Apple: Apple Intelligence will be promoted in more countries and languages (FY24Q4 conference call summary)

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

Below is the summary of Apple's Q4 2024 earnings call. For an interpretation of the financial report, please refer to Apple: A Hundred Billion Loss, Can It Endure?

1. $Apple(AAPL.US) Core Information Review:

2. Detailed Content of Apple's Earnings Call

2.1 Executive Statements on Core Information:

1) Business Progress

iPhone Business

Revenue reached $46.2 billion in the September quarter, a year-on-year increase of 6%.

Set new records in multiple markets, including the US, Middle East, South Korea, and South Asia for the September quarter; ranked first in sales in urban areas of the US, China, the UK, Australia, and Japan.

The active install base of iPhones reached a new high globally; customer satisfaction for the iPhone 15 series in the US is 98%.

The newly launched iPhone 16 series features the A18 chip, a 48MP camera, and a new "action" button, while the iPhone 16 Pro is equipped with the A18 Pro, offering higher battery life quality.

Mac Business

Revenue of $7.7 billion, a year-on-year increase of 2%.

The install base (number of users) for Mac reached a new high, with new users accounting for about half of the quarterly total; customer satisfaction for Macs in the US is 95%.

The latest M4 series chips provide faster performance and advanced neural engines, enhancing Mac's capabilities in AI applications.

Launched the first carbon-neutral Mac mini, showcasing environmental commitment.

iPad Business

Revenue of $7 billion, a year-on-year increase of 8%.

Achieved double-digit growth in markets such as Mexico, Brazil, the Middle East, India, and South Asia.

The install base for iPads reached a new high, with new users accounting for more than half; customer satisfaction for iPads in the US is 97%.

The latest iPad mini supports Apple Pencil Pro.

Wearables, Home, and Accessories

Revenue of $9 billion, a year-on-year decrease of 3%.Launched the new Apple Watch Series 10, featuring a slimmer design; WatchOS 11 expands health features (such as sleep apnea reminders).

The installed base of Apple Watch has reached a new high, with over half of the users being first-time buyers; customer satisfaction for Apple Watch in the U.S. is 96%.

Launched the AirPods 4 with an open noise-cancellation feature.

AirPods Pro 2 adds end-to-end hearing assistance features, including hearing protection, hearing tests, and amplification.

Apple Vision Pro

Vision Pro includes over 2,500 native spatial applications and 1.5 million compatible visionOS 2 applications.

Announced expansion to South Korea and the UAE, continuing to drive global market expansion.

Services Business

Revenue reached $25 billion, a year-on-year increase of 12%, setting a historical record.

Apple TV+ paid subscriptions achieved double-digit growth, with total paid subscriptions exceeding 1 billion.

Education support programs expanded to 100 schools and communities.

Environmental Sustainability

Plans to achieve full carbon neutrality by 2030, having launched carbon-neutral Mac mini and Apple Watch, promoting environmental innovation.

Future Outlook and Technological Innovation

Apple Intelligence: Combining generative AI and privacy protection, launched smart writing tools and personalized features. Plans to expand in more countries and languages to enhance user experience.

Next-Generation Product Development: Continuing to focus on the empowerment of future products by generative AI.

2) Financial Performance

Revenue Side

Fourth-quarter revenue reached $94.9 billion, a year-on-year increase of 6%, setting a record for the September quarter.

Product revenue was $70 billion, a year-on-year increase of 4%, with growth mainly from iPhone, iPad, and Mac.

Service revenue set a historical high of $25 billion, a year-on-year increase of 12%, performing strongly globally.

Gross Margin Side

The company's overall gross margin was 46.2%, close to the high end of the guidance range.

Product gross margin was 36.3%, an increase of 100 basis points from the previous quarter.

Service gross margin was 74%, unchanged from the previous quarter.

Operating Expenses and Net Income

Operating expenses reached $14.3 billion, a year-on-year increase of 6%.

