Apple: A massive loss of 10 billion, can it withstand?

Apple (AAPL.O) released its Q4 2024 financial report (for the period ending September 2024) after U.S. stock market hours on November 1, 2024, Beijing time.

1. Overall Performance: Revenue & Profit, Meeting Market Expectations. In this quarter, Apple achieved revenue of $94.9 billion, a year-on-year increase of 6.1%, slightly better than the market consensus expectation ($94.32 billion). The increase in revenue this quarter was mainly driven by growth in the iPhone, iPad, and smart wearable businesses. Apple's gross margin was 46.2%, an increase of 1 percentage point year-on-year, basically in line with market consensus expectations (46%). The gross margin for the software services business remained high at 74%.

2. iPhone: Both Volume and Price Increased. Driven by the launch of the iPhone 16 series, $Apple(AAPL.US) saw an increase in both shipment volume and average selling price this quarter. Dolphin estimates that iPhone shipments grew by 4.5% year-on-year this quarter, while the average selling price also increased by 1% year-on-year.

3. Other Hardware Beyond iPhone: Mac and iPad Both Saw Growth. The recovery in the tablet market, combined with the company's new products this year, allowed the iPad business to maintain $7 billion. As for the Mac business, although there was growth this quarter, shipment volume saw a double-digit decline year-on-year, mainly because customers are waiting for the new M4 Mac products. Other hardware businesses, such as wearables, continued to decline by 3% this quarter, with demand still weak.

4. Software Services: Continuing to Rise. Software services revenue this quarter was $25 billion, below market consensus expectations ($25.28 billion). This quarter, software business revenue reached a new high, and the gross margin continued to maintain a high level of 74%. With a high gross margin, the software business accounted for nearly 26% of revenue, generating 44% of the company's gross profit, serving as a stabilizer for the company's performance.

Dolphin's Overall View: Apple's Financial Report is Standard.

The company's operational performance this quarter met market expectations. The growth in revenue was mainly driven by the improvement in the iPhone, iPad, and smart wearable businesses. As for the significant decline in net profit, it was mainly affected by a one-time tax payment to the EU. Excluding the impact of this $10.2 billion payment, the company's operational net profit this quarter returned to $24.9 billion, slightly better than market expectations ($24.3 billion).

Looking at the specific businesses: 1) The company's core hardware segment (iPhone, iPad, and Mac) saw varying degrees of growth this quarter, with the iPhone business experiencing a slight increase in both shipment volume and average price; 2) The company's wearables and other businesses continued to decline this quarter, with market demand remaining relatively sluggish; 3) The company's software services business continued to maintain double-digit growth, making it the most stable part of the company's growth; 4) The company's capital expenditure increased this quarter, with quarterly spending rising to $2.9 billion, but it remains relatively small compared to the company's operating profits.

Overall, Apple's core hardware segment has shown improvement. After the new iPhone models were all equipped with 3nm chips, the sales of the iPhone 16 series performed better than the iPhone 15 series in the same period last year. The iPad business, supported by new products and a recovery in demand, also stabilized at $7 billion in revenue. As for the Mac, the shipment volume declined this quarter, mainly because the market is waiting for new products equipped with the M4 chip.

Regarding the revenue expectations for the next quarter, the company has provided a year-on-year growth forecast of low single digits to mid-single digits, which is slightly below the market consensus expectation of 7%. Based on Apple's typical performance being slightly better than the company's expectations, the final revenue may be roughly similar.

As for the company's profits, this quarter was affected by a one-time impact from EU tax adjustments. Excluding this impact, the company's operating profit for this quarter was still $24.9 billion, achieving an operating net profit of $103.9 billion for fiscal year 2024, while the current company's stock price corresponds to a PE ratio of about 33 times. For a company maintaining single-digit growth, the market assigns a valuation of over 30 times, which also includes expectations for the company's AI terminals and related monetization capabilities. This financial report basically met market expectations, and further increases will still require more performance exceeding expectations from the company. Future attention should be paid to the company's management communication regarding its outlook for future operations, AI, and related layouts and monetization details.

Dolphin Jun's specific analysis of Apple's financial report is detailed below:

1. Overall Performance: Revenue & Profit, Meeting Market Expectations

1.1 Revenue: In the fourth quarter of fiscal year 2024 (i.e., Q3 24), Apple achieved revenue of $94.9 billion, a year-on-year increase of 6.1%, slightly better than the market consensus expectation ($94.32 billion). The increase in the company's revenue this quarter was mainly driven by growth in the iPhone, iPad, and software services businesses. Although revenue from the Greater China region declined slightly, other regions showed varying degrees of growth.

From both hardware and software perspectives:

Apple's hardware business grew by 4.1% this quarter. The hardware segment continued to grow this quarter, although wearables and other businesses still declined, the company's core hardware products (iPhone, iPad, and Mac) all experienced varying degrees of growth, directly driving the continued recovery of the hardware segment;
Apple Inc.'s software business growth rate for this quarter is 11.9%, continuing to maintain double-digit growth. The software business has a certain degree of risk resistance. Even during periods of relatively low hardware revenue, software services have continued to grow.

