Apple missed expectations in its most recent quarter, but its results illustrated several trends business owners should be thinking about, such as the strategic importance of developing markets, customer loyalty, and diversification to survive change.
Keeping the sails in the wind
Revenue hit $89.5 billion, down about 1% on the last-year quarter, though company management tried to put a positive spin on the data.
Within the results, there were several key highlights, not least that Apple’s pivot to services has proved its value. Services revenue reached a new all-time high above $22.3 billion. For Apple, that’s a serious number, particularly as its combined Mac, iPad, wearables, home, and accessories business generated $23.3 billion in the same period, but at much lower margins. (Product margin hit 36.6%, said Apple.)
Across the last 12 months, services have generated $85 billion in revenue, around 70.9% of which was profit.
Bottom line?
Services is doing its job. It is, as I’ve argued, helping the company maintain its business during an incredibly challenging environment. Overall, gross margins reached 45.2%, “the highest level ever,” noted Deep Water analyst Gene Munster.
Weakness for the Mac, but was predicted
Speaking during its last quarter, Apple had warned Mac sales would decline, in part because on a year-by-year basis, the market itself has changed. Apple benefitted from a lot of pent-up demand for Macs following pandemic-related shutdowns, and (in the US, at least) also got a slice of the action following various economic stimulus payments.
All the same, the data was a little dispiriting as Mac revenue fell almost 34% — despite the release of the superb 15-in. M2 MacBook Pro.
With the introduction this week of M3 Macs, Apple CEO Tim Cook predicted a “significantly better” quarter for Mac sales in the current quarter, but described the PC market currently as “challenging.” It is worth noting that even while PC sales decline, Apple continues to build share.
The other challenge Apple faces is that for many users, the M1 Macs they purchased earlier still do everything they need, which means the upgrade cadence remains 3 to 5-years — though user satisfaction remains solid. Those M1 upgrades will start to show up in 2024, I suspect, particularly as MacBook Air and mini get M3 chips. Mac customer satisfaction in the US hit 97%.
Meanwhile, there are positive signs that tomorrow’s employees will want Macs.
“According to the latest data from Student Monitor, nearly two out of three college students use a Mac,” said Cook.
“Half of our Mac buyers during the quarter were new to the platform, driven by the MacBook Air,” said CFO Luca Maestri. “We expect Mac year-over-year performance to significantly accelerate from the September quarter.”
The day after tomorrow
No doubt, the economic consequences of war, disease, inflation, strained supply chains, and the consequences of climate change on communities and food commodities was bound to take a bite from the company’s results. Apple execs certainly planned ahead, and while Wall Street may be pounding the stock today, the impact in the current quarter was just a tiny 1% decline. That’s really the equivalent of a scratch in a sea of blood-red financial results.
This well executed/resilient approach to business management means investors will soon come running back, particularly as sales of the company’s cash cow iPhone set a new $43.8 billion September quarter revenue record. “If you look at iPhone 15 for that period of time and compare it to iPhone 14 for the same time in the year-ago quarter, iPhone 15 did better than iPhone 14,” Cook said.
One thing Apple also confirmed: it isn’t yet meeting demand for iPhone 15 Pro and iPhone 15 Pro Max, supply of which remains “constrained.” The company has done an excellent job upselling the world to its high-end iPhones — it just can’t seem to make them swiftly enough.
Arguably, however, Apple’s services arm is a more important metric now, given that these are far more profitable and that they delivered around half as much revenue as iPhone. “Our active installed base of devices has again reached a new all-time high across all products and all geographic segments, thanks to the strength of our ecosystem and unparalleled customer loyalty,” said Maestri.
“Every main service hit a record,” added Cook, noting Apple has more than a billion paid subscriptions. With iPhone customer loyalty so high, these people aren’t going anywhere — and will likely try new Apple services as they appear.
Far more than threats around opening up the App Store, for investors, the future red flag around services pertains to the future of the Apple/Google Safari search deal, which is said to contribute $19 billion to Apple’s services income.