One-time tax expenses reached $10.2 billion, stemming from the annulment of the EU General Court's state aid ruling.

Excluding one-time tax expenses, net income was $25 billion, with diluted earnings per share of $1.64, a year-on-year increase of 12%.

Cash Position and Capital Return

Cash and cash equivalents at the end of the quarter totaled $157 billion.

Repurchased 11.2 million shares of Apple stock in the open market, returning over $29 billion to shareholders, including $3.8 billion in dividends and $25 billion in stock buybacksDecember Quarter Guidance

Revenue Guidance: Total revenue is expected to grow low to mid-single digits year-over-year.

Service Revenue Guidance: Expected to grow at a similar double-digit rate as in fiscal year 2024.

Gross Margin Guidance: Expected to be between 46% and 47%.

Operating Expense Guidance: Between $15.3 billion and $15.5 billion.

Tax Rate Guidance: Expected tax rate is 16%.

2.2 Q&A Analyst Q&A

Q: Can you elaborate on the early feedback for Apple Intelligence in iOS 18.1 and the developer beta? Do you believe Apple Intelligence has contributed to the strong performance of the current iPhone?

A: This Monday, we officially launched the first features of Apple Intelligence on iPhone, iPad, and Mac, available for U.S. English users. These features include system-wide writing tools to help users optimize their writing; more natural Siri conversation capabilities; a smarter Photos app that can automatically create videos from input descriptions; and new ways to help users focus better through notification summaries and prioritized messages. Additionally, we have added email summaries and email prioritization features.

Feedback from developers and users has been very positive. In fact, just from the data of the first three days since Monday, the adoption rate of version 18.1 is twice that of version 17.1 during the same period last year, clearly indicating widespread interest in Apple Intelligence. We plan to launch more features in December, including more powerful writing tools, enhanced visual intelligence experiences, ChatGPT integration, and localized English support in regions such as the UK, Australia, and Canada. It is expected that from the update on Monday to the feature release in December, this will be a content-rich software quarter.

Looking ahead to 2025, we will gradually roll out more language support and new features starting in April.

Q: Can you discuss the outlook for capital expenditures and whether investments in private cloud computing will change the historical capital expenditure range of about $10 billion per year?

A: Our capital expenditure (CapEx) model is hybrid; in data center management, we have both self-built data centers and facilities provided by third-party services. Therefore, our capital expenditure data may not be fully comparable to other companies.

However, it is clear that we are gradually rolling out new features like Apple Intelligence and providing the necessary capacity support for these features. You can see the capital expenditure for fiscal year 2024 in our 10-K filing. In fiscal year 2025, we will continue to make necessary investments, especially in AI-related capital expenditures, where we will maintain our investment.

Q: Over the past four years, iPhone demand has often exceeded supply in the December quarter. For the current iPhone 16 cycle, the delivery cycle this quarter is relatively short, and there is currently no supply shortage. Can you provide relevant information on early iPhone demand this year? What findings do you have regarding upgrade rates, conversion rates, trade-ins, downgrades, and price sensitivity? Overall, does Apple Intelligence have an impact on iPhone 16 sales?

A: Regarding Apple Intelligence, we believe it has strong upgrade appeal. Although it was just released three days ago, we have already seen that the adoption rate of iOS 18.1 is twice that of 17.1, indicating significant market interest.

As for the situation where demand exceeded supply in the December quarter over the past four years, I do not recall this being the case every year. We did experience supply chain disruptions during COVID, but under normal circumstances, we hope to achieve supply-demand balance as soon as possible to avoid customers waiting for products.

This year, we are making good progress in supply-demand balance for the iPhone 16 series. Although there was tight supply for the Pro and Pro Max in October, we expect this to be resolved soon. This reflects a good dynamic between supply and demand, and we have prepared in advance for quarterly demand.

Q: Can you help us understand your views on raw material and component prices? Overall, do you still believe these factors will be favorable for gross margins, and how sustainable is this favorability? Or might it turn into a disadvantage in the future?

