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    AAPL
    Earnings call· Dec 2022(Q1 FY23)

    Apple Q1 FY23 earnings call AAPL

    Feb 2, 2023 Source

    Executive summary

    Apple Q1 FY23 — Strong Services and Installed Base Growth Amidst Supply Constraints

    Apple reported a challenging quarter with a 5% revenue decline, primarily driven by significant foreign exchange headwinds and supply constraints for high-end iPhone models. Despite these challenges, the company achieved record Services revenue and saw its installed base of active devices exceed 2 billion, demonstrating strong customer loyalty and ecosystem growth. Management remains confident in the long-term strategy, focusing on innovation, customer experience, and value-driven leadership.

    Highlights

    5

    • Services revenue reached an all-time record of $20.8 billion, exceeding expectations

    • Installed base of active devices surpassed 2 billion, a double-digit increase year-over-year

    • iPad revenue grew 30% year-over-year to $9.4 billion, benefiting from improved supply

    • Gross margin guidance for Q2 FY23 is strong, between 43.5% and 44.5%

    • Operating cash flow was very strong at $34 billion

    Concerns

    5

    • Total revenue declined 5% year-over-year to $117.2 billion due to foreign exchange headwinds and supply constraints

    • Foreign exchange headwinds had a nearly 800 basis point impact on revenue

    • iPhone revenue was down 8% year-over-year to $65.8 billion due to supply shortages for iPhone 14 Pro/Pro Max

    • Mac revenue declined 29% year-over-year to $7.7 billion due to challenging compares and macro environment

    • Wearables, Home and Accessories revenue was down 8% year-over-year to $13.5 billion

    Guidance & targets

    9
    CategoryTargetConfidence
    March quarter year-over-year revenue performance
    similar to the December quarter
    high materiality
    Medium
    Foreign exchange negative year-over-year impact
    5 percentage points
    medium materiality
    High
    Services revenue growth
    grow year-over-year
    medium materiality
    Medium
    iPhone year-over-year revenue performance
    accelerate relative to the December quarter year-over-year revenue performance
    high materiality
    Medium
    Mac and iPad revenue
    decline double digits year-over-year
    medium materiality
    Medium
    Gross margin
    between 43.5% and 44.5%
    high materiality
    High
    Operating expenses (OpEx)
    between $13.7 billion and $13.9 billion
    medium materiality
    High
    Other Income and Expense (OI&E)
    around negative $100 million
    low materiality
    High
    Tax rate
    around 16%
    low materiality
    High

    Segment performance

    5
    SegmentRevenueYoYQoQMargin
    iPhone
    Revenue was down year-over-year due to significant foreign exchange headwinds, supply constraints on iPhone 14 Pro and iPhone 14 Pro Max, and a challenging macroeconomic environment. On a constant currency basis, iPhone revenue was roughly flat. Set all-time iPhone revenue records in Canada, Italy, Spain, India, and Vietnam. Installed base of active iPhones continues to grow and is at an all-time high across all geographic segments.
    		$65.8B-8%——
    Mac
    Revenue was in line with expectations, driven by a difficult compare against last year's successful launch of M1 MacBook Pros, macroeconomic environment, and foreign exchange headwinds. The installed base of active Macs reached an all-time high across all geographic segments.
    		$7.7B-29%——
    iPad
    Very strong growth due to a favorable compare to the prior year when significant supply constraints were experienced, and the launch of new iPad and iPad Pro models. The iPad installed base reached a new all-time high, with over half of purchasers being new to the product.
    		$9.4B30%——
    Wearables, Home and Accessories
    Revenue was down year-over-year driven by foreign exchange headwinds and a challenging macroeconomic environment. The installed base of devices in this category set a new all-time record, with nearly two-thirds of Apple Watch purchasers being new to the product.
    		$13.5B-8%——
    Services
    Set an all-time revenue record despite more than 700 basis points of negative impact from foreign exchange. In constant currency, Services revenue grew double digits. Achieved all-time Services revenue records in the Americas, Europe, and rest of Asia Pacific, and a December quarter record in Greater China. Set records in many Services categories, including all-time revenue records for cloud services, payment services, and music, and December quarter records for the App Store and AppleCare.
    		$20.8B6%——

    Operational metrics

    14
    Company Gross Margin
    43%up 70 bps sequentially
    Q1 FY23

    Reported for the December quarter.

    Products Gross Margin
    37%up 240 bps sequentially
    Q1 FY23

    Reported for the December quarter.

    Services Gross Margin
    70.8%up 30 bps sequentially
    Q1 FY23

    Reported for the December quarter.

    Operating Expenses
    $14.3Bbelow guidance range
    Q1 FY23

    Significantly below the guidance range provided, grew at a slower pace due to actions taken in response to the macro environment.

    Diluted Earnings Per Share
    $1.88
    Q1 FY23

    Reported for the December quarter.

    Cash and Marketable Securities
    $165B
    Q1 FY23

    Ended the quarter with this balance.

    Total Debt
    $111B
    Q1 FY23

    After repaying $1.4 billion in maturing debt and decreasing commercial paper by $8.2 billion.

    Net Cash
    $54B
    Q1 FY23

    At the end of the quarter, with a goal of becoming net cash-neutral over time.

    Capital Returned to Shareholders
    $25B
    Q1 FY23

    Returned during the December quarter.

    Services Revenue Growth (Constant Currency)
    double digitson top of 24% growth a year ago
    Q1 FY23

    Achieved despite more than 700 basis points of negative FX impact.

