Apple: Resting on Laurels Is Easy, Regaining Momentum Is Hard

Apple (AAPL.O) released its Q2 2025 financial report (for the period ending March 2025) after U.S. stock market hours on May 2, 2025, Beijing time. The key points are as follows:

1. Overall Performance: Revenue & Profit, Steady Growth. In this quarter, Apple achieved revenue of $95.4 billion, a year-on-year increase of 5.1%, slightly better than the market consensus expectation ($94.2 billion). The increase in revenue this quarter was mainly driven by growth in iPhone, Mac, iPad, and software services. Apple's gross margin was 47.1%, an increase of 0.5 percentage points year-on-year, in line with market consensus expectations (47.1%). The gross margin for software services continued to improve to 75.7% this quarter.

2. iPhone: Average Price Decline, Shipment Growth. This quarter, the company's iPhone business achieved revenue of $46.8 billion, a year-on-year increase of 1.9%, better than the market consensus expectation ($45.4 billion). The growth in the mobile phone business this quarter was mainly driven by the launch of the iPhone 16e and some consumers purchasing in advance to cope with tariffs. For this quarter, Dolphin Research estimates that the overall iPhone shipment volume increased by 10.1% year-on-year, while the average shipment price declined by 7.4% year-on-year.

3. Other Hardware Beyond iPhone: Wearables and Other Businesses Still Under Pressure. Driven by new products and replacement demand, the company's Mac and iPad businesses continued to grow this quarter. However, for wearables and other hardware businesses, although benefiting from China's national subsidy policy, revenue still declined this quarter, indicating that overall demand remains quite sluggish.

4. Software Services: New Record High. Software services revenue this quarter was $26.6 billion, slightly below market consensus expectations ($26.7 billion). This quarter, software business revenue reached a new record high, with gross margin continuing to improve to 75.7%. With a high gross margin, the software business accounted for nearly 28% of total revenue, generating 45% of the company's gross profit.

Dolphin Research Overall View: Although this quarter was decent, there are risks hidden in "low growth."

$Apple(AAPL.US) The overall financial report data for this quarter is quite good, with both revenue and profit achieving steady growth. The growth in revenue was mainly driven by increases in iPhone, Mac, iPad, and software services; the improvement in software services gross margin structurally pushed up the overall gross margin However, this financial report appears "stable," but it hides some risks: 1) Even with the support of the iPhone 16e this quarter, the iPhone business only saw slight growth; 2) Demand for hardware products such as wearables remains sluggish, with negative growth in revenue; 3) Although software service revenue continues to grow, the growth rate shows a downward trend; 4) Hardware products such as wearables will still be affected by tariffs, increasing the company's related costs.

As for the market's concern about the impact of tariffs, the company's management expects the cost impact for the next quarter to be around $900 million. Dolphin Research believes this mainly comes from products like AirPods and Apple Watch, while core products (iPhone, Mac, and iPad) have received exemptions. Therefore, compared to the company's nearly $40 billion hardware costs in a single quarter, the $900 million impact seems relatively small, but it will still erode the gross margin.

From a short-term perspective, the company expects the revenue growth range for the next quarter to be 0-5%. Although the iPhone 16e was launched this quarter, the company's growth for the next quarter remains weak. Under the influence of tariff policies, the wearables and other hardware businesses will continue to face pressure, which will also erode the company's overall gross margin for the next quarter.

Considering the company's current market value of $3.2 trillion, this corresponds to a nearly 29 times PE for the fiscal year 2025 (assuming a revenue growth rate of +4% and a profit growth rate of +7% after excluding the impact of last year's EU tax). Although the company values shareholder interests (with $3.8 billion in dividends and $25 billion in buybacks this quarter, and an additional $100 billion approved for stock buybacks), the multiple operational risks will still put pressure on the company's valuation.

