Only the iPhone business is covering up, how will management explain it? (Apple Phone Company)

On the early morning of July 29th (Beijing time), Apple (AAPL.O) released the financial report for the third fiscal quarter of 2022 (ending June 2022) after the US stock market closed.

$ Apple.US FY2022Q3 only the iPhone business was significantly higher than expected:

1. Revenue: achieved $83 billion in the quarter, a year-on-year increase of 1.9%, in line with market expectations ($82.7 billion);

2. Net profit: achieved $19.4 billion in the quarter, a year-on-year decrease of 10.5%, slightly higher than market expectations ($19 billion);

3. Performance of each business:

   • iPhone achieved a revenue of $40.7 billion, a year-on-year increase of 2.8%, exceeding market expectations ($38.9 billion);
   • Mac achieved a revenue of $7.4 billion, a year-on-year decrease of 10.4%, lower than market expectations ($8.4 billion);
   • iPad achieved a revenue of $7.2 billion, a year-on-year decrease of 2.0%, slightly exceeding market expectations ($6.9 billion);
   • other hardware such as wearables achieved a revenue of $8.1 billion, a year-on-year decrease of 7.7%, lower than market expectations ($8.8 billion);
   • service business achieved a revenue of $19.6 billion, a year-on-year increase of 12.2%, in line with market expectations ($19.7 billion).

4. Explanation of performance during the conference call:

   • 1. Exchange rate factor;
   • 1. Mac and iPad supply chains were affected by the pandemic;
   • 1. Macro environment.

Detailed financial report information can be found in Dolphin Analyst's commentary The Slightly Increased iPhone Became Apple's Last "Fig Leaf".

Original text of the conference call:

I. Management Report

1. iPhone: revenue of $40.665 billion, a year-on-year increase of 3%
   • 1. Affected by exchange rate factor;
   • 1. iPhone13 has a high level of user satisfaction;
   • 1. Developed and emerging markets have both reached historic highs;
   • 1. The number of upgraded devices in the US market achieved double-digit year-on-year growth.
2. Mac: revenue of $7.382 billion, a year-on-year decrease of 10%.
   • 1. Severely affected by the negative impact of the supply chain;
   • 1. The all-new MacBook is powered by the M2 chip.
3. iPad: revenue of $7.224 billion, a year-on-year decrease of 2%.
   • 1. Greatly affected by supply chain restrictions and negative exchange rate factors;
   • 1. The demand in the education and enterprise markets remains strong;
   • 1. The proportion of new users has reached a historic high.
4. Wearable devices and other hardware: revenue of $8.084 billion, a year-on-year decrease of 8%.
   • 1. The basic installation of devices has reached a historic high;
   • 1. The Apple Watch has a high attraction for health.
5. Service business: revenue of $19.604 billion, a year-on-year increase of 12%.
6. Affected by foreign exchange factors to a large extent;
7. The United States, Mexico, Brazil, South Korea and India have achieved historic highs;
8. Excellent performance of Apple music/Care/Pay. iCloud;

2. Analyst Q&A

Q1: Have you seen concerns about recession and inflation causing consumer weakness?

A1: If you look at the June quarter, we do see that macroeconomic headwinds have impacted our business and performance. One of them is obviously foreign exchange, with a year-over-year growth rate of over 300 basis points.

In terms of product categories, on iPhone there is no clear evidence of macroeconomic impact other than foreign exchange in the June quarter. Mac and iPad are supply-constrained, and we don't have enough products to test demand; for wearables, home and accessories, we did see some impact, which we attributed to macroeconomic conditions; looking at services, some services were affected, such as digital advertising obviously impacted by the macroeconomic environment. So from what we see, this is a blended impact. Given the magnitude of the challenges in the quarter, we're thrilled with the way we navigated it, and the results speak for themselves.

Q2: In the service business, you continually add interesting and transformative features like payments every year, and this business is quite mature. As investors, how should we think about the growth model for the service business?

A2: As you know, we've moved away from providing any earnings guidance after this quarter. But I think that we should all think about there are a lot of levers in the services business. The first one is the install base. It's the power behind our growing company, and as I mentioned earlier, it hit an all-time high across geographies and all of our product categories. The second lever is customer engagement. We know over time our customers will engage more and more with us. Transactions, paid accounts, and paid subscriptions are all growing, so the engagement rate of course is going up. As you mentioned, the breadth and quality of services that we provide will only increase over time. And these are all things that over the long-term will be beneficial to us. If you look at our growth rate across the last several quarters, it's been strong. Of course, macro has some ups and downs in there. For example, digital advertising can be impacted at times. There's some instability with it in COVID-19. But when we look at what we are doing in services overall, we feel really good about the business going forward.

Q3: In the service area, is Apple interested in acquiring external products to accelerate the growth of its service business?

A3: We always look at ourselves and ask whether it has strategic value, and we don't do acquisition for acquisition's sake or for profitability's sake. But if it has strategic value, we will do it. To date, we've been focused on smaller IP and talent acquisitions. But I don't rule out any possibilities for the future, we have always been watching the market.

