Apple: Overcoming the odds and making a comeback is the true mark of a "king of technology".

On the morning of May 5th, 2023 Beijing time,$Agilent Tech(A.US)pple(AAPL.US) released its Q2 2023 financial report (ending March 2023) after the US stock market closed.

1. Overall Performance: Alpha against the cycle. $Agilent Tech(A.US)pple.US realized revenue of 94.8 billion US dollars in the quarter, a year-on-year decrease of 2.5%, exceeding Bloomberg's consensus expectations ($92.6 billion). The main reason why this quarter exceeded market expectations was due to the exceptional performance of the smartphone business. Apple's gross margin this quarter was 44.3%, a year-on-year increase of 0.6 percentage points, which matched the Bloomberg consensus expectation (44.1%). This quarter's gross margin on the software side was 71%. In the macroeconomic context, it is not easy to maintain a gross margin of over 70%.

2. iPhone: The "King of Phones" that sees growth against the trend. The global smartphone market experienced a double-digit decline this quarter, while Apple's iPhone business saw growth against the trend. The dolphin estimates that Apple's smartphone shipments this quarter slightly decreased, far better than the industry situation. At the same time, the shipment of high-priced models continued to bring the company an increase in average selling price.

3. Other hardware outside the iPhone: Weak demand, ultimately a decline. Mac business continued to decline significantly by 31%, mainly because the channel side completed inventory replenishment and there is currently not sufficient demand. The performance of the iPad business was average, and overall performance tended to be stable after the demand for home office and other needs decreased. The decline in wearable hardware products this quarter has narrowed, mainly due to the rebound in demand for some products in the business.

4. Software services: The most robust growth. This quarter's software service revenue was $20.9 billion, slightly lower than Bloomberg's consensus expectations ($21.1 billion). The shipment of hardware end products will affect the growth of the company's software service users. In the current situation of weak hardware demand, the company's software services have maintained a steady growth trend, which is already quite robust.

Overall view: Apple's financial report this time is still good. Looking at the core data, Apple's revenue and net profit this quarter have exceeded market expectations. This is mainly because in the case of weak demand for electronic products such as smartphones, the market's expectations for Apple this quarter were not high. However, the company's financial report still has some highlights, demonstrating that the company has its own alpha.

Specifically:

①Highlights on the revenue side: Demonstrating industry status. The surprise in this financial report mainly comes from the iPhone business. The company achieved growth in its smartphone business in an industry where the overall market declined by double digits. This is mainly due to Apple's absolute superior brand and industry status, the continued sales of high-priced models brought an increase to the average selling price, and the opening up of markets in India, Indonesia, the UAE, Turkey, and other countries brought in incremental volume.

②Highlights of gross margin: Demonstrating the status of the industry chain. In the context of weak demand, the profit-making ability of the entire smartphone and electronic product industry chain has seen a significant decline, but Apple's hardware side still achieved a gross margin of 36.7%. This is mainly due to the company's position in the industry chain. Even in situations of cost increases and declining profit-making ability, Apple can shift risks. Therefore, although the industry is facing headwinds, Apple has shown the ability to overcome them in this financial report. While industry demand is weak, Apple can occupy a larger market share with its own alpha. Even if the industry is not making money, Apple can maintain its profitability by increasing costs and passing them on through its industry chain position.

When the cycle is up, all companies in the industry are making money. It is only when the tide recedes that we can see who has the obvious advantages and absolute discourse power in the industry.

Longqiao Dolphin's detailed analysis of Apple's financial report is as follows:

1. Overall performance: Fighting against the cycle with alpha

1.1 Revenue: In the second quarter of the 2023 fiscal year, Apple achieved revenue of $94.8 billion, down 2.5% year-on-year, exceeding Bloomberg's consensus expectation ($92.6 billion). The company gave an explanation for the decline in revenue this quarter due to exchange rates and economic factors, but it is actually because of weak demand for electronic products.

From the perspective of market demand and product shipments, the sluggishness of the electronic product market has been recognized by the market. Therefore, the market has also lowered its revenue expectations for Apple this quarter. The performance of Apple's revenue side this quarter exceeded market expectations, indicating that the company has its own alpha.

From both hardware and software perspectives:

①The hardware business growth rate of Apple this quarter was -4.6%, better than last quarter. The main cause of the decline in the hardware side this quarter was the drag on the iPad and Mac business. The performance of the mobile phone business was better than market expectations, mainly due to the increase in unit price;

②Apple's software business grew by 5.5% this quarter, with growth rate continuing to maintain single digits. Despite the impact of declining hardware revenue and macro environment, software services can still achieve growth, which is not easy. However, in the current situation, it is difficult for the software business to return to high growth rates.