From a medium to long-term perspective, although the company has shifted some production capacity to Vietnam and India, as long as it is not manufactured domestically in the U.S., there will still be tariff risks in the future. In addition, the company will increase the proportion of chips procured in the U.S., which may also raise the company's future hardware costs. If Apple fails to launch unexpected AI features or new blockbuster hardware products, the company will still face growth pressures in its operations, making it difficult to boost market confidence.

Dolphin Research's detailed analysis of Apple's financial report can be found below:

I. Overall Performance: Revenue & Profit, Steady Improvement

1.1 Revenue: In the second quarter of fiscal year 2025 (i.e., Q1 25), Apple achieved revenue of $95.4 billion, a year-on-year increase of 5.1%, slightly better than the market consensus expectation ($94.2 billion). The increase in the company's revenue this quarter is mainly driven by growth in iPhone, Mac, iPad, and software service businesses, while only wearables and other hardware businesses saw a year-on-year decline. In this quarter, only the revenue from the Greater China region declined, while revenues from other regions experienced varying degrees of growth.

From the perspectives of hardware and software:

① Apple's hardware business grew by 2.7% this quarter. The hardware business continued to grow this quarter, although the wearables and other segments are still declining, the company's core hardware products (iPhone, iPad, and Mac) all experienced varying degrees of growth, driving positive growth in the hardware segment;

② Apple's software business grew by 11.6% this quarter, 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 continued to grow. However, it is worth noting that the current growth rate of the company's software business shows a downward trend.

From a regional perspective: This quarter, Apple's revenue only declined in the Greater China region, while there was varying degrees of growth in other regions. The company's poor performance in the Greater China region is mainly affected by intense market competition. Although China has introduced relevant subsidies for electronic products such as mobile phones, it actually favors domestic Android brands more, and Apple's market share in China has been eroded.

The Americas, Europe, and Greater China are the company's three main sources of revenue. Specifically, the revenue from the Americas accounted for 42.3%, growing by 8.2% this quarter; Europe experienced a slight growth of 1.3% this quarter; while the revenue from Greater China declined by 2.3% year-on-year this quarter.

1.2 Gross Margin: In the second quarter of fiscal year 2025 (i.e., 1Q25), Apple's gross margin was 47.1%, an increase of 0.5 percentage points year-on-year, in line with market consensus expectations (47.1%). The increase in the company's gross margin is mainly driven by the growth in the gross margin of the software business.

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

Apple's software gross margin continued to rise to a historical high of 75.7% this quarter, which is the main source of the company's gross margin increase this quarter. Meanwhile, the hardware gross margin fell to 35.9%, a year-on-year decline of 0.7 percentage points, mainly influenced by product mix, foreign exchange factors, and seasonality. Among them, the relatively low-priced iPhone 16e launched by the company this quarter had a corresponding impact on the average price and gross margin of the company's product mix.

1.3 Operating Profit: In the second quarter of fiscal year 2025 (i.e., Q1 2025), Apple Inc. reported an operating profit of $29.6 billion, a year-on-year increase of 6.1%. The growth in operating profit this quarter was driven by an increase in revenue and gross margin.

This quarter, Apple's operating expense ratio was 16%, an increase of 0.2 percentage points year-on-year. The company's selling and administrative expenses remained stable, but the investment in AI at Apple was mainly reflected in R&D expenditures, with the additional spending this quarter primarily in R&D.

It can be reasonably inferred that regardless of Apple's revenue in the future, R&D will rigidly expand. If the AI replacement does not materialize as expected, the company may rely on faster growth in software revenue to continue improving the gross margin structure, but the release of operating leverage on the expenditure side may be squeezed.

II. iPhone: Average Price Decline, Shipment Growth

In the second quarter of fiscal year 2025 (i.e., Q1 2025), iPhone business revenue was $46.8 billion, a year-on-year increase of 1.9%, better than the market consensus expectation ($45.4 billion). The growth in Apple's iPhone business this quarter was mainly due to an increase in shipment volume. The decline in the average price of the iPhone was primarily influenced by the launch of the lower-priced iPhone 16e this quarter.

