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    AAPL
    Earnings call· Mar 2024(Q2 FY24)

    Apple Q2 FY24 earnings call AAPL

    May 2, 2024 Source

    Executive summary

    Apple Q2 FY24 — Services and Mac Drive Growth, Capital Return Boosted

    Apple reported a mixed quarter with strong Services and Mac performance offsetting declines in iPhone, iPad, and Wearables. The company achieved record EPS and significantly increased its share repurchase authorization, underscoring confidence in future growth. Management highlighted ongoing investments in generative AI and an optimistic long-term outlook for key markets like India and China, despite current macroeconomic headwinds.

    Highlights

    5

    • Services revenue reached an all-time record of $23.9 billion, up 14% year-over-year

    • Mac revenue was $7.5 billion, up 4% year-over-year, driven by new MacBook Air models

    • Diluted EPS was a March quarter record of $1.53

    • Installed base of active devices reached an all-time high across all products and geographic segments

    • Board authorized an additional $110 billion for share repurchases

    Concerns

    5

    • Total revenue was $90.8 billion, down 4% from last year, impacted by a difficult iPhone compare

    • iPhone revenue was $46 billion, down 10% year-over-year

    • iPad revenue was $5.6 billion, down 17% year-over-year

    • Wearables, Home and Accessories revenue was $7.9 billion, down 10% year-over-year

    • Foreign exchange had a negative year-over-year impact of 140 basis points on revenue

    Guidance & targets

    9
    CategoryTargetConfidence
    June quarter total company revenue growth
    low single digits year-over-year
    high materiality
    Medium
    June quarter Services business growth
    double digits at a rate similar to the growth reported for the first half of the fiscal year
    medium materiality
    Medium
    June quarter iPad revenue growth
    double digits
    medium materiality
    Medium
    June quarter gross margin
    between 45.5% and 46.5%
    high materiality
    Medium
    June quarter operating expenses
    between $14.3 billion and $14.5 billion
    medium materiality
    Medium
    June quarter Other Income & Expense (OI&E)
    around $50 million, excluding any potential impact from the mark to market of minority investments
    low materiality
    Medium
    June quarter tax rate
    around 16%
    low materiality
    Medium
    Share repurchase authorization
    additional $110 billion
    high materiality
    High
    Dividend increase
    4% to $0.25 per share of common stock
    medium materiality
    High

    Segment performance

    8
    SegmentRevenueYoYQoQMargin
    Total Company
    Revenue was down 4% year-over-year, with a negative foreign exchange impact of 140 basis points. If adjusted for a one-time $5 billion impact in the prior year, total company revenue would have grown.
    		$90.8B-4%——
    Products
    Products revenue declined 10% year-over-year due to the challenging iPhone compare, partially offset by Mac strength. The installed base of active devices reached an all-time high across all products.
    		$66.9B-10%——
    Services
    Services set an all-time revenue record, with strong performance in both developed and emerging markets. Transacting and paid accounts reached new all-time highs, and paid subscriptions more than doubled in four years.
    Paid accounts: double-digit growthPaid subscriptions: double-digit growthTotal paid subscriptions: well over 1 billion
    		$23.9B14%——
    iPhone
    iPhone revenue was down 10% year-over-year, primarily due to a difficult comparison with the prior year's March quarter, which included a $5 billion benefit from channel inventory replenishment. Adjusting for this, iPhone revenue would be roughly flat. Growth was seen in some markets, including Mainland China.
    iPhone active installed base: new all-time high
    		$46.0B-10%——
    Mac
    Mac revenue grew 4% year-over-year, driven by the launch of new 13- and 15-inch MacBook Air models with M3 chips. Customer satisfaction for Mac was 96% in the U.S.
    Mac installed base: all-time highNew to Mac buyers (MacBook Air): 50%
    		$7.5B4%——
    iPad
    iPad revenue declined 17% year-over-year due to a challenging comparison against the launch of M2 iPad Pro and 10th generation iPad in the prior year. Customer satisfaction for iPad was 96% in the U.S.
    iPad installed base: all-time highNew to product buyers (iPad): over 50%
    		$5.6B-17%——
    Wearables, Home and Accessories
    Revenue for Wearables, Home and Accessories was down 10% year-over-year, attributed to a difficult launch comparison from the prior year, which benefited from the launches of AirPods Pro second generation, Watch SE, and Watch Ultra. Customer satisfaction for Apple Watch was 95% in the U.S.
    Apple Watch installed base: new all-time highNew to product buyers (Apple Watch): almost 2/3
    		$7.9B-10%——
    Greater China
    Greater China revenue was down 8% year-over-year, but this was an acceleration from the previous quarter. iPhone revenue in Mainland China grew on a reported basis.
    		—-8%——

    Operational metrics

    26
    Company gross margin
    46.6%up 70 bps sequentially
    Q2 FY24

    Company gross margin reached a high level not seen in decades.