Q4: The iPhone upgrade cycle speed has slowed down, and there may be some pressure next year, but you did not mention the pressure of the slowdown, as the growth of new iPhone users has reached double digits. Can you tell us some of the various factors you think are driving the continued strength of the iPhone?

A4: Products and internal innovation are driving growth. Of course, other key variables such as the installed base and the scale of the installed base have been significantly increasing. In this quarter, which is June, we also created a record-breaking strong double-digit growth for this quarter. This further increases the additional installation base. We continue to develop businesses in some important areas where the iPhone penetration rate is very low. In the opening remarks of Indonesia, Vietnam, and India, we mentioned some of these issues. We are doing quite well in these countries, and the iPhone is often the growth engine for these markets, especially in the early days of creating a market for Apple products there. So what we are really focused on is all of these things, from the number of installation bases to the number of switchers to their geographic distribution. And of course, the most important thing for us is to maintain customer satisfaction and loyalty. We are pleased that the latest iPhone has a satisfaction rate of 98%. These are the factors that support its growth. 5G has become a kind of booster. And the penetration rate of 5G, especially from a global perspective, is still relatively low. In some regions, the penetration rate of 5G is significantly higher, but globally, the penetration rate of 5G is still very low. So I think we have reason to be optimistic.

Q5: With the arrival of the third quarter, can you help us understand some changes in the service industry, where will the growth or slowdown occur? Can we also expect double-digit growth?

A5: We expect the economy to slow down on a basis of 12% in the June quarter. Please keep in mind that we will see a 600 basis point, 6% exchange rate impact compared to the same period last year, so this is a significant factor for us. Also, remember that our business in Russia is still affected by these numbers. The weak link is mainly in the digital advertising field, and we need to overcome these weak links. But at the same time, our service business grew a lot a year ago. So comparisons are also a bit challenging. So we cannot give a very specific number today.

Q6: The privacy policy you have adopted has indeed reshaped the mobile advertising market. Can you talk about Apple's role as an advertising network and how to help developers not only profit from app sales, but also increase advertising revenue over time?

A6: We believe privacy is a fundamental right. So what we have done in terms of privacy is to let users decide for themselves whether they want to share their data. That's what's behind app tracking transparency and some other features. We're trying to make sure users own their own data and make their own choices. As far as advertising sales are concerned, we have search ad business on the App Store, which we believe is a good way for developers big and small to get exposure. So, I see that we play a role in it.

Q7: Now that you’ve launched “Pay later,” what measures will you take to improve the affordability of Apple products? We know that the world is in an economic tight spot. How do you view the evolution of various payment plans, from the United States to other markets, especially emerging markets?

A7: Affordability is a very important topic for us in terms of consumer purchasing power. For many years now. Pay later is our latest action in this regard. At the heart of it, we are committed to two main affordability initiatives. One is installment payments. Installment payment plans have become more common around the world, not just in the United States but in most markets, especially emerging markets, where it is very important to lower the affordability threshold.

The other is trade-in programs. Many markets have trade-in programs. We can do better in other markets because the residual value of our products is a huge differentiating factor for our users. After they use our devices, they can reuse our devices and retain more value than other platforms. So, raising this awareness is important to us. Therefore, we will continue to expand these programs around the world. So, installment payments and trade-ins are very, very important for affordability.

Q8: The Mac business supply chain has been severely constrained. How do you view the impact of the supply chain on the Mac business market growth? Last quarter, you were confident in the new M2 chip and that you could continue to grow in this particular market, despite potential declines. Has your perspective changed now? Could you look ahead to this section of the market?

A8: I don’t want to make forecasts this quarter. But in the last quarter, what we saw was that when Shanghai was restricted by COVID, we lost a major source of supply for Mac computers. For most of this quarter, this has either been declining or completely down. This has had a big impact on our Mac business.

But to be honest, we feel good, and we think we can get back to where we were down 10 percentage points by the end of this quarter. On the one hand, this is driven by the supply chain. Of course, the exchange rate has also played a role as a pusher due to problems worldwide. Our business in Russia has also had some impact. But these are the three reasons I want to tell you about.

In terms of testing demand, you cannot really test demand unless you have supply. We are far from the data from the previous quarter, so we have an estimate of demand that we believe in. But this is just an estimate. We realize the current situation in this industry. We believe we have a great story about the Mac with the launch of the M1 and M2. We have a very, very strong back-to-school season, and we will show action in October. Q9: Can you share more about your perspective on supply chain constraints?

A9: To give everyone a clearer understanding of what we saw during this quarter in June, from the perspective of constraints, our data was slightly below $4 billion, close to the lower limit, and the actual impact was lower than expected. In the last quarter, most of the constraints came from the factory closures caused by the epidemic, and the factories operated with lower utilization rates at some time in this quarter (in some cases, most of the time in this quarter).

Then another factor is the silicon shortage, which has affected our performance for several quarters. Looking ahead, we cannot predict when the silicon shortage will end. Overall, we believe that the negative impact on our supply in September this quarter will be lower than in June this quarter. However, we are optimistic about the epidemic restriction part between these two parts.