Dolphin Research specifically looks at the main sources of growth in the iPhone business this quarter from the perspective of volume and price relationship:

1) iPhone Shipment Volume: According to IDC, the global smartphone market grew by 1.5% year-on-year in the first quarter of 2025. Apple's global shipment volume increased by about 10% year-on-year this quarter, outperforming the overall market. Dolphin Research believes this is mainly due to two reasons: 1) The company launched the iPhone 16e, which stimulated some demand; 2) The uncertainty of U.S. tariff policies led to expectations of price increases, prompting some consumers to make purchases in advance. 2) iPhone Average Selling Price: Based on the revenue and shipment volume of the iPhone business, the average selling price of iPhone shipments this quarter is approximately $809, a year-on-year decline of 7.4%. This is mainly due to the launch of the lower-priced iPhone 16e this quarter, which structurally lowered the average price of the company's iPhone product mix.

III. Other Hardware Beyond iPhone: Wearables and Other Businesses Will Continue to Face Pressure

3.1 Mac Business

In the second quarter of fiscal year 2025 (1Q25), Mac business revenue was $7.9 billion, a year-on-year increase of 6.7%, which is basically in line with market expectations ($7.8 billion).

According to IDC's report, global PC market shipments increased by 5% year-on-year this quarter, while Apple's PC shipments increased by 14.6% year-on-year, significantly outperforming the overall market, mainly driven by the latest models such as the MacBook Air, MacBook Pro, and Mac mini.

Combining company and industry data, Dolphin Research estimates that the average selling price of Mac shipments this quarter is $1,445, a year-on-year decline of 6.9%. The growth of the company's Mac business this quarter mainly comes from the increase in shipment volume.

3.2 iPad Business

In the second quarter of fiscal year 2025 (1Q25), iPad business revenue was $6.4 billion, a year-on-year increase of 15.2%, better than the market consensus expectation ($6.2 billion), mainly driven by the new iPad Air equipped with the M3 chip.

From an industry perspective, the tablet market has shown signs of recovery, achieving year-on-year growth for three consecutive quarters. Since the public health event, there has been a demand for device upgrades in the tablet market. Additionally, due to the national subsidy policy in China, some iPad products fall within the relatively favorable subsidy range, which is expected to boost related sales.

3.3 Wearables and Other Hardware

In the second quarter of fiscal year 2025 (1Q25), revenue from wearables and other hardware businesses was $7.5 billion, a year-on-year decline of 4.9%, lower than the market consensus expectation ($8.1 billion). Wearables and other businesses have experienced a decline for seven consecutive quarters, indicating that downstream demand remains sluggish With the implementation of national subsidies, wearable products such as watches in China will benefit from policy support. However, it is important not to overlook the U.S. tariff policy, where currently iPhones, Macs, and iPads are exempt, while products like AirPods and Apple Watches remain non-exempt, which will also put pressure on the wearable and other hardware businesses.

IV. Software Services: Reaching New Heights

In the second quarter of fiscal year 2025 (i.e., Q1 2025), software service revenue reached $26.6 billion, a year-on-year increase of 11.6%, slightly below market consensus expectations ($26.7 billion). Although the business still maintains double-digit growth, the growth rate shows signs of decline. The growth in software business mainly comes from user retention and an increase in revenue per user.

According to Sensor Tower data, Apple's App Store revenue grew by 13% year-on-year this quarter, with downloads increasing by 3.8% year-on-year.

Among software services, the most concerning aspect is the gross margin level of software services. In this quarter, the gross margin for software services continued to rise to 75.7%, maintaining above 74% for five consecutive quarters, and reaching a new high. With a high gross margin, the company's software business accounted for nearly 28% of revenue this quarter, generating 45% of the company's gross profit.