    Paid Subscriptions
    935M+up 150M+ in last 12 months
    Q1 FY23

    Across services on the platform, nearly 4x what it was 5 years ago.

    Transacting Accounts Growth
    double digitsYoY
    Q1 FY23

    Set a new all-time record.

    Paid Accounts Growth
    double digitsYoY
    Q1 FY23

    Set a new all-time record.

    Dividend Per Share
    $0.23
    Q1 FY23

    Declared by the Board of Directors.

    Industry KPIs

    5
    MetricValueDetails
    Capital return FCF$25BUSD
    Gross margin drivers43%%
    Company specific kpis98%%
    Component supply constraintsiPhone 14 Pro and iPhone 14 Pro Max supply
    Installed base refresh runway2B+devices

    Product announcements

    5
    ProductTypeDetails
    Next-generation HomePodlaunch
    Freeform applaunch
    MLS Season Passlaunch
    Apple Business Connectlaunch
    iMessage contact key verification, security keys for Apple ID, advanced data protection for iCloudupdate

    Deals & partnerships

    3
    Major League Soccerpartnership10-year

    Historic 10-year partnership to launch MLS Season Pass, providing access to every live MLS regular season game, playoffs, and MLS Cup in over 100 countries with no blackouts.

    Mars Incorporatedcustomer contract

    Expanded use of AppleCare for Enterprise to provide timely device support for iPads deployed across their manufacturing sites.

    HCA Healthcarecustomer contractannual refresh

    Leveraged Apple Financial Services to manage the annual refresh of its entire fleet of iPhones, ensuring staff stay current on technology and providing significant annual savings.

    Risks & headwinds

    5
    Foreign exchange headwindsQ1 FY23

    nearly 800 basis point impact on revenue

    Mitigation: Not explicitly stated, but company grew on a constant currency basis in most markets.

    COVID-19-related supply challengesNovember through most of December

    significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max

    Mitigation: Production is now back to desired levels.

    Challenging macroeconomic environmentQ1 FY23 and ongoing

    affected revenue performance across products, particularly Mac and Wearables

    Mitigation: Company is thoughtful and deliberate, manages for the long term, adapts quickly, and invests in innovation.

    Difficult compare for Mac revenueQ1 FY23

    Mac revenue down 29% year-over-year

    Mitigation: New MacBook Pro models with M2 Pro and M2 Max, and M2-powered Mac mini introduced; confidence in long-term opportunity with Apple silicon.

    Macroeconomic headwinds impacting Services categoriesQ1 FY23 and ongoing

    impacted certain categories such as digital advertising and mobile gaming

    Mitigation: Company remains focused on the large long-term opportunity in Services, observing increased customer engagement and growing paid subscriptions.

    Q&A highlights

    9

    How does Apple view its supply chain and inventory management going forward to insulate against disruptions, and how might this affect margins and cash flow?

    Tim Cook stated that iPhone production is now back to normal, and the supply problem is behind them. He noted that the supply chain is resilient despite recent challenges and that they are in decent supply for most products this quarter. He did not elaborate on specific changes to inventory strategy or financial impacts.

    “From a supply point of view, we did see disruption from early November through most of December. And from a supply chain point of view, we're now at a point where production is what we need it to be. And so the problem is behind us.”

    asked by David Vogt · answered by Timothy Cook

    2 min read5 chapters

    Detailed Narrative

    01

    Impact of Macroeconomic Headwinds and Supply Constraints

    Apple's Q1 FY23 revenue of $117.2 billion was down 5% year-over-year, primarily due to significant foreign exchange headwinds🌐 (nearly 800 basis points impact) and COVID-19-related supply challenges for iPhone 14 Pro and Pro Max. The macroeconomic environment, including inflation and geopolitical events, also contributed to the challenging quarter. Production for iPhone 14 Pro and Pro Max is now back to desired levels, and the company expects iPhone revenue performance to accelerate in the March quarter.

    02

    Record Installed Base and Services Growth

    The installed base of active Apple devices reached a new all-time high of over 2 billion, doubling in the last seven years. This broad-based growth across all geographic segments and major product categories, particularly in emerging markets like India and Brazil, is a key driver for Services revenue. Services achieved an all-time record of $20.8 billion, growing double digits on a constant currency basis, with strong performance in cloud, payment services, and music, and over 935 million paid subscriptions.

    03

    Product Category Performance

    iPhone revenue was $65.8 billion, down 8% year-over-year, impacted by supply constraints. Mac revenue declined 29% to $7.7 billion due to a tough comparison with the M1 MacBook Pro launch last year and macro headwinds🌐. iPad revenue grew 30% to $9.4 billion, benefiting from improved supply compared to the prior year. Wearables, Home and Accessories revenue was $13.5 billion, down 8% due to FX and macro factors, though the installed base for this category also set a new record.

    04

    Geographic Performance and India Focus

    Apple set all-time revenue records in several markets including Canada, Indonesia, Mexico, Spain, Turkey, and Vietnam, along with quarterly records in Brazil and India. While Greater China revenue declined 7% on a reported basis, it grew on a constant currency basis despite supply constraints and COVID-19 restrictions. India is highlighted as a major focus market, with strong double-digit growth and plans to open Apple retail stores, leveraging lessons learned from scaling in China.

    05

    Capital Return and Net Cash Neutral Goal

    The company returned over $25 billion to shareholders in the December quarter, including $3.8 billion in dividends and $19 billion in share repurchases. Apple ended the quarter with $165 billion in cash and marketable securities and a net cash position of $54 billion, reiterating its long-term goal of becoming net cash-neutral.

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