Apple: LLM "Slimming Down," Hardware Becomes the Final Winner?

Apple (AAPL.O) released its Q1 2025 financial report (for the period ending December 2024) after U.S. stock market hours on January 31, 2025, Beijing time. The key points are as follows:

1. Overall performance: Revenue & profit meet market expectations. This quarter, Apple achieved revenue of $124.3 billion, a year-on-year increase of 4%, in line with market consensus expectations ($124.23 billion). The increase in revenue this quarter was mainly driven by growth in Mac, iPad, and software businesses. Apple's gross margin was 46.9%, an increase of 1 percentage point year-on-year, slightly better than market consensus expectations (46.5%). This quarter, the gross margin for software services further increased to 75%.

2. iPhone: Shipment volume declines, average price increases. This quarter, the company's iPhone business achieved revenue of $69.1 billion, a year-on-year decline of 0.8%, below market consensus expectations ($71.13 billion). Due to insufficient innovation in the iPhone 16 series and subsidies in some regions at the end of the year, iPhone products faced significant competition in China, affecting $Apple(AAPL.US)'s market share. For this quarter, Dolphin estimates that overall iPhone shipments declined by 4.5% year-on-year, while the average shipment price increased by 3.8% year-on-year.

3. Other hardware outside of iPhone: Mac and iPad are the main growth points. The tablet market has seen growth rates exceeding 20% for two consecutive quarters, showing signs of recovery, and the company's iPad business also reached $8.1 billion again. Although the overall PC market remains stable, the launch of the M4 chip drove the company's Mac business to achieve a 15.5% growth. Wearable business still saw a decline, but the drop has significantly narrowed over the past three quarters.

4. Software services: New record high. Software services revenue this quarter was $26.3 billion, meeting market consensus expectations ($26.09 billion). This quarter, software business revenue reached a new record high, with gross margin further increasing to 75%. With a high gross margin, the company's software business accounted for nearly 26% of revenue, generating 44% of the company's gross profit.

Dolphin's overall view: Apple's financial report this time is quite good.

The company maintained single-digit growth in revenue this quarter, with gross margin continuing to rise steadily, and R&D and sales expenses remaining at a healthy level, ultimately achieving growth in the company's profit.

By business segment, the company's software revenue maintained double-digit growth, while hardware performance showed differentiation. This quarter, the iPad and Mac businesses performed well, with both segments experiencing a 15% growth, showing signs of recovery The iPhone and wearable business are relatively weak, with insufficient innovation in new iPhone models and facing significant market competition, leading to a decline in market share this quarter.

The company's stock price has been on a continuous decline since the end of December, reflecting some market concerns: ① The subsidy policy directly benefits Android products, which has a certain impact on iPhone market share; ② The implementation of increased tariffs may have potential impacts on the company's manufacturing side. However, Dolphin believes that these concerns have already been reflected in the stock price. As for the impact of tariffs, the company can shift demand from the U.S. market to production in India, thereby mitigating the related effects.

Regarding the recent market situation and the company's financial report, there are still some highlights:

1) Hardware outside of iPhone: The iPad and Mac businesses show clear signs of recovery, with a year-on-year growth of 15% this quarter. Additionally, driven by the subsidy policy, iPad and wearable products are relatively benefited, which helps the company's hardware performance;

2) Reduction in training costs: Apple has not made large-scale investments in AI previously, maintaining annual capital expenditures at around $10 billion (with $2.94 billion this quarter), but the company has maintained an advantage in hardware. If training costs decrease, it will help accelerate the rollout of downstream applications. Given the company's large hardware base, it will particularly benefit;

3) Potential boost from AI phones: Currently, the company's iPhone business performance is relatively flat, but if the company launches AI features on a large scale, it is expected to stimulate demand for iPhone upgrades, thereby driving growth in the iPhone business, which would be a potential benefit for the company in the future.

Overall, Apple's financial report this time is quite good, and the market's concerns have been digested in advance, with the company not delivering a "worse" performance. For the next quarter's expectations, the company has projected a revenue growth of 3-4% and a gross margin maintained at 46.5%-47.5%. This stable expectation provides the market with a "reassurance." This "noteworthy" financial report further consolidates market confidence.

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

1. Overall performance: Revenue & Profit, meeting market expectations

1.1 Revenue: In the first quarter of fiscal year 2025 (i.e., Q4 2024), Apple achieved revenue of $124.3 billion, a year-on-year increase of 4%, in line with market consensus expectations ($124.23 billion). The increase in revenue this quarter is mainly driven by growth in Mac, iPad, and software services. Although revenue in Greater China has declined, other regions have shown varying degrees of growth.

From both hardware and software perspectives:

① Apple's hardware business growth rate this quarter is 1.6%. The hardware segment continues to grow this quarter, although iPhone and wearables and other businesses saw a slight decline, the growth rates for the company's iPad and Mac businesses are around 15%, driving positive growth in the hardware segment;

② Apple's software business growth rate this quarter is 13.9%, maintaining double-digit growth. The software business has a certain degree of risk resistance. Even during periods of relatively low hardware revenue, software services have consistently maintained a growth trend.

