Apple: "Roll King" also difficult to escape decline during off-season (FY2022Q4 conference call)

Apple (AAPL.O) The Q4 2022 financial report (as of September 2022) for US stocks was released in the early morning of Beijing time on October 28th.

Apple's financial report this quarter is basically in line with market expectations. Only the Mac business performed well and achieved high growth against the trend, while all other businesses performed flat:

1. Revenue: the quarter achieved USD 90.1 billion, a year-on-year increase of 8.1%, slightly higher than market expectations (USD 88.6 billion);

2. Net profit: the quarter achieved USD 20.7 billion, a year-on-year increase of 0.8%, slightly higher than market expectations (USD 20.4 billion);

3. Business situation: iPhone achieved revenue of USD 42.6 billion, a year-on-year increase of 9.7%, in line with market expectations (USD 42.6 billion) / Mac achieved revenue of USD 11.5 billion, a year-on-year increase of 25.4%, exceeding the market expectations (USD 9.25 billion)/ iPad achieved revenue of USD 7.2 billion, a year-on-year decrease of 13.1%, lower than market expectations (USD 7.81 billion) / other hardware such as wearable achieved a revenue of USD 9.7 billion, a year-on-year increase of 9.8%, lower than market expectations (USD 8.8 billion)/ service business achieved revenue of USD 19.2 billion, a year-on-year increase of 5%, in line with market expectations (USD 19.97 billion);

Detailed financial report information can refer to Dolphin Analyst's comment "Apple: The Only Standing Giant, Can It Last for Long?"

Management Report

1. Business Discussion

1. iPhone: Revenue was USD 42.6 billion, a year-on-year growth of 10%. Upgrading users set a quarterly record, and replacement users grew in double digits. The active installation base of iPhone reached a historical high in all regions. The performance in large emerging markets was outstanding. Revenue in India reached a record high, and revenue in Thailand, Vietnam, Indonesia, and Mexico increased by more than double digits YoY.

2. Mac: Revenue reached USD 11.5 billion, a year-on-year growth of 25%. We set a quarterly record of upgrading users, and nearly half of the users who bought Mac computers this quarter were new users. The growth in this quarter benefited from three factors:

3. The launch of the new MacBook Air and MacBook Pro with M2 chips.

4. Secondly, we can meet the suppressed demand, which is left under the serious supply restrictions we faced in the quarter of June.

5. Third, with the improvement of our supply situation, we can fill the channels. Importantly, our investment in this area attracted Mac upgraders and new users, helping us reach a historical new high in the installation base.

1. iPad: Revenue was $7.2 billion, down 13% YoY, due to significant negative foreign exchange impact and a high base one year ago when new iPads were released. The installed base of iPads reached a historic high, primarily driven by customer loyalty and new customers. More than half of the customers buying iPads this quarter were new to iPad.
2. Wearables, Home, and Accessories: Revenue was $9.7 billion, up 10% YoY, setting a new all-time revenue record for this category. The wearables category's installed base reached a new all-time high during the quarter. Two-thirds of the customers buying an Apple Watch this quarter were new to the product.
3. Services: Revenue was $19.2 billion. On top of the 26% growth we experienced in the September quarter last year, we achieved double-digit constant currency growth in the services field. Certain service businesses were impacted by macroeconomic factors, including foreign exchange. Digital advertising and gaming were areas where we saw some softness.

Quarterly Trends:

1. Install base for Apple.US continues to grow in every geographic segment and every major product category, which bodes well for expanding our ecosystem in the future.
2. Second, our customers are engaging with our services at higher rates this quarter. Both our active and paid accounts grew double digits YoY and established new all-time highs. The percentage of accounts paying for our services continues to rise.
3. Third, our paid subscriptions saw incredible growth. Currently, we have over 900 million paid subscriptions on our ecosystem, adding 155 million over just the last 12 months, which is double the number from three years ago. We continue to invest in new content and features across our services products.

Outlook:

Compared to the September quarter, the December quarter overall company revenue will show a year-over-year slowdown for several reasons. First, we expect the negative YoY impact of foreign exchange to be nearly 10 percentage points. Second, in Macs, in addition to the increased headwind from foreign exchange, we face a very large challenge versus last year, which benefited from the releases of our new, M1-powered MacBook Pro and related channel-fill. As a result, we expect Mac revenue to be down significantly in the December quarter.