Considering different regions: Apple continued to decline in the Americas market this quarter, while Europe and the Asia-Pacific region began to rebound. The Americas is the largest source of Apple's revenue and declined by 7.6% this quarter. Europe and other Asia-Pacific regions have returned to growth, especially in India, Indonesia, the UAE, and Turkey, where iPhone sales have doubled. 1.2 Gross Profit Margin: In the second quarter of the 2023 fiscal year, Apple's gross profit margin was 44.3%, a year-on-year increase of 0.6pct, which is in line with Bloomberg's consensus forecast (44.1%). The company's gross profit margin has steadily increased this quarter, with the effect of increasing the average price. The company's gross profit margin has been maintained above 42% for nine consecutive quarters.

Dolphin divides the software and hardware gross profit margins:

Apple's software gross profit margin this quarter continued to remain above 70%. The market is still most concerned about the level of gross profit margin on the hardware side. This quarter, Apple's hardware gross profit margin has slightly declined to 36.7%. The launch of the Apple 14 series new phone has driven up the average price, and the company's position in the industrial chain has transferred cost increases.

1.3 Operating Profit: In the second quarter of the 2023 fiscal year, Apple's operating profit was 28.3 billion U.S. dollars, a year-on-year decrease of 5.5%. The decline in Apple's operating profit in this quarter is mainly due to the growth of expenses.

The operating expense ratio of Apple in this quarter was 14.4%, a year-on-year increase of 1.3pct. Due to the impact of the decline in revenue this quarter, the sales and administrative expense ratio and the research and development expense ratio have both increased year-on-year. From an absolute value perspective, the company continues to increase research and development investment, which is the main reason for the growth in expenses.

II. iPhone: The"King of Phones" Upside-down Growth

In the second quarter of the 2023 fiscal year, iPhone business revenue was 51.3 billion U.S. dollars, a year-on-year increase of 1.5%, exceeding Bloomberg's consensus forecast (48.9 billion U.S. dollars). The overall mobile phone market declined by 14.6% this quarter, but the company's mobile phone business grew against the trend, mainly benefiting from its leading industry position.

From the perspective of the relationship between quantity and price, Dolphin looks at the main source of growth in iPhone business this quarter:

1) iPhone shipment volume: Prior to this quarter's financial report disclosure, IDC had already disclosed the shipment situation of various brands in the quarter. Due to factors such as the epidemic and inflation, the global smartphone market in the first quarter of 2023 decreased by 14.6% year-on-year. With its strong product lineup, Apple's market share continues to rise from 18% to 20.5%. The company's shipment volume in this quarter only declined by 2.3%, a significant improvement over the industry average.

2) Average iPhone shipment price: This quarter's iPhone shipment volume has been digested by the market according to IDC data. Based on iPhone business revenue and shipment volume estimates, the average iPhone shipment price continued to increase year-on-year this quarter, reaching around $930. The main reason for the further rise in average iPhone shipment price this quarter is the increased proportion of shipments of the iPhone 14 Pro series released at the autumn launch event, which brought structural growth.

3. Other hardware besides iPhone: Weak demand, eventually fell

3.1 Mac business

In the second quarter of the 2023 fiscal year, Mac business revenue was $7.2 billion, a year-on-year decrease of 31.3%, well below Bloomberg's consensus expectation of $7.9 billion. The sharp decline in Mac business this quarter was mainly due to weak industry demand.

According to IDC's report, global PC market shipments in this quarter fell by 29% year-on-year, while Apple's shipment volume in this quarter only declined by 40.5%. Dolphin believes that after the previous demand for inventory replenishment, there are still a lot of Macs available in the channel side, thereby reducing the demand for this quarter. Overall demand in the current PC market is still sluggish.

3.2 iPad business

In the second quarter of the 2023 fiscal year, iPad business revenue was $6.7 billion, a year-on-year decrease of 12.8%, in line with Bloomberg's consensus expectation of $6.68 billion. The market demand for iPad is similar to that of Macs. When demand for working from home drops, demand for iPads also drops to steady levels.

iPad is not like iPhone, which is a must-have product, but more of an optional consumer item. Optional consumption is more affected by macroeconomic factors, and demand is currently relatively weak.

3.3 Wearables and Other Hardware

"Wearables and other hardware revenue for the second quarter of 2023 was $8.8 billion, a 0.6% YoY decline, slightly higher than the Bloomberg consensus estimate of $8.35 billion. The decline in Apple's wearable and other hardware business this quarter has slowed, driving demand for wearable devices with the recovery of tourism and other demands. The recovery of some products offsets the decline in wearable and other hardware business performance.