    Products gross margin
    36.6%down 280 bps sequentially
    Q2 FY24

    Sequential decline primarily due to seasonal factors and mix.

    Services gross margin
    74.6%up 180 bps from last quarter
    Q2 FY24

    Services gross margin improved due to a favorable mix.

    Operating expenses
    $14.4Bup 5% year-over-year
    Q2 FY24

    Operating expenses were at the midpoint of guidance.

    Net income
    $23.6B
    Q2 FY24

    Reported net income for the quarter.

    Diluted EPS
    $1.53
    Q2 FY24

    March quarter record diluted EPS.

    Diluted EPS (first half FY24)
    $3.71up 9% from last year
    H1 FY24

    First half diluted EPS record, driven by strong Services growth and gross margins.

    Debt repaid
    $3.2B
    Q2 FY24

    Repayment of maturing debt during the quarter.

    Commercial paper
    unchangedsequentially
    Q2 FY24

    Commercial paper balance remained stable.

    Total debt
    $105B
    Q2 FY24

    Total debt at the end of the quarter.

    Net cash
    $58B
    Q2 FY24

    Net cash position at the end of the quarter, working towards net cash neutral goal.

    Capital returned to shareholders
    over $27B
    Q2 FY24

    Total capital returned to shareholders during the quarter.

    Dividends and equivalents
    $3.7B
    Q2 FY24

    Amount paid in dividends and equivalents.

    Open market share repurchases
    $23.5B
    Q2 FY24

    Amount spent on share repurchases, reducing share count.

    Foreign exchange impact on revenue
    -140 bpsyear-over-year
    Q2 FY24

    Negative impact of foreign exchange on reported revenue.

    Foreign exchange headwind (June quarter guidance)
    about 2.5 percentage points
    Q3 FY24

    Expected foreign exchange headwind for the upcoming quarter's revenue growth.

    Foreign exchange impact (sequential gross margin)
    -30 bpssequentially
    Q3 FY24

    Expected negative sequential impact of foreign exchange on gross margin.

    Memory commodity cost impact (sequential gross margin)
    slight headwindsequentially
    Q3 FY24

    Expected slight headwind from memory commodity costs on gross margin.

    R&D spend (last 5 years)
    more than $100B
    Last 5 years

    Significant investment in research and development over the past five years.

    Installed base of active devices
    all-time high
    Q2 FY24

    Reflects strong customer satisfaction and loyalty.

    Customer satisfaction (iPhone)
    99%
    Q2 FY24

    High customer satisfaction for iPhone 15 family.

    Customer satisfaction (Mac)
    96%
    Q2 FY24

    High customer satisfaction for Mac products.

    Customer satisfaction (iPad)
    96%
    Q2 FY24

    High customer satisfaction for iPad products.

    Customer satisfaction (Apple Watch)
    95%
    Q2 FY24

    High customer satisfaction for Apple Watch.

    Emissions reduction
    more than half
    Since 2015

    Apple has significantly cut overall emissions while revenue grew nearly 65% during the same period.

    Water replenishment goal
    billions of gallons
    next 2 decades

    Goal to replenish 100% of water used in places that need it most.

    Industry KPIs

    6
    MetricValueDetails
    Capital return FCF$110BUSD
    Gross margin drivers46.6%%
    Market share commentary—
    Component supply constraints—
    Installed base refresh runwayall-time high
    Revenue mix by end market segment—

    Product announcements

    6
    ProductTypeDetails
    Apple Vision Prolaunch
    13- and 15-inch MacBook Air with M3 chiplaunch
    Apple Sports applaunch
    Apple Podcasts transcripts featureupdate
    iMessage privacy protectionsupdate
    M3-powered MacBook Airmilestone

    Capital programs

    1
    Restore Fundunderway$200M
    Funding: Apple and supplier partners

    Benefit: nature-based carbon removal projects

    Apple has committed $200 million to the fund, with two supplier partners investing up to an additional $80 million.

    Risks & headwinds

    7
    Difficult iPhone compareQ2 FY24

    estimated $5 billion impact in prior year March quarter

    Mitigation: Focus on new product launches and market expansion. iPhone revenue would have been roughly flat year-over-year without this impact.

    Foreign exchange headwindsQ2 FY24 and Q3 FY24

    -140 basis points year-over-year impact on revenue in Q2 FY24; about 2.5 percentage points headwind for June quarter revenue growth; about 30 basis points sequential negative impact on gross margin in June quarter

    Mitigation: Not explicitly stated, but management acknowledges the impact and continues to operate globally.