In services, we expect growth, but it will be impacted by the macroeconomic environment, impacting foreign exchange, digital advertising, and gaming. We anticipate gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $14.7 billion and $14.9 billion. We expect OI&E to yield income of about negative $300 million, excluding the potential impact of minority equity investments measured at fair value. Our tax rate will be about 16.5%.

1. Analyst Q&A

Q: Can you talk a little bit about how you're viewing the iPhone upgrade cycle? On the positive side, you've raised prices, on the negative side, there are concerns from investors about what that means for demand. Could you talk about what you're seeing in terms of initial iPhone demand and how you think it's evolving? A: iPhone revenue grew by 10% to reach $42.6 billion in Q4. Customer demand was strong and exceeded our expectations. However, this was achieved on the basis of a tough comparison as iPhone revenue had grown 39% in the 21 financial year, so we are very satisfied with this.

As for new products, the 14 and 14 Pro and Pro Max are still in the early stages. But from the beginning, we have been constrained by the production capacity of the 14 Pro and 14 Pro Max, and we are still constrained by the production capacity today. Therefore, we are working very hard to meet demand, and it is difficult to give sales ratios until we can meet demand.

We are very satisfied with the strong performance of the iPhone in the last quarter. We occupy 3 of the top 4 positions in the US and UK, the top 3 positions in the urban markets of China, the top 6 positions in Australia, and the top 5 in Germany and the top 2 in Japan. Consumer satisfaction with iPhone remains very high, reaching 98%, so we feel very good about our performance in Q4. Of course, the start of this generation means that we will be constrained by production capacity for a period of time on the 14pro and 14pro Max. But we are working hard to remedy the situation.

Q: Let's talk about the gross margin, taking into account the 10 basis point foreign exchange impact in the next quarter. Other factors seem to be favorable. When we look to the future, what else should we consider?

A: I will start with the gross margin for Q4 and then look at Q1. We achieved a record of 42.3% in the September quarter, which was achieved in the context of very serious negative foreign exchange growth. In Q4, from a continuous basis, foreign exchange negative growth was 70 basis points, and from a year-on-year basis, it was 170 basis points. Basically, all the currencies in the world have depreciated against the US dollar. Now we have set our expectations for Q1 at 42.5% to 43.5%, even though we have a negative exchange rate of 330 basis points compared to the same period last year. On a quarter-over-quarter basis, it is unfavorable by 120 basis points.

The strong US dollar has caused difficulties in many areas, making pricing difficult in emerging markets and also affecting the conversion of these revenues into dollars. However, on the positive side, we see that the performance of commodities is quite favorable to us. So we believe we can offset the impact of foreign exchange. I think the guidance we provide reflects this, and of course, it also takes into account foreign exchange. It takes into account a certain degree of inflationary pressure. But I think the results are good.

Q: We have seen significant differences in performance between iPad and Mac in this quarter. Both are relatively constrained from the supply side. What factors have led to the performance differences, and will these factors reverse or normalize after we get through the December quarter? A: The performance of Mac is the best quarter in our company's history. This is thanks to the release of the MacBook Air with M2. In the previous quarter, most of our factory's production capacity was lost. As a result, we had a backlog of orders from the third quarter to the fourth quarter. We were able to meet all the demand in the fourth quarter and filled the sales of the Mac. Therefore, the quarterly performance of Mac is unbelievably good.

From the perspective of new releases, the iPad is the opposite. We launched the iPad in September last year. This year, we launched a new iPad in October. The iPad Pro was just released before the start of the quarter, so this is the first full quarter for our new iPad Pro. Therefore, the quarterly performance of the iPad last year was exceptionally strong, and the release of the new product was the key to this performance. This is why the iPad shrank in this quarter.

A: Overall, we still have a few days left this quarter, which will affect our revenue and costs. Not every week is the same, as we have some peaks during a quarter, such as Black Friday or Christmas. But overall, we have increased sales and additional operating costs for a few days. This happens about every 6 years for us, as we need to synchronize our weekly calendar with our fiscal calendar.

A: Recently, we have made some price adjustments in music, TV+, and the One bundle. I'm curious about how you balance consumer prices and your own costs and related follow-up work?

A: On Monday of this week, we announced a price increase for Apple Music and Apple TV+, as well as the corresponding Apple One bundle that combines both products. There are two different situations here. In terms of music, licensing costs have increased, so we are paying more for music. The benefit of doing this is that singers will also get more revenue from the songs they play on streaming media. On Apple TV+, when we first priced it, there were only a few shows. We were very focused on original content, so we had a low price with 4 to 5 shows initially. Now we have more content and more coming out every month. So we raised the price to represent the value of the service. Of course, Apple One is just a combination of these two price changes.

