Apple Inc. delivered quarterly results after the closing bell on Thursday ahead of what is expected to be a robust AI upgrade cycle for its iPhones in the coming months. Revenue in Apple’s fiscal third quarter, which ended in June, grew 5% year over year to a record $85.78 billion — ahead of LSEG’s estimate of $84.53 billion. Earnings per share rose 11% to $1.40 — above LSEG’s consensus estimate of $1.35. AAPL YTD Mountain Apple YTD Apple shares fell 2.7% in after-hours trading before clawing their way back into positive territory. The stock closed the regular session down 1.7% in a tough Thursday market. Bottom Line In addition to strong sales and earnings overall, services revenue in the fiscal third quarter was an all-time high. Apple once again achieved a record installed base of active devices, across all geographies and product categories. All of that translated into a healthy gross margin across the company, keeping the tech giant on a strong footing as it prepares to unveil its new AI-powered iPhone next month. While Greater China remained a weak spot, sales in the region fell just 6.5% year-over-year, an improvement from a dismal first half of the year. In a post-earnings call, management said China was down less than 3% on a constant currency basis, meaning foreign exchange headwinds accounted for more than half of the quarterly decline. According to a survey from analytics provider Kantar, iPhones were the top three models sold in urban China during the quarter. Why we own it: Apple’s dominant, growing hardware and services businesses provide a deep competitive moat and plenty of consolidation opportunities. Management’s net cash neutral strategy provides confidence that free cash flow will continue to fund dividends and buybacks. Additionally, the company’s commitment to customer experience has translated into industry-leading user loyalty scores, giving it pricing power. There’s a reason it’s one of only two “own, don’t trade” stocks in the portfolio. Last purchased: April 8, 2014 Started: December 2, 2013 During the call, CEO Tim Cook discussed Apple’s AI in detail. The company is clearly excited and optimistic about the potential of generative AI and what it means for its ecosystem. “We will continue to make significant investments in this technology and dedicate ourselves to innovation that will unleash its full potential,” he said. While we know that users will need an iPhone 15 Pro or better to take advantage of the upcoming AI software features, we’ve yet to see the iPhone 16 and all the hardware upgrades it will bring. Apple typically unveils new iPhones in September. Since the company’s fourth fiscal quarter ends in September, we likely won’t see the full financial benefits from sales of the new devices. That won’t come until the first quarter of Apple’s fiscal 2025, the holiday period that ends in December. Still, the expected surge in sales of new AI-powered iPhones is a clear positive catalyst on the near horizon. Therefore, we continue to believe that investors should patiently “hold, don’t trade” the stock and use the weakness in the stock as an opportunity to build positions ahead of the upgrade cycle. We reiterate our $240 price target on the stock and maintain our 2 rating. Apple shares, down about 8% from last month’s all-time high above $237, have performed better in the recent painful market rotation away from technology stocks. Quarterly Commentary Cost of sales was higher than expected in the quarter. But that’s to be expected given the sales beat. Company-wide profitability was strong with a gross margin in the quarter of 46.3%, an expansion of 174 basis points, or 1.74 percentage points, from last year and better than expected. While the product gross margin was slightly lower, the difference was more than offset by very strong profitability in services. R&D expenses were slightly higher, but more than offset by selling and general administrative expenses. Given the AI opportunity Apple has ahead of it, we’re more than happy to let them spend more on R&D. This is even more true given that the company is a cash printing machine, with strong operating cash flow and free cash flow for the quarter and supporting capital returns to shareholders over time. Apple exited the fiscal third quarter with approximately $153 billion in cash, cash equivalents, and marketable securities on the balance sheet. After subtracting $101 billion of debt, we’re left with a net cash position of approximately $52 billion. Apple has a policy of net cash neutrality over time, meaning that if cash isn’t used for acquisitions or organic growth investments, it is returned to shareholders through buybacks and dividends. During the reported quarter, Apple returned more than $32 billion to shareholders, including $3.9 billion in dividends and cash equivalents and another $26 billion through the repurchase of 139 million shares. iPhone product sales were down slightly in the quarter. However, they were up on a constant currency basis. CFO Luca Maestri said on the call that iPhones “set records in the June quarter in several countries including the UK, Spain, Poland, Mexico, Indonesia and the Philippines.” The MacBook Air with the M3 chip led notebook results during the quarter, with Maestri saying that “half of MacBook Air customers in the quarter” were new to the device. iPad unit sales benefited from the launch of the new iPad Pro and iPad Air, with Maestri saying that “half of customers who bought iPads during the quarter were new to the product.” The Wearables, Home and Accessories segment declined year-over-year as the Watch and AirPods faced tough comparisons. Still, the result was better than expected and points to a sequential acceleration. “Apple Watch continues to attract new customers as nearly two-thirds of customers who bought Apple Watch during the quarter were new to the product, sending the Apple Watch install base to a new all-time high,” Maestri said. Services: All-time revenue record, with record highs in developed markets and record June quarters in emerging markets. Paid subscriptions grew by double digits to an all-time high, with Maestri saying that “both transactional and paid accounts reached an all-time high.” Apple now has more than 1 billion paid subscriptions across its services platform. That’s more than double the number from just four years ago. On the call, Cook said, “We set revenue records across most of our services categories, with all-time revenue records in advertising, cloud, and payments.” The record-setting installed base certainly bodes well for services revenue. However, we were also pleased to hear Maestri say that the company is seeing “increased customer engagement with our services offerings.” Guidance The September Q4 guidance assumes that the overall economic outlook doesn’t deteriorate. Revenue in the fiscal fourth quarter is expected to grow at a similar rate to what we saw in the June quarter — 5% year-over-year despite a 1.5 percentage point currency headwind. That compares to the Street’s estimate of 4.3% growth. So, we can see that as slightly better than expected. Services is expected to grow at a double-digit rate similar to the rate Apple saw in the first quarter of fiscal 2024. We grew 11.3% year-over-year in that quarter, and the Street is looking for 10.9% in the September third quarter. So the evidence here also seems to be slightly better. Gross margin is expected to be between 45.5% and 46.5%, better than the 45.7% estimate at the midpoint. Operating expenses are expected to be between $14.2 billion and $14.4 billion, better than the $14.56 billion estimate. (Jim Cramer’s Charitable Trust is a long-term AAPL fund. See here for a full list of stocks.) 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A person holds an original iPhone and a new iPhone 15 outside the Apple Store on Fifth Avenue in New York City ahead of the launch of Apple's new iPhone 15, on September 22, 2023.
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apple Apple Inc. reported quarterly results after the close on Thursday ahead of what is expected to be a robust AI upgrade cycle for the iPhone in the coming months.