By region: This quarter, Apple's revenue in Greater China still declined, while there was varying degrees of growth in other regions. The company faces insufficient demand and market competition for some products in Greater China. Specifically, the Americas region is Apple's largest source of revenue, growing 3.9% this quarter; meanwhile, revenue in Greater China declined by 0.3% this quarter.

1.2 Gross Margin: In the fourth quarter of fiscal year 2024 (i.e., 3Q24), Apple Inc.'s gross margin is 46.2%, an increase of 1 percentage point year-on-year, basically in line with market consensus expectations (46%). The increase in the company's gross margin is mainly driven by the growth in the gross margin of the software business.

Dolphin Jun breaks down the gross margins of software and hardware:

Apple Inc.'s software gross margin remains high at 74% this quarter, which is the main source of the company's gross margin increase. The hardware gross margin slightly declined to 36.3%, mainly affected by promotional policies for some products and inventory preparations for new products.

1.3 Operating Profit: In the fourth quarter of fiscal year 2024 (i.e., 3Q24), Apple Inc.'s operating profit is $29.6 billion, a year-on-year increase of 9.7%. The growth in Apple's operating profit this quarter is driven by increases in revenue and gross margin.

This quarter, Apple's operating expense ratio is 15.1%, an increase of 0.1 percentage points year-on-year. The company's selling and research and development expenses have increased this quarter, but the proportion of both expenses remains stable.

2. iPhone: Both Volume and Price Rise

In the fourth quarter of fiscal year 2024 (i.e., 3Q24), iPhone business revenue reached $46.2 billion, a year-on-year increase of 5.5%, better than the market consensus expectation ($45.04 billion). The growth of the company's iPhone business this quarter is mainly attributed to the overall rebound in shipment volume and average selling price. The new iPhone 16 series was launched on September 20, and sales data for the first 8 days have already surpassed that of the iPhone 15 series during the same period last year.

Dolphin Jun specifically analyzes the main sources of growth in the iPhone business this quarter from the relationship between volume and price:

1) iPhone Shipment Volume: According to IDC, the global smartphone market grew by 4.4% year-on-year in the third quarter of 2024. Apple's shipment volume growth rate this quarter was around 4.5%, slightly better than the overall market performance.

2) iPhone Average Selling Price: Based on the iPhone business revenue and shipment volume, the average selling price of iPhone shipments this quarter was approximately $825, a year-on-year increase of 1%. The third quarter has traditionally been a period of lower average selling prices for the company's iPhones, mainly because some customers were waiting to purchase the soon-to-be-released new models. This quarter, driven by the launch of the iPhone 16, the average selling price of products has increased.

3. Other Hardware Beyond iPhone: Mac and iPad Both Show Growth

3.1 Mac Business

In the fourth quarter of fiscal year 2024 (i.e., 3Q24), Mac business revenue reached $7.7 billion, a year-on-year increase of 1.7%, which is basically in line with market expectations ($7.75 billion).

According to IDC's report, global PC shipment volume grew by 1% year-on-year this quarter, while Apple's shipment volume experienced a double-digit decline year-on-year, significantly underperforming the overall market. Dolphin Jun believes this is mainly because the market is waiting for the new MacBook Pro equipped with the M4 chip that the company will launch within the year.

Combining company and industry data, Dolphin Jun estimates that the average selling price of Mac shipments this quarter was $1,460, a year-on-year increase of nearly 30%. The growth of the company's Mac business this quarter mainly comes from the increase in average selling price

3.2 iPad Business

In the fourth quarter of fiscal year 2024 (i.e., Q3 2024), iPad business revenue was $7 billion, a year-on-year increase of 7.9%, which is basically in line with market consensus expectations ($7.07 billion). The iPad business remains the fastest-growing hardware segment this quarter.

From an industry perspective, the tablet market has shown a significant recovery since last quarter. In the second quarter, the overall industry shipment volume increased by 21.6% year-on-year, with quarterly shipments stabilizing above 30 million units, and the company's iPad shipments also saw a 17% growth. Dolphin believes that since the public health event, the tablet market has been persistently sluggish, and there is now some replacement demand. Additionally, influenced by Apple's launch of new iPad products this year, the company's iPad business quarterly revenue has remained at $7 billion.

3.3 Wearables and Other Hardware

In the fourth quarter of fiscal year 2024 (i.e., Q3 2024), revenue from wearables and other hardware was $9 billion, a year-on-year decline of 3%, slightly below market consensus expectations ($9.17 billion). The wearables and other business has experienced a continuous decline for five consecutive quarters, and overall demand remains weak. However, the rate of decline has significantly narrowed in the past two quarters.

4. Software Services: Continuing to Rise

In the fourth quarter of fiscal year 2024 (i.e., Q3 2024), software services revenue was $25 billion, a year-on-year increase of 11.9%, which is below market consensus expectations ($25.28 billion). The software business is the most stable segment, with revenue continuing to grow. The growth in software business primarily comes from user retention and an increase in revenue per user.

Among software services, the most noteworthy aspect is the gross margin level of software services. In this quarter, the gross margin for software services remained at 74%, continuing to stay high, having maintained above 70% for 13 consecutive quarters. With a high gross margin, the company's software business accounts for nearly 26% of revenue, generating 44% of the company's gross profit, serving as a stabilizer for the company's performance.