A: Do you have any preliminary thoughts on capital expenditures for fiscal year 23? Capital expenditures have been relatively stable over the past few years. Can you talk about the main components of capital expenditure data?

A: Our capital expenditures have been fairly stable. There are three main areas of capital expenditures for our company. We have specialized tools for production equipment. We have investments in data centers and offices around the world. We will monitor all changes and we have not seen anything unexpected in the next 12 months.

Q: What is driving the strong growth in wearable devices this quarter? Is it due to the strong iPhone or the new products announced this quarter?

A: Wearable devices have grown by 10%, and we are very satisfied with this. Apple Watch is a contributor in many ways. It is worth mentioning that Apple's new product lineup includes the Apple Watch Ultra, Apple Watch Series 8, and SE. Ultra's supply was limited in the quarter and supply is still limited. So we are working hard to meet demand and get these products to customers. We also released AirPods Pro in September. The noise reduction and sound quality of this product have broken records. In other aspects, clearly, exchange rate fluctuations are a negative factor affecting wearable devices, home and accessories, just like they affect our other products and services. It is clear that our business in Russia has also had an impact on us.

Another thing I want to mention is that about two-thirds of the Apple Watch we sell are to new customers. So we are still selling products to new customers here to a large extent, which is very, very beneficial for the future.

Q: Can you quantify how much of the Mac's growth is due to filling channels and meeting orders from the June period, and how much would be achieved without these factors if it had not reached 25% growth?

A: The three reasons I gave were all key to achieving 25% growth. The M2 MacBook Air, the release of new products, meeting overdue orders from the previous quarter, and filling channels are all key factors.

Q: You have been talking about digital advertising all the time. Are there any metrics we can use to understand your business situation? Do you think Apple can establish a large-scale advertising business without sacrificing consumer privacy?

A: First of all, we focus on privacy, so we won't do anything that deviates from privacy. We believe that privacy is a fundamental human right, which is how we look at privacy. Our specific advertising business is relatively small compared to other companies. But we have not disclosed the exact numbers, but it is clearly not very large.

Q: Regarding inflationary pressures and labor issues in the US and globally. Perhaps you can talk about what Apple can do to alleviate these issues? Foreign exchange is becoming a fairly important negative factor. Is there anything that can be done to alleviate this situation?

A: In terms of personnel, we focus on caring for our team and providing them with the best benefits and compensation so that we can empower them to do their best work in their lifetime. That's what our team cares about. Inflation-wise, wages have clearly risen. Logistics also has inflation. If you compare it with pre-pandemic levels, it hasn't returned to pre-pandemic levels regardless of any aspect we see. Some silicon components also have inflationary pressures. This is not all aspects we see, but it provides us with a part of the inflationary pressure we see. In the guidance we provided during the conference call, we have already taken this into consideration when it comes to gross profit margin.

Regarding foreign exchange, this is clearly a very important factor that affects our performance, including revenue and gross profit margin. In the case where the US dollar is very strong, we hedge our risk exposure. We try to hedge in as many places as possible around the world. There may be some currencies, very small currencies, that we do not hedge because the cost is too high or there is no market. But overall, we will continue to hedge because it gives us great margin stability. As time goes by, this protection will decrease because the hedging will expire and we need to purchase new contracts. However, this is our main tool for offsetting some of the forex pressure. Of course, when we launch new products, we will pay special attention to the forex market. This is how we deal with this issue.

We are most pleased with the fact that despite the US dollar being very strong and the forex environment being difficult, we have had very strong performances in many international markets, especially in some very large emerging markets. We have seen strong double-digit growth in India, Indonesia, Mexico, Vietnam, and many other places even when priced in US dollars. Obviously, these growth rates are even higher when calculated in local currency. For us, observing the performance of these markets measured in local currency is extremely important because it allows us to better understand customer reactions to our products, engagement with our ecosystem, and overall brand strength.

Q: In the guidance, you mentioned that the performance is expected to slow down relative to September in the quarter of December. The year-over-year growth rate for September was about 8%. Should I assume that this 8% will decrease year by year based on December's base?

A: What we said is that we will slow down from September, which was 8%, so the percentage will be lower than 8%. We did not provide guidance for the reasons we explained. There are a lot of uncertainties here. So we can see the progress of this quarter. But don't forget the 10 basis points of forex impact.

Q: About cash and capital allocation. Given the valuation and adjustments of some public and private companies, would you be more aggressive in acquisitions? Or do you think it is more attractive to hold more cash for interest income than your previous investment goal?