Q10: What are your thoughts on the development of AR and VR in existing products? Do you see any opportunities?

A10: We are pleased that there are now more than 14,000 ARKit apps in the App Store. They are providing augmented reality experiences for millions of people. Of course, we are in an innovative industry, so we are always exploring new and emerging technologies. But that's all I have to say.

Q11: Can you provide a more detailed analysis of the factors causing changes and growth fluctuations? What are the predictions for the next quarter?

A11: As we said before, we do not provide guidance because of global uncertainty. But we have given some data points, roughly around $5 billion. This is a big number and will have an impact on us. The situation in Russia has had some impact on us, which is obviously different from normal seasonality. Our supply constraints will be lower than what we saw in June, but they will still exist.

Q12: What changes in product strength are there when different product ASPs are combined?

A12: We hope to better improve the value of our products and services, and the foreign exchange impact of wearable devices is very obvious. Phone ASP may be slightly higher, but we will not disclose specific data.

Q13: Have you seen the impact of the epidemic on demand itself? Is there a quick downturn?

A13: We have indeed seen a slight decline in demand in cities affected by the epidemic blockade, but these cities rebounded at the end of the quarter in June, especially before the 618 shopping festival, an important shopping festival in China. The rebound in demand in Beijing and Shanghai, China, was very strong. Indeed, the macroeconomic situation is not good, but Apple has achieved rapid growth in the past few years, and some sectors have doubled.

Q14: In the face of macroeconomic uncertainties, how is Apple considering investment strategies?

A14: We believe that investment has benefits during economic downturns. Therefore, we will continue to hire employees and invest in certain areas, but considering the reality of the environment, we will be more cautious in doing so. Q15: What is the product replacement cycle for iPhone 13?

A15: It is difficult to accurately measure the replacement cycle at any given time, but our key mission is to create products that everyone loves and wants to upgrade to. Therefore, our focus is on continuous innovation to give consumers what they truly desire.

Q16: Did China's epidemic prevention and control during the June quarter have a significant negative impact on App Store revenue or positive impact on game downloads, etc.?

A16: The service business performance in the China region was very good last quarter, with double-digit growth above the company average, and a new record revenue for the quarter in June.

Dolphin Apple History Article Retrospective:

Financial Report Season

July 29, 2022 Financial Report Commentary: "Micro-increased iPhone, unexpectedly became Apple's last "fig leaf"

April 29, 2022 Phone Conference: "Apple gives soft guidance due to multiple factors (conference summary)"

April 28, 2022 Financial Report Commentary: "Crazy profitable Apple, needs to worry about growth! | Financial Report Season"

January 28, 2022 Phone Conference: "Apple: Supply crisis eased, innovation ignites real technology (phone conference minutes)"

January 28, 2022 Financial Report Commentary: "Apple's hard strength, sweet and fragrant again | Reading Financial Reports"

October 29, 2021 Phone Conference: "What did Apple management communication after performance expectations fell short?"

October 29, 2021 Financial Report Commentary: "Expectations fall short, Apple's response is awkward"

July 28, 2021 Phone Conference: "After Apple's "Five-Event" exceeded expectations, how did the management interpret it? (with complete Q&A)"

July 28, 2021 Financial Report Commentary: "Apple: The Definition of Excellence, the "Five-Event" far exceeded expectations" 2021 year on April 29th telephone conference "Apple 2021Q2 Performance Conference Minutes"

2021 year on April 29th financial report review "Excellent companies always exceed expectations, will Apple be tough enough in the new quarter!"

2021 year on April 25th financial report preview "After the aggressive first quarterly report, will Apple's new quarterly report continue to explode?"

In-depth Reports

June 17th, 2022, "Consumer Electronics 'Ripe', Apple Stands Strong, Xiaomi Hard to Endure"

June 6th, 2022, "Did Apple, Tesla, and Nvidia get wrongfully killed in the great shake-up of Wall Street?"

February 28th, 2022, "Apple: Passing Cost Pressures on to You, We Salute You!"

December 6th, 2021, "Apple: Double Power Drive Gradually Waning, Desperately Needs Strong Hardware to Boost Its Momentum"

Live Broadcasting

April 29th, 2022, "Apple Company (AAPL.US) 2022 Second Quarterly Earnings Conference"

January 28th, 2022, "Apple Company (AAPL.US) 2022 First Quarterly Earnings Conference"

October 29th, 2021, "Apple Company (AAPL.US) 2021 Fourth Quarterly Earnings Conference"

October 19th, 2021, "Apple October New Product Launch Event" 2021-09-15: Apple 2021 Autumn Event

2021-07-28: Apple (AAPL.US) 2021 Q3 Earnings Call

2021-04-29: Apple (AAPL.US) 2021 Q2 Earnings Call

2021-04-21: Apple Spring New Product Launch Event

Risk disclosure and statement in this article: Disclaimer and General Disclosure of Dolphin Investment Research