    Uneven macroeconomic environmentOngoing

    Unquantified, but noted as a factor in overall business management.

    Mitigation: Managing thoughtfully and deliberately, focusing on user needs and innovation.

    Challenging iPad compareQ2 FY24

    -17% year-over-year revenue decline

    Mitigation: Attributed to strong launches in the prior year (M2 iPad Pro and 10th gen iPad). Focus on continued installed base growth and new customer acquisition.

    Difficult Wearables, Home and Accessories launch compareQ2 FY24

    -10% year-over-year revenue decline

    Mitigation: Attributed to strong launches in the prior year (AirPods Pro 2nd gen, Watch SE, Watch Ultra). Focus on continued installed base growth and new customer acquisition.

    Commodity cost increases (memory)Q3 FY24

    Starting to go up, slight headwind expected in June quarter

    Mitigation: Company starts from a very high gross margin level (46.6%) and tries to buy ahead when cycles are favorable.

    Competitive market in ChinaOngoing

    Unquantified, but described as 'the most competitive market in the world'

    Mitigation: Focus on serving customers well, expanding channels, and developing the ecosystem. iPhone grew in Mainland China on a reported basis in Q2 FY24.

    Q&A highlights

    7

    Will Apple's CapEx cadence change due to increased investments in AI, specifically regarding tooling, data centers, and facilities?

    Apple is excited about GenAI and has invested over $100 billion in R&D over the last five years. The company uses a hybrid CapEx model, investing directly and sharing with suppliers/partners for manufacturing and data centers, and plans to continue this approach.

    “It's a model that has worked well for us historically, and we plan to continue along the same lines going forward.”

    asked by Michael Ng · answered by Luca Maestri

    2 min read6 chapters

    Detailed Narrative

    01

    iPhone Performance and Market Dynamics

    iPhone revenue was $46 billion, down 10% year-over-year. This decline was attributed to a difficult comparison with the prior year, which included a nearly $5 billion benefit from replenishing channel inventory and fulfilling pent-up demand for iPhone 14 Pro models. Adjusting for this one-time📎 impact, iPhone revenue would have been roughly flat year-over-year. Despite the overall decline, iPhone saw growth in some markets, including Mainland China, where the iPhone 15 and 15 Pro Max were among the top-selling smartphones.

    02

    Services Business Momentum

    Services achieved an all-time revenue record of $23.9 billion, growing 14% year-over-year. This growth was broad-based, with record performance in both developed and emerging markets and across several service categories like cloud, video, and payment services. The installed base of active devices continued to grow, supporting future services growth, with paid accounts and paid subscriptions both showing strong double-digit growth, exceeding 1 billion paid subscriptions across the platform.

    03

    Mac and iPad Performance

    Mac revenue increased 4% year-over-year to $7.5 billion, driven by the strong launch of the new 13- and 15-inch MacBook Air models powered by the M3 chip. The Mac installed base reached an all-time high, with half of MacBook Air buyers being new to Mac. Conversely, iPad revenue was $5.6 billion, down 17% year-over-year, facing a challenging comparison against the launch of the M2 iPad Pro and 10th generation iPad in the prior year. The iPad installed base also grew to an all-time high, with over half of new iPad purchasers being new to the product.

    04

    Generative AI Opportunity and Investments

    Apple expressed significant bullishness regarding generative AI, viewing it as a key opportunity across its product portfolio. The company is making substantial investments in AI, leveraging its integrated hardware, software, and services, Apple silicon with neural engines, and a focus on privacy. Management anticipates sharing exciting developments with customers soon, with upcoming product announcements and the Worldwide Developers Conference expected to highlight AI advancements.

    05

    Capital Return Program and Net Cash Neutral Goal

    Apple ended the quarter with $162 billion in cash and marketable securities and a net cash position of $58 billion. The Board authorized an additional $110 billion for share repurchases, bringing the total to $200 billion over the last two years, as the company continues its goal of reaching net cash neutral over time⏳. The quarterly dividend was also raised by 4% to $0.25 per share, with plans for annual increases to continue.

    06

    Emerging Markets and China Outlook

    Apple saw strong momentum in emerging markets, setting first-half revenue records in regions like Latin America, the Middle East, India, Indonesia, the Philippines, and Turkey. In Greater China, revenue was down 8% year-over-year, but iPhone revenue in Mainland China grew on a reported basis. Management remains optimistic about the long-term potential in China, despite it being a highly competitive market, and views India as an incredibly exciting market with strong double-digit growth and significant expansion opportunities across the ecosystem.

    AI-generated summary of the company’s earnings call. Not investment advice.