A: In terms of acquisitions, we have averaged one per month throughout the entire fiscal year 22. We have been monitoring the market to see what is available and what can be synergistic, what can provide the intellectual property or talent we need, or preferably both. So we have been looking at acquisitions of various sizes.

A: As for cash allocation, we like to look at long-term capital return plans. Since the start of that plan, we have repurchased over $550 billion at an average repurchase price of $47. We still have net cash, and we have always said that we hope to achieve cash neutrality at some point. Our cash generation has been very strong over the past few years, especially last year. I think I mentioned in the prepared remarks that we had $111 billion of free cash flow, which grew by 20% YoY and we will use these funds for investors. Q: Does the extra week in this quarter help offset some foreign exchange volatility? In other words, would a 13-week quarter be more adversely affected by the 10-percentage-point negative impact of foreign exchange?

A: No, because it is just a percentage, and 13 or 14 weeks are the same.

Dolphin Apple History Review:

Earnings Season

October 28, 2022 Earnings Review: "Apple: The Only Top Dog That Hasn't Fallen Yet, How Much Longer Can It Last?"

July 29, 2022 Telephone Conference: "How Will Management Explain the Solely iPhone Business (Apple Telephone Conference)"

July 29, 2022 Earnings Review: "The Slightly-Growing iPhone Becomes Apple's Only 'Fig Leaf'"

April 29, 2022 Telephone Conference: "Apple Gives Soft Guidance Due to Multiple Factors (Telephone Conference Summary)"

April 28, 2022 Earnings Review: "Crazy Earnings Apple Should Be Worried About Growth! | Earnings Season"

January 28, 2022 Telephone Conference: "Apple: Supply Chain Crisis Alleviated and Innovation Ignites Real Technology (Telephone Conference Summary)"

January 28, 2022 Earnings Review: "The Hard Strength of Apple Is Both Sweet and Fragrant | Read Earnings Reports"

October 29, 2021 Telephone Conference: "After Failing to Meet Expectations, What Did Apple Management Talk About?"

October 29, 2021 Earnings Review: "Apple Fails to Meet Expectations"

July 28, 2021 Telephone Conference: "After Apple Exceeded Expectations in All Five Areas, What Did Management Say? (Including Complete Q&A)" 2021 Financial Report Review "Apple: The Definition of Excellence, Five-Event Super Expectations Exceeded" on July 28, 2021.

April 29, 2021 Telephone Conference "Apple 2021Q2 Performance Meeting Minutes."

April 29, 2021 Financial Report Review "Excellent companies always exceed expectations, and Apple is tough enough for the new quarter!"

April 25, 2021 Financial Report Preview "After the first quarter report reveals its domineering, will Apple's new quarter financial report continue to explode?"

Depth,

"Consumer electronics are "overripe", and Apple is tough while Xiaomi is suffering" on June 17, 2022.

"Did the US Stock Market Big Shake wrongly kill Apple, Tesla, and Nvidia?" on June 6, 2022.

"Apple: Serving You by Transferring Cost Pressures!" on February 28, 2022.

"Apple: The Double-Drive Gradual Weakness Appears, Urgently Needs Single Product Continuation Force" on December 6, 2021.

Live broadcast:

"Apple 2022 Autumn Release Conference" on September 8th, 2022.

"Apple Inc. (AAPL.US) 2022 Q2 Earnings Conference Call" on April 29, 2022.

"Apple Inc. (AAPL.US) 2022 Q1 Earnings Conference Call" on January 28, 2022.

"Apple Inc. (AAPL.US) Q4 2021 Earnings Conference Call" on October 29, 2021. 2021-10-19 "Apple October New Product Launch Conference" (https://longbridgeapp.com/lives/2794?channel=nl2794&invite-code=032064)

2021-09-15 "Apple 2021 Autumn Conference" (https://longbridgeapp.com/lives/2429)

2021-07-28 "Apple Inc. (AAPL.US) Third Quarter 2021 Earnings Conference Call" (https://longbridgeapp.com/lives/747)

2021-04-29 "Apple Inc. (AAPL.US) Second Quarter 2021 Earnings Conference Call" (https://longbridgeapp.com/lives/28)

2021-04-21 "Apple Spring New Product Launch Conference" (https://longbridgeapp.com/lives/21)

Risk disclosure and statement: Dolphin Analyst Disclaimer and General Disclosures (https://support.longbridge.global/topics/misc/dolphin-disclaimer)