Apple earnings: About that iPhone ‘slump’ in China

If he hasn’t already, it’s past time for Apple CEO Tim Cook to gain a reputation for dry wit when it comes to handling preconceived opinion — he ladled out several helpings of this during Apple’s second-quarter fiscal call on Thursday. Though the company’s financials were down, they were still ahead of what Wall Street had anticipated.

Revenue for the quarter was $90.8 billion, down 4% from the same quarter last year, but Apple’s gross margins increased to 46.6%, mainly on the strength of solid services increases.

Cook states the facts 

For me, one of his best lines during the presentation was captured in this exchange during analyst questions:

Wells Fargo analyst:  “I guess I’m going to go back to the China question. I guess at a high level, the simple question is, when we look at the data points that have been repeatedly reported throughout the course of this quarter, I’m curious, Tim, what are we missing? Where do you think people are missing Apple’s iPhone traction within the Chinese market?”

Tim Cook: “I can’t address the data points. I can only address what our results are. And we did accelerate last quarter and the iPhone grew in mainland China. So that’s what the results were. I can’t bridge to numbers we didn’t come up with.”

Translation: The analyst is confused because all the industry data points (IDC, Counterpoint, Gartner, Ming Chi Kuo) seem to have been inaccurate. Cook simply dismisses those estimates with the company’s actual results.

What happened in China?

What’s confusing here is that the company’s management report confirms weak iPhone sales in every segment — but in part this reflects one of those “difficult comparisons” the company likes to state. 

Think back to this time last year, when Apple was just emerging from what had been a very difficult time operationally. In the run up to this quarter a year ago, COVID-19 had closed the iPhone factories, meaning lots of smartphones weren’t being made, and order fulfillment was delayed. Apple told us then that it realized about $5 billion in iPhones sales in the quarter that would have been made in the preceding one. 

That’s not the case this year. “If you remove that $5 billion from last year’s results, we would have grown this quarter on a year-over-year basis,” Cook said. “And so that’s how we look at it internally from how the company is performing.” 

If that’s true, it explains why Apple doesn’t seem especially concerned that its iPhone sales internationally did decline by 10% in revenue in the quarter. After all, the iPhone was the top-selling smartphone model in the US, urban China, Australia, UK, France, Germany, and Japan. The device also achieved 99% customer satisfaction according to Changewave.

Managing change

Even though Cook told us that iPhone sales grew in China, both the Wall Street Journal and Nikkei insist sales fell there. In fact, the two best-selling smartphones in mainland China during the quarter were the iPhone 15 and 15 Pro Max, Apple confirmed during the presentation. 

Apple did concede that it has work to do on its other products, and iPhone sales were down in contrast to this time last year. Weakness was felt across multiple markets, and with the iPhone Apple’s biggest product, the impact of this and softening iPad sales contributed to revenue decline.

What is interesting is that in Japan and elsewhere in the APAC region, Apple sales seemed weak. That doesn’t mean there isn’t an appetite for the company’s products. Cook sees enthusiasm across the region: “Everywhere I travel, people have such a great affinity for Apple, and it’s one of the many reasons I’m so optimistic about the future,” he said. He also expressed his confidence in the long-term Apple market in China.

What about enterprise use?

Apple made a handful of references to enterprise sales, the majority of which pertained to its latest device, the Vision Pro headset. The company reported that over half of the world’s Fortune 100 companies have already bought Vision Pro units to explore what the device can do for their business. 

“We are seeing so many compelling use cases, from aircraft engine maintenance training at KLM to real-time team collaboration and immersive kitchen design at Lowes,” said Apple CFO Luca Maestri.

Apple also confirmed the ongoing rise of Macs in the enterprise. “More and more enterprise customers are embracing the Mac,” said Maestri.

In healthcare, Epic Systems, the world’s largest electronic medical record provider, recently launched its native app for the Mac, making it easier for healthcare organizations like Emory Help to transition thousands of PCs to the Mac for clinical use. “I think there’s a great opportunity for us around the world in enterprise,” said Cook.

A note on Europe

Two points seemed interesting:

Apple anticipates solid services growth (which includes Europe) in the current quarter, despite the EU’s DMA act which is forcing it to change its App Store business model.

With those changes, Apple said it’s too early to tell whether consumers or developers will migrate outside the App Store; its focus for now is on complying with the EU law while “mitigating the impacts to user privacy and security” of doing so.

One step beyond

Apple also discussed emerging markets. 

Maestri: “…When we start looking at places like India, like Saudi, like Mexico, Turkey, Brazil, Mexico and Indonesia, the numbers are getting large. And we’re very happy because these are markets where our market share is low. The populations are large and growing. And our products are really making a lot of progress within those markets. The level of excitement for the brand is very high. So, it is very good for us.

“And then and certainly the numbers are getting larger all the time. And so the gap as you compare it to the numbers in China is reducing. And hopefully that trajectory continues for a long time.”

The takeaway from those statements tells me that, like any farmer, Apple is investing in future business growth and most certainly sees rapidly emerging markets as the bedrock for tomorrow’s success as mature markets atrophy.

What happens next?

Looking forward, Apple warned of low single-digit growth in the June quarter, with services predicted to continue to grow and the iPad to see double-digit growth. The company is expected to ship a new iPad as soon as next week. 

That iPad may also introduce some new AI-driven tools, perhaps as a taster of what to expect at WWDC and their expected spread across the company’s products this fall. Discussing generative AI, Cook described it as a “very key” opportunity, stressed his confidence that the company has advantages to bring such tech to market, and promised “we will be talking more about it as we go through the weeks ahead”. So, there’s a lot to look forward to.

Apple’s data points

So, having established that there’s no data about Apple better than Apple’s own data, what data points did Apple share? You can review its press release here and financial statements here and here. What follows are some details cherry-picked from within the company’s analyst call:

Apple reached revenue records in more than a dozen countries and regions, including in Latin America and the Middle East, as well as Canada, India, Spain, and Turkey.

It also achieved an all-time revenue record in Indonesia, “one of the many markets where we continue to see so much potential,” said Cook, who recently visited the nation.

Services hit an all-time revenue record, up 14% YoY at $23.9 billion. (It’s worth noting that recent data indicates Apple TV+ is the fastest growing streaming service in major markets.)

Mac sales by revenue grew 4% YoY. (Cook described the MacBook Air as “the best consumer laptop for AI”, which I take to mean “watch this space.”)

iPad revenue fell 17%, ahead of next week’s expected refresh.

Wearables, home, and accessory sales fell 10%.

Apple nodded toward CSR, confirming its plan to be completely carbon neutral across its business by 2030 and celebrating that it has reduced overall emissions by over 50% even while revenue (and therefore sales) increased 65% since 2015.

Apple expects gross margins in the June quarter of 45.5% to 46.5% (which is really high, even for Apple).

Apple predicts single-digit growth in comparison to last year in the upcoming June quarter. In 2023, it booked $81.8 billion in revenue for that period.

If you own Apple shares, you’ll get 25 cents per share on May 16.

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