Q3 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Apple's Services revenue reached an all-time record of $24.2 billion, growing 14% year-over-year, driven by double-digit growth in paid subscriptions and increased customer engagement, indicating strong growth potential in the high-margin Services segment.
- Apple is significantly increasing its investments in AI and machine learning, including Apple Intelligence and integrations with technologies like ChatGPT, demonstrating a commitment to innovation that can drive future growth. Additionally, new AI features require the latest hardware, potentially boosting demand for new devices. , ,
- Despite macroeconomic challenges, Apple achieved a record iPhone installed base in China and a June quarter record for upgraders, showing strong customer loyalty and confidence in long-term opportunity in a key market.
- Pressure on gross margins due to increasing component costs and hardware requirements: Apple is experiencing increases in commodity costs, particularly in memory components, which could impact gross margins. Luca Maestri acknowledged, "we have seen some increases on the memory front, but the rest of the commodities, we see a continuous decline." Additionally, the need for advanced silicon to support new AI features like Apple Intelligence may increase production costs and affect profitability.
- Rising R&D expenses could pressure operating margins: The company is increasing its investment in AI and machine learning, leading to higher R&D expenses. Tim Cook stated, "we have increased R&D over time... you can expect that there's—we will continue to invest and increase it year-on-year." This ongoing investment may pressure operating margins in the near term.
- Sales decline and competitive challenges in Greater China: Apple's sales in Greater China decreased by 6.5% year-over-year, with over 50% of the decline due to currency impacts. Tim Cook noted that "the competitive environment there is the most competitive in the world." Despite recent improvements, there is uncertainty about the sustainability of performance in this key market due to intense competition and macroeconomic headwinds.
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Apple Intelligence Rollout and Impact
Q: How will Apple Intelligence affect future revenue and Services?
A: Tim Cook stated that Apple has begun rolling out Apple Intelligence with developers this week, with some features available now and more to come over the next year. The rollout is staggered, with ChatGPT integration expected by the end of the calendar year. To run Apple Intelligence, devices require specific hardware like the iPhone 15 Pro and Pro Max, and Macs and iPads with M series silicon. Apple is increasing investment in R&D, particularly in AI and ML, and plans to continue this investment year-over-year. While not disclosing specific monetization details, Cook emphasized the importance of both on-device processing and partnerships like that with OpenAI. Regulatory considerations in regions like the EU and China may impact rollout timelines, but Apple is actively engaging with authorities. -
China Sales
Q: How did China revenue perform this quarter?
A: Tim Cook reported that revenue in Greater China decreased by 6.5% year-over-year, but only less than 3% in constant currency, meaning over 50% of the decline was due to currency exchange rates. The iPhone installed base set a record in Greater China, and Mainland China saw a June quarter record for upgraders. The iPhone 15 is outperforming the 14 when comparing the same number of weeks from launch. Cook remains confident in the long-term opportunity in China despite a highly competitive environment and macroeconomic factors. -
Gross Margins Outlook
Q: What is the outlook for gross margins?
A: Luca Maestri stated that Apple reported a gross margin of 46.3%, down 30 basis points sequentially due to mix changes, but up significantly year-over-year. For the next quarter, they are guiding gross margins between 45.5% to 46.5%, similar to the current quarter. Foreign exchange continues to be a headwind. Commodity prices are mixed, with increases in memory costs but declines in other areas. Product mix and the success of different products impact overall gross margins, but Apple feels good about their position. -
iPhone Replacement Cycle
Q: What is the status of the iPhone replacement cycle?
A: Tim Cook noted that the installed base hit an all-time high during the quarter. The iPhone 15 is performing better than the 14, comparing the same number of weeks from launch. While it's difficult to predict upgrade rates mid-cycle, Cook is excited about the value Apple Intelligence will provide to users, presenting another compelling reason for upgrades. -
OpenAI Partnerships and Monetization
Q: How will partnerships with OpenAI be monetized?
A: Tim Cook explained that Apple Intelligence includes on-device processing and Private Cloud Compute for personal context, while integrating with ChatGPT for world knowledge. While he did not disclose specific terms of the commercial agreements due to confidentiality, he emphasized that both aspects are important and that people want both. -
Services Growth Drivers
Q: What's driving the strong Services growth?
A: Luca Maestri attributed the 14% growth in Services to a combination of factors: a larger installed base, increased customer engagement, and strong double-digit growth in paid accounts and subscriptions. New services like Apple TV+, Apple Arcade, and Fitness+ contribute to growth, along with significant investments in content. Despite tougher comparisons in the second half of the fiscal year, Services delivered better-than-expected growth. -
Regulatory Impacts on Apple Intelligence
Q: Are regulations affecting Apple Intelligence rollout?
A: Tim Cook acknowledged that regulatory complexities in regions like the EU and China may impact the rollout timelines of Apple Intelligence features. Apple is constructively engaging with regulators to understand requirements and aims to move as fast as possible to bring features to everyone. -
CapEx, R&D Spending and Cash Flow Impact
Q: Will Apple Intelligence require more R&D and CapEx?
A: Tim Cook stated that Apple has increased R&D over time, investing in AI and ML for years, and plans to continue increasing investment year-over-year. For CapEx, Apple uses a hybrid approach, with investments both internally and through partners where CapEx appears on their balance sheets. This approach may impact free cash flow, but Apple aims to run the company efficiently. -
Free Cash Flow Margins Increase
Q: What's driving higher free cash flow margins?
A: Luca Maestri is pleased with the increase in free cash flow margins, attributing it to a combination of factors: improvement in the top line, margin expansion over several years, and efficient capital management. The company increased its return of capital to shareholders this quarter, marking a record quarter. Apple's hybrid CapEx model and focus on capital efficiency contribute to strong free cash flow. -
Wearables Category Performance
Q: What's driving Wearables' acceleration?
A: Tim Cook explained that the Wearables, Home, and Accessories category has faced difficult launch comparisons due to last year's benefits from products like the AirPods Pro second generation, Watch SE, and first Watch Ultra. Despite this, over the trailing 12 months, the business has grown to almost $40 billion, doubling over five years.