What will Apple’s management come up with to limit the impact of that? While not precisely connected, it’s interesting to note that Apple’s inventory levels grew to $6.3 billion from $4.9 billion as the company prepares for next year’s Vision Pro launch. (This likely also reflects supply levels of newly-announced M3 Macs.)
Geography club
In terms of location, much post-announcement reporting seems focused on China. Apple confirmed that Q4 year-over-year revenue there fell 2.5%. It also noted a decline in Japan (down 3.4%), and across the rest of the Asia-Pacific (down 0.7%).
It wasn’t just China (down from $74.2 billion to $72.5 billion) that dragged down Apple’s results. In the Americas, revenue fell to $162.5 billion from $169.6 billion. If anything, while the US results see some improvement in Q4 (a quarterly record, no less), it’s hard not to think that economic recovery remains relatively unstable. And there may still be shocks that haven’t yet been baked into the system.
China and the US are Apple’s key markets, so it’s no great surprise the company is investing so much in building business elsewhere. (We’ll skip the fawning-at-Musk UK for now, as its near-term future seems bleak.)
You can’t discuss emerging markets without mentioning India. So, Apple mentioned India. “We achieved an all-time revenue record in India,” Cook said during the analyst call. Apple generated its highest-ever iPhone sales in India this year.
Apple also achieved records in Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam, and more. As geo-politics shifts, management is preparing for when these economies grow.
The real green shoots of recovery
Apple had little to add when it comes to the environment. It confirmed that more than 300 of its suppliers have committed to using 100% clean energy for Apple production by 2030 and mentioned its continued investment in green-focused entrepreneurs. The company repeated its promise to become completely carbon neutral by 2030.
Wheels of industry
Apple always spends a few seconds during every announcement celebrating its enterprise wins. This time was no different. Maestri confirmed two:
- Starbucks recently refreshed its over 10,000 Macs to the latest M2-powered MacBook Air.
- In Indonesia, tech company GoTo now supports Mac as a choice in its employee choice scheme – and over half of its workforce are selecting Macs. The company has around 10,000 employees and is the most valuable start-up in Indonesia.
Don’t look up
Looking ahead, Apple warned that it expects results more or less in line with Q1 FY23 in its current quarter, which disappointed analysts accustomed to inexorable growth. But I imagine that by the time those results appear, that flat line will look like growth in comparison with the rest of the market.
And here’s where I repeat myself again; handling such uncertainty is precisely where Apple’s services segment helps the company most. Those nice, predictable subscription incomes, coupled with best-in-class customer experiences, limited churn, and maximum loyalty means the company can more or less bank on solid revenue to help it through rough seas.
For Apple — or any business seeking to shore up its core industry through services provision — the next challenge will be to deliver localized services to appeal to a wider audience, and to extend the number of services available. Meanwhile, the rumor that never seems to want to die is the notion the company may offer more of its hardware on a subscription basis in future.
GAI to get you into my life
Apple had to get in on the act eventually. Yes, that’s right, Cook confirmed Apple is working on Generative AI.
“If you kind of zoom out and look at what we’ve done on AI and machine learning and how we’ve used it, we view AI and machine learning as fundamental technologies. And they’re integral to virtually every product that we show. And so just recently when we shipped iOS 17, it had features like personal voice and live voicemail. AI is at the heart of these features.
“And then you can go all the way to the life-saving features on the watch and the phone like fall detection, crash detection, ECG on the watch. These would not be possible without AI. And so, we don’t label them as such, if you will. We label them as what their consumer benefit is. But the fundamental technology behind it is AI and machine learning.
“In terms of generative AI, obviously we have work going on. I’m not going to get into details about what it is because you know, as you know, we don’t, we really don’t do that. But you can bet that we’re investing, we’re investing quite a bit. We’re going to do it responsibly and you will see product advancements over time where those technologies are at the heart of them.”
So, erm, I guess we’ll be dumping OpenAI next year.
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