Section 4: Software and Services - The Most Robust Growth

"Software and services revenue for the second quarter of 2023 was $20.9 billion, a 5.5% YoY increase, slightly lower than the Bloomberg consensus estimate of $21.1 billion. This quarter's single-digit growth in software and service businesses is still the most robust part of the company's growth.

"Dolphin Jun believes that the slowing growth rate of Apple's software and service revenue, from double digits in the past to single digits, is mainly due to the dual impact of volume and price. ① Volume: This is because Apple's hardware integration model will also affect the growth rate of Apple's software service users when the previous quarter's hardware growth is no longer high. Apple's software and service growth rate has shown a continuous decline; ② Price: Under the influence of the macroeconomic environment, consumers' willingness to pay for services has been affected to some extent.

"However, compared to the decline in hardware business, the software business has strong resistance to risks. Even in the case of declining hardware business, Apple's software business can still maintain growth.

"The most important thing to note in software and services is the gross margin level. In this quarter, the gross margin of software and services was 71%, which has been maintained at 70% or above for seven consecutive quarters. Even in the overall depression of the internet advertising industry, Apple can still obtain a gross margin of more than 70%, which can still show the importance of Apple's hardware entrance.

Long Bridge Dolphin Apple Historical Article Review:

Financial Report Season

February 3, 2023 Financial Report Commentary "Apple: The Thunder on Your Body Finally Comes Out"

February 6, 2023 Telephone Conference "Limited Demand Impact, Guidance Continues to Inspire Confidence (Apple FY2023Q1 Conference Call)"

October 28, 2022 Telephone Conference "Apple: The Peak Season Is Not Good, and the 'Roll King' Cannot Escape the Decline (FY2022Q4 Conference Call) invite-code=EZND0I&channel=t3586604)》

2022 October 28th Financial Report Review - "Apple: The only giant who hasn't fallen, how much longer can they last?"

2022 July 29th Conference Call - "How will management explain the embarrassment of relying solely on iPhone business? (Apple Conference Call)"

2022 July 29th Financial Report Review - "The slightly growing iPhone has unexpectedly become Apple's last "fig leaf""

2022 April 29th Conference Call - "Multiple factors have caused trouble, Apple gives a soft guidance (Conference Summary)"

2022 April 28th Financial Report Review - "Apple, who is crazy profitable, should worry about growth! | Financial Report Season"

2022 January 28th Conference Call - "Apple: Supply crisis easing, innovation igniting true technology (Conference Summary)"

2022 January 28th Financial Report Review - "Apple's hard power, sweet and fragrant | Read Financial Report"

2021 October 29th Conference Call - "After performance expectations fell through, what did Apple management discuss?"

2021 October 29th Financial Report Review - "Expectations fall through, Apple's answer sheet is embarrassing"

2021 July 28th Conference Call - "After Apple's five-category dominance exceeded expectations, management's interpretation (including complete Q&A)"

2021 July 28th Financial Report Review - "Apple: Definition of Excellence, Five-category dominance exceeds expectations" On April 29, 2021, there was a phone meeting on "Apple's Q2 2021 Performance Summary." On the same day, there was also a financial report review on "Excellent companies always exceed expectations. Will Apple's new quarter be strong enough!" A financial report preview was also held on April 25, 2021, titled "After the domineering first-quarter report, will Apple's new financial report continue to explode?" There are in-depth discussions on topics such as "Semiconductor Avalanche? Real elasticity will only come after the most severe decline" on December 29, 2022, and "Did Tesla, Apple and Nvidia get wrongfully killed due to the stock market's giant tremors?" on June 6, 2022. Similarly, there is also an article titled "Is Apple really sweet even though it is still declining despite good performance?" published on November 11, 2022. On June 17, 2022, there was a discussion on "Mature state of consumer electronics. Apple's hard persistence and Xiaomi's bitter endurance." Lastly, there was a live event held on September 8, 2022 - "Apple 2022 Autumn Launch Event" - and financial results conference calls for both the Q2 and Q1 of 2022. On October 29, 2021, "Apple (AAPL.US) Fourth Quarter 2021 Earnings Call" was held.

On October 19, 2021, "Apple October Product Launch" was held.

On September 15, 2021, "Apple 2021 Autumn Conference" was held.

On July 28, 2021, "Apple (AAPL.US) Third Quarter 2021 Earnings Call" was held.

On April 29, 2021, "Apple (AAPL.US) Second Quarter 2021 Earnings Call" was held.

On April 21, 2021, "Apple Spring New Product Launch" was held.

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