From a regional perspective: This quarter, Apple's revenue in Greater China experienced a double-digit decline, while other regions showed varying degrees of growth. The company's weak performance in Greater China is mainly affected by significant market competition faced by products like the iPhone. Additionally, subsidies in some regions at the end of the year are relatively more favorable to domestic Android brands, which has also impacted the iPhone's market share to some extent.

Specifically, the Americas region is Apple's largest source of revenue, growing 4.4% this quarter; while revenue in Greater China declined by 11.1% this quarter.

1.2 Gross Margin: In the first quarter of fiscal year 2025 (i.e., Q4 2024), Apple's gross margin is 46.9%, an increase of 1 percentage point year-on-year, slightly better than the market consensus expectation (46.5%). The increase in the company's gross margin is mainly driven by the growth in software business gross margin.

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

Apple's software gross margin further increased to a new high of 75% this quarter, which is the main source of the company's gross margin improvement this quarter. The hardware gross margin remains at 39.3%, a year-on-year decline of 0.1 percentage point. Driven by new products, the company's hardware gross margin shows signs of seasonal improvement this quarter, basically maintaining a relatively high level year-on-year.

1.3 Operating Profit: In the first quarter of fiscal year 2025 (i.e., Q4 2024), Apple's operating profit is $42.8 billion, a year-on-year increase of 6.1%. 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 12.4%, an increase of 0.3 percentage points year-on-year. Both sales and R&D expenses have increased this quarter, but the proportion of these two expenses has remained basically stable.

II. iPhone: Shipment volume declines, average price increases

In the first quarter of fiscal year 2025 (i.e., Q4 2024), iPhone business revenue was $69.1 billion, a year-on-year decline of 0.8%, slightly lower than the market consensus expectation ($71.13 billion). The growth of the company's iPhone business this quarter is mainly attributed to the increase in the average price of the iPhone. The decline in iPhone shipment volume is primarily due to competition from domestic Android brands.

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 data, the global smartphone market grew by 1.7% year-on-year in the fourth quarter of 2024. Apple's shipment volume this quarter declined by about 4.5%, with the company's shipment performance lagging behind the overall market, resulting in a year-on-year decline in market share. The company's shipment volume in the Chinese market declined by nearly 1.9 million units this quarter.

2) iPhone Average Shipment Price: Based on the iPhone business revenue and shipment volume, the average shipment price of the iPhone this quarter was around $899, a year-on-year increase of 3.8%. Driven by the release of new Apple devices, the iPhone average price showed a seasonal rebound. The proportion of shipments of relatively high-priced models is relatively high.

III. Other Hardware Beyond iPhone: Mac and iPad are the main growth points

3.1 Mac Business

In the first quarter of fiscal year 2025 (i.e., Q4 2024), Mac business revenue was $9 billion, a year-on-year increase of 15.5%, better than market expectations ($7.95 billion). According to IDC's report, global PC shipments increased by 3.4% year-on-year this quarter, while Apple's shipments grew by 19.3% year-on-year, significantly outperforming the overall market. This is mainly driven by the launch of the M4 chip, which further boosted Mac shipments.

Combining company and industry data, Dolphin estimates that the average selling price of the company's Mac this quarter is $1,322, a year-on-year decline of 3.2%. The growth in the company's Mac business this quarter mainly comes from the increase in shipment volume.

3.2 iPad Business

In the first quarter of fiscal year 2025 (i.e., Q4 2024), iPad business revenue was $8.1 billion, a year-on-year increase of 15.2%, better than the market consensus expectation ($7.35 billion), mainly benefiting from the new iPad mini and iPad Air.

From an industry perspective, the tablet market has clearly begun to recover. Previously, the year-on-year growth rate had reached over 20% for two consecutive quarters, and global shipments in the third quarter have returned to 39.6 million units. Dolphin believes that since the public health event, the tablet market has remained sluggish, but after four years, the demand for upgrades has re-emerged. In addition, with the support of national subsidies and other policies, some iPad products also fall within the relatively favorable range of national subsidies, which is expected to further drive the recovery of the iPad business.

3.3 Wearables and Other Hardware

In the first quarter of fiscal year 2025 (i.e., Q4 2024), revenue from wearables and other hardware was $11.7 billion, a year-on-year decline of 1.7%, slightly below the market consensus expectation ($11.94 billion) . Although the wearables and other business continues to decline, the drop has significantly narrowed over the past three quarters. Additionally, wearable products such as watches will benefit from the support of national subsidy policies, and the wearables business is expected to stabilize and rebound.

4. Software Services: Setting New Records

In the first quarter of fiscal year 2025 (i.e., Q4 2024), software services revenue was $26.3 billion, a year-on-year increase of 13.9%, reaching the market consensus expectation ($26.09 billion) . The software business is the most stable part, maintaining double-digit growth in revenue. The growth in the software business mainly comes from user retention and an increase in revenue per user.

According to Sensor Tower data, Apple's App Store revenue this quarter increased by 15% year-on-year, with both downloads and ASP showing growth compared to the previous year In software services, the most concerning aspect is the gross margin level of software services. In this quarter, the gross margin of software services further increased to 75%, maintaining a high level, standing firm at over 74% for four consecutive quarters. With a high gross margin, the company's software business accounted for nearly 21% of revenue this quarter, generating 34% of the company's gross profit.