaction.
• Apple Watch: 98% satisfaction.

Notes on employee choice, Apple, and the enterprise

As it always does, Apple shared a few insights into the impact of employee choice on enterprise IT. Maestri noted that Blackstone and Gilead have introduced choice schemes that mean Macs and iPads are now in use across thousands of employees at those companies.

iPhone and services will guide next quarter

Apple expects the September quarter to be similar to June. That means foreign exchange fluctuations will continue to take a bite, and Mac and iPad sales will likely decline by double digits in comparison to the year ago quarter.

On the bright side, with new models on the way, iPhone sales are expected to accelerate even as services adoption continues to increase, said Apple. Maestri observed how last year’s September quarter benefitted from pent-up demand for Macs and iPads following Covid-related factory shutdowns in China over summer.

What the analysts are saying

Reaction to ther earnings report has been mixed. Shares took a small dive following the news, but most analysts remain optimistic. Wedbush, Canaccord, and Barclays increased target share prices, to $230, $205, and an outlying $167 per share, respectively. Oppenheimer raised the target to $220 from $195.

However, Morgan Stanley pruned targets to $215 from $220 and Rosenblatt downgraded the company to “neutral” from “buy,” albeit while maintaining a $198 target price. UBS is also neutral on the stock with a $190 target.

With a $235 target, JP Morgan analyst Samik Chatterjee is resolutely optimistic. “We continue to view the setup into FY 2024 for Apple to be positive with likely improvements in consumer spending from trough levels, which will return the company to healthy revenue and robust earnings growth, and drive an outperformance for the shares,” he wrote.

Jesse Cohen, at Investing.com, wrote: “Solid demand growth for its line-up of high-end iPhones helped offset incremental weakness in other areas of the business. The earnings beat suggests that Apple’s premium smartphone business may be insulated from concerns about deteriorating consumer confidence and a worsening macroeconomic outlook.”

That last statement speaks volumes.

The iPhone might remain Apple’s most important product, but the company has cushioned itself against future shock by its far-seeing investments in developing markets, services, and accessories. The company’s shrewd management set those businesses up in front of our eyes and we can now see the benefit of this diversification.

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