Apple Inc. (NASDAQ:AAPL) Q4 2023 Earnings Call Transcript

Apple Inc. (NASDAQ:AAPL) Q4 2023 Earnings Call Transcript November 2, 2023

Apple Inc. beats earnings expectations. Reported EPS is $1.46, expectations were $1.39.

Operator: Good day, and welcome to the Apple Q4 Fiscal Year 2023 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead.

Suhasini Chandramouli: Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook. And he’ll be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company’s business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast.

For more information, please refer to the risk factors discussed in Apple’s most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I’d now like to turn the call over to Tim for introductory remarks.

Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $89.5 billion for the September quarter. We achieved an all-time revenue record in India, as well as September quarter records in several countries, including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam and more. iPhone revenue came in ahead of our expectations, setting a September quarter record, as well as quarterly records in many markets, including China mainland, Latin America, the Middle-East, South Asia and an all-time record in India. In services, we set an all-time revenue record with double-digit growth and ahead of our expectations. During the September quarter, we continue to face an uneven macroeconomic environment, including foreign exchange headwinds and we’ve navigated these challenges by following the same principles that have always guided us.

We’ve continued to invest in the future and manage for the long-term. We’ve adapted continuously to circumstances beyond our control, while being thoughtful and deliberate on spending. And we’ve carved a path of groundbreaking innovations and delivered with excellence every step of the way. That includes Apple Vision Pro, which has gotten such an amazing response from developers who are currently creating truly incredible apps. We’re excited to get this magical product in the hands of customers early next year. Now let me share more about our products, beginning with iPhone. iPhone revenue came in at $43.8 billion, 3% higher than a year ago, and a new record for the September quarter. This fall, we were thrilled to debut the iPhone 15 lineup.

The all-new iPhone 15 and iPhone 15 Plus feature a gorgeous design, powerful cameras and the intuitive Dynamic Island. Powered by the industry-leading A17 Pro, our iPhone15 Pro lineup has a beautiful strong and durable titanium design and the best iPhone camera system ever, including a 5X Telephoto lens on iPhone 15 Pro Max. Customers are loving the entire iPhone 15 family and reviews have been off the charts. In Mac, revenue came in at $7.6 billion, down 34% year-over-year from the prior year’s record quarter. This was due to challenging market conditions, as well as difficult compares against the supply disruptions and subsequent demand recapture we experienced a year ago. Earlier this week, we were excited to unveil the next generation of Apple silicon with our incredible family of M3 chips, M3; M3 Pro; and M3 Max.

We’re continuing to innovate at a tremendous pace. And our industry-leading lineup of personal computers just got even better. The new MacBook Pro lineup brings our most advanced technology to our Pro users, while iMac, the world’s best-selling all-in-one, just got faster and more capable. And according to the latest data from Student Monitor, nearly two out of three college students chose a Mac. We couldn’t be more excited about the future. Turning to iPad. Revenue for the September quarter was $6.4 billion. iPad sets the gold standard for tablets and our competitors are unable to match the iPad experience that is enabled by our seamless integration of hardware and software. iPad is also our most versatile product. In classrooms around the world, it’s helping educators bring lessons to life, while giving students a window into the world around them.

And in artist workshops, design studios and everywhere else, creative minds come together, iPad supercharges the creative process, helping users take their ideas farther than they ever could before. Across wearables, home and accessories, revenue came in at $9.3 billion. Apple Watch has become essential in our lives and this is our best Apple Watch lineup ever. With Apple Watch Series 9 and Apple Watch Ultra 2, we’re giving people even more tools to stay safe and live healthy, active lives. With the new double tap gesture, users can easily control Apple Watch Series 9 and Apple Watch Ultra 2 using just one hand and without touching the display. It feels like magic. Our latest Apple Watch lineup also includes our first-ever carbon-neutral products, a significant achievement of innovation and determination.

Apple’s unique ecosystem of hardware, software, and services delivers an unparalleled user experience. During the quarter, we also had the chance to introduce a range of exciting new updates to our software that will allow users to get even more out of their devices. Whether it’s personalized contact posters and new face time features in iOS 17, new tools for users to make their experience their own in macOS Sonoma and iPadOS 17, or a bold new look in watchOS 10 that lets you see and do more, faster than ever, Apple is delivering an even better, richer experience that users are loving. Services revenue set an all-time record of $22.3 billion, a 16% year-over-year increase. We achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music.

Whether subscribers are waking up to headlines on Apple News+, getting their morning workout in with Fitness+, feeling the beat with Apple Music on their way to work or school, or unwinding at the end of the day with Apple Arcade, we have so many different services to enrich their day. Apple TV+ continues to delight customers as well, with new and returning shows like the Morning Show, Lessons in Chemistry and Monarch. We’re telling impactful stories that inspire imagination and stir the soul. Making movies that make a difference is also at the heart of Apple TV+ and we were thrilled to produce Martin Scorsese’s Killers of the Flower Moon, a powerful work of cinema that premiered in theaters around the world last month. We’re proud to say that since launch, just over four years ago, Apple TV+ has earned nearly 1,600 award nominations and nearly 400 wins.

We also offer subscribers an unprecedented live sports experience with MLS Season Pass. We couldn’t be more pleased with how our partnership with Major League Soccer has gone in its first year. Subscriptions to MLS Season Pass have exceeded our expectations and we’re excited to continue that momentum next year. With the playoffs now underway, we can’t wait to see who takes home MLS cup. And nowhere does the magic of Apple come alive more than it does in our stores. Over the past year, we’ve continued to find ways to connect with even more customers. We welcomed customers to our first-ever retail locations in India. We also opened doors to new stores in Korea, China and the UK and expanded the Apple store online to Vietnam and Chile. And we have another store opening in China this week.

In September, I joined our team at Apple Fifth Avenue on launch day and the energy and excitement were unbelievable. Every time we connect with the customer, we’re reminded why we do what we do. From simple joys of creating and sharing memories, to lifesaving features like emergency SoS via satellite, we’re enriching lives in ways large and small. And whether we’re working to safeguard user privacy, ensure technology made by Apple is accessible for everyone, or build an even more inclusive workplace, we’re determined to lead with our values. Our environmental efforts are a great example of the intersection of our work and our values. Across Apple, we act on a simple premise, the best products in the world should be the best products for the world.

We’ve made our environmental work a central focus of our innovation, because we feel a responsibility to leave the world better than we found it and because we know that climate change cannot be stopped, unless everyone steps up and does their part. Our first ever carbon-neutral products represent a major milestone and we’re going to go even further. We plan to make every product across our lineup carbon neutral by the end of the decade. And we’re not doing it alone. Over 300 of our suppliers have committed to using a 100% clean energy for Apple production by 2030. We also continue to invest in entrepreneurs who are lighting the way for a greener, more equitable future. Through our third impact accelerator class, we’re proud to support a new class of diverse innovators on the cutting edge of green technology and clean energy.

Apple is always looking forward, driven in equal measure by a sense a possibility and a deep belief in our purpose. We’re motivated by the meaningful difference we can make for our customers and keenly determined to push the limits of technology even further. And that’s why I’m so confident that Apple’s future is bright. With that, I’ll turn it over to Luca.

Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the September quarter was $89.5 billion, down less than 1% from last year. Foreign exchange had a negative impact of over 2 percentage points. And on a constant-currency basis, our revenue grew year-over-year in total, and in each geographic segment. We set a September quarter record in the Americas and saw strong performance across our emerging markets, where both iPhone and Services grew double digits. Products revenue was $67.2 billion, down 5% from last year, due to very challenging compares on both Mac and iPad, which I will discuss in more detail later on. At the same time, we reached a September quarter record on iPhone, driven by strength in emerging markets.

Our total installed-base of active devices reached an all-time high across all products and all geographic segments, thanks to our high levels of customer satisfaction and many new customers joining our ecosystem. Our Services revenue set an all-time record of $22.3 billion, up 16% year-over-year, with growth accelerating sequentially from the June quarter. Our performance in Services were broad based, as we reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China. We also set new records in every Services category. Company gross margin set a September quarter record at 45.2%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange.

Products gross margin was 36.6%, up 120 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 70.9%, up 40 basis points from last quarter due to a different mix. Operating expenses of $13.5 billion were at the low end of the guidance range we provided, up 2% year-over-year. Net income was $23 billion, diluted earnings per share was $1.46, up 13% versus last year and a September quarter record, and operating cash flow was strong at $21.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $43.8 billion, up 3% year-over-year and a new September quarter record. We had strong performance in several markets, including an all-time record in India as September quarter records in Canada, Latin America, the Middle East, and South Asia .

Our iPhone active installed base grew to a new all-time high and fiscal 2023 was another record year for switches. We continue to see extremely high levels of customer satisfaction which 451 Research recently measured at 98% in the U.S. Mac revenue was $7.6 billion, down 34% year-over-year, driven by challenging market conditions and compounded by a difficult compare in our own business, whereby last year we experienced supply disruptions from factory shutdowns in the June quarter and were subsequently able to fulfill significant pent-up demand during the September quarter. We also had a difference in launch timing with the MacBook Air launching earlier this year in the June quarter compared to the September quarter last year. We have great confidence in our Mac lineup and are excited about the recently announced iMac and MacBook Pro powered by our M3 chips.

Our installed base is at an all-time high and half of Mac buyers during the quarter were new to the product, driven by MacBook Air. Also, we saw reported customer satisfaction of 97% for Mac in the U.S. iPad generated $6.4 billion in revenue, down 10% year-over-year. Similar to Mac, these results were a function of a