In this research note, we look at the positives and negatives from Apple’s March 2024 Q earnings.  We also share what we gather are some of the main questions on investors minds from our recent conversations with the street.

 

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Key Takeaways

• Services remains a standout revenue point and is a significant contribution to outstanding gross margins
• Strong case to be made Apple is entering a phase of re-accelleration
• Strong hints to significant developments around generative AI, which Apple is particularly well positioned to capitalize one

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The main takeaway we think is worth continuing to reinforce, which is evidenced by Apple’s continued strength in services, is how the sum of the parts of Apple’s business is extremely strong.  These two points from earnings are worth emphasizing.

• Revenue from subscriptions grew double digits, and we have well over 1 billion paid subscriptions across the services on our platform. That’s more than double from four years ago.
• Both transacting accounts and paid accounts reached new all-time highs, with paid accounts growing double digits year-over-year.

Apple has the most loyal customer base with well over 2 billion active devices, and the active installed base continuing to invest in Apple’s ecosystem, Apple has the strongest consumer business of any company in the world. We think this point is particularly interesting in light of what an AI paid tier/service could look like for Apple. We do expect Apple to integrate highly useful features leveraging AI into the base operating systems but also don’t rule out the idea of a more personal paid AI service that could be a la carte or bundled into Apple Premier.  There are few companies as well positioned as Apple to offer AI as a service than Apple if they so choose.

 

Positives

• Apple’s March quarter revenue of $90.8B was largely in line with expectations, driven by better than expected results from Mac, Services, and Wearables.
• Gross margin of 46.6% was ~20bps ahead of street expectations, combined with slightly lower Operating Expenses (OpEx) resulted in an EPS beat.
• June quarter guidance was better than feared, with revenue expected to grow in the low single digits year-over-year (Y/Y). This includes double-digit Y/Y growth for iPad and ~13% Y/Y growth for Services.
• Apple announced a $110B increase to its current buyback authorization, marking the largest incremental authorization in the company’s history.
• Adjustments in Services Gross Margins (GMs), now reaching 74-75% on an annual basis next year versus ~71% previously.
• Resilient iPhone revenues year-over-year and significant revenue growth expected from iPads following a product launch.
• China revenue improved with iPhone revenues expanding year-over-year in the Mainland China region.
• The management hinted at Generative AI announcements to come, which strengthens the investment thesis.
• Significant reduction in channel inventory in F2Q, in line with seasonal trends.
• Strong double-digit growth in the India market, setting a new March quarter revenue record.

Negatives

• Despite in-line to better than expected results in some areas, overall March quarter revenue declined by 4% Y/Y.
• Phone and iPad results were slightly weaker than expected, with iPhone 1% below and iPad 13% below street estimates.
• The upcoming iPhone 16 cycle is expected to be similar to the iPhone 15 in terms of units, indicating that growth may remain challenging without significant innovation.
• iPhone revenue is expected to be down mid-single digits, highlighting the macro and competitive challenges facing Apple.
• Despite some positive trends, increased stock reaction creates an unfavorable risk/reward scenario based on the analysis that suggests consensus FY25 EPS may be too optimistic

Key Questions On Investors Minds:

Growth Outlook for the iPhone 16 Cycle: Investors are wondering how Apple will fare in the upcoming iPhone 16 cycle, especially given the checks indicating that it may be similar to the iPhone 15 in terms of units. This raises questions about Apple’s ability to drive volume growth in a highly competitive and saturated market.

Impact of Macroeconomic and Competitive Challenges: There’s curiosity about how Apple will navigate macroeconomic headwinds and intensifying competition, particularly reflected in the expected mid-single-digit decline in iPhone revenue. Investors are keen to understand Apple’s strategy for sustaining growth amid these challenges.

Market Positioning Ahead of WWDC and AI Strategy: With the Worldwide Developers Conference (WWDC) on the horizon, investors are curious about what Apple will unveil, especially in terms of generative AI technologies, and how it compares to competitors like Samsung. The effectiveness of Apple’s AI strategy is a significant point of interest, given its potential impact on future product competitiveness and innovation.

China Market Performance: Given recent soft industry data, particularly for smartphones in China, investors are looking for clarity on Apple’s performance and strategy in this key market. The expectations for a recovery or continued challenges in China are a major focus.

Buyback Strategy and Shareholder Returns: With Apple announcing its largest incremental buyback authorization in company history, investors are questioning the implications for shareholder value and the company’s approach to capital allocation, especially in terms of achieving net cash neutrality over time

Services Segment Growth and Gross Margins: The future growth trajectory of Apple’s Services segment and the expected improvement in Services gross margins are of particular interest. Investors are eager to understand how these factors will contribute to overall profitability and revenue.

Valuation Concerns: Given the stock’s valuation and the premium it commands relative to the market, there’s interest in whether Apple can continue to justify its valuation with its growth prospects, especially considering the concerns over its EPS growth projections.

 

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