A: Apple's gross margin is influenced by various factors, including raw material prices, but this is not the only factor. Regarding component prices, most component prices are expected to decline in the September and December quarters, while NAND and DRAM saw increases in the September quarter and are expected to continue rising in the December quarter.

The company is very satisfied with its gross margin performance for the year, achieving record gross margin levels in fiscal year 2024. For the December quarter, Apple expects gross margins to be between 46% and 47%. With the introduction of new technologies and features, the company has launched numerous new products, and the current gross margin level is a positive signal.

Q: The company expects overall revenue in the December quarter to achieve low single-digit growth. Do you believe iPhone growth will be faster? Additionally, regarding the gradual improvement in performance in the Chinese market, what are your thoughts on this?

A: We are not providing more detailed data today. As mentioned earlier, the company expects total revenue to achieve low to mid-single-digit growth. Please note that the features and language of Apple Intelligence will be rolled out gradually. Just this week, we also launched several new products or features, including Apple Intelligence and M4 Max. Overall, the company's growth guidance has been provided, and we expect the growth rate of the services business to remain consistent with fiscal year 2024.**

Q: There is a lot of discussion in the market about production and delivery times, with a certain level of pessimism. Your growth guidance is mid to low single-digit growth; what factors do you think the outside world may be overlooking?

A: I am very excited about the launch of Apple Intelligence. We are actively developing future updates, and these new features are gradually changing my daily life. In particular, the health features we have launched, such as the hearing function, have received many user feedback stating that using AirPods Pro 2 as a hearing aid is touching.

Additionally, we are about to provide sleep apnea notification features through the Apple Watch, which is also an exciting health update for me. This week, we just released several new Mac and desktop products, which is our strongest product lineup since entering the holiday season. For the noise in the market, I choose to ignore it.

Q: The annual revenue of the current services business has reached $100 billion. Can you talk about what proportion of the current services business is recurring revenue (such as subscriptions) and one-time revenue (such as transactions), and whether the growth rates of these two differ?

A: Over the years, the portion with recurring revenue characteristics has grown rapidly, and its growth rate has exceeded that of transactional revenue. Currently, we have over 1 billion paid subscription users on our platform, including our own and third-party services, and this part continues to grow at a strong double-digit rate. Therefore, overall, the growth rate of recurring revenue is indeed higher than that of transactional revenue.

Q: Regarding the growth rates in different regions. The performance of the iPhone in the Chinese market in September looks quite good; can you share your views on the demand in the Chinese market? In particular, could the recent stimulus plan in China become a catalyst for iPhone demand? Additionally, the EMEA region achieved double-digit growth; please discuss this situation as well.

A: Regarding the performance in the Chinese market, the results for this quarter are basically flat year-on-year, and this improvement is partly due to the favorable rebound in foreign exchange rates, which is a positive factor for us. Our active device installation base has reached a historical high. According to third-party data, our two phones rank first in sales in urban areas of China. Additionally, the proportion of new customers purchasing Mac and iPad exceeds 50%, and new users of the Apple Watch account for three-quarters, which are all positive signals. The team is closely monitoring the stimulus policies in China.

As for the European market, this quarter performed well, achieving an overall double-digit growth of 11%. Our definition of Europe includes some emerging markets, such as Turkey, the Middle East (like Saudi Arabia and the UAE), and India, where growth is very strong. At the same time, Western Europe also achieved good growth, so the overall performance of the European region is very satisfactory.

Q: Based on the current demand environment and the comments mentioned earlier, can it be said that Apple's product revenue mix in the December quarter may decline? If this is a risk, is it mainly concentrated in categories like iPhone and Mac? What factors have led to a cautious attitude in Apple's expectations for the December quarter?**

A: Apple will not provide more detailed financial forecast information and has only shared partial data on its services business. Currently, the company is in the early stages of its product cycle, launching many new products and features, which is very exciting. At the same time, the rollout of Apple Intelligence will be gradual rather than a global synchronized launch like typical software releases.

Q: Based on the phased global rollout of Apple Intelligence, will it affect the historical demand patterns in different regions? Should we expect to see demand patterns in future quarters (such as December, March, June quarters, etc.) that differ from historical trends, especially in cases where customers may need to wait for device activation of the new operating system?

A: The rollout pace of Apple Intelligence is indeed different from our usual practices. As we discussed at WWDC, we want to present a comprehensive vision of Apple Intelligence and plan to roll it out gradually, and we are currently proceeding smoothly as planned. Regarding the demand curve, we believe that Apple Intelligence is a strong reason for users to upgrade, which comes not only from my personal experience but also from the feedback I have received. However, we will not make predictions about the situation beyond the current quarter.

Q: Regarding the phased rollout of Apple Intelligence, can you help us understand the likelihood of global smartphone users in their regions obtaining Apple Intelligence in the next one to two years? What are the key factors during the rollout process?

A: We have already started offering the American English version of Apple Intelligence, which officially launched this past Monday. Next, in December, we will release an update with more features that will not only be available for American English but will also be localized for the UK, Australia, Canada, Ireland, and New Zealand. In April next year, more languages will be added, with specific languages yet to be determined, and we will continue to expand throughout the year. We are pushing forward as quickly as possible while ensuring quality.

Q: Regarding R&D issues. Given the investment efforts of your peers in the artificial intelligence field, does Apple Intelligence require Apple to invest in R&D beyond the current 7% to 8% of sales to seize this opportunity?

A: Over the past few years, we have made significant investments in R&D, with notable growth in R&D spending. During the 2024 fiscal year, we also reallocated some existing resources to the new technology of artificial intelligence. Our investment intensity in AI has significantly increased, although it may not be fully reflected in external data due to the internal reallocation of engineering resources.

Q: Can Apple Intelligence drive the growth rate of the services business?

A: Apple has released a large number of APIs, and developers will be able to fully utilize these APIs, with more to come in the future. I believe many developers will widely leverage Apple Intelligence. As for the specific impact on the services business, I will not make predictions, but from an ecosystem perspective, I believe this will greatly enhance the user experience and be very beneficial for users

Q: Have you observed any changes in consumer behavior across different models of the iPhone series, especially when there is more feature consistency (such as Apple Intelligence also being applied to the iPhone 15 Pro and Pro Max)? Has there been any change in user preference between different models?

A: Due to supply constraints on the Pro and Pro Max models in October, it is currently difficult to accurately determine consumer preference between the Pro and other models.

Q: Despite Apple having a large user base, certain components of the Apple One bundle (such as music, news, games, and fitness) have not significantly become market-leading products. What factors could change this situation? Additionally, what other services could serve as examples of faster growth, broader market reach, or larger potential user bases, such as Apple Pay or advertising business?

A: The company has ample opportunities across all these services and will continue to invest in the services sector, adding new features such as News+, Music, and Arcade. The company focuses more on "doing the best" rather than "doing the most." He noted that most of the mentioned services are not cross-platform but are designed specifically for Apple users, which may affect the sales of these services, but Apple's goal has always been to provide the best experience.

Q: Over the past two years, Apple's net cash level has remained around $50 billion. In the past, there have been instances of increasing market share through higher marketing expenditures or other initiatives. Considering the current operating expenditure scale of $57 billion, do you see incremental opportunities to invest this cash into the business? Or will we continue to see an increase in shareholder returns?

A: Our operating expenses (OpEx) have increased over these years. At the same time, our gross margin has also significantly improved, reaching levels that were hard to anticipate a few years ago, but we have achieved outstanding results in multiple areas. Therefore, every time we conduct annual planning, we consider various areas of investable resources to drive business growth. I believe we are doing well in the long term, but our fundamental philosophy is to prioritize business development, and if there is excess cash, we will continue to return it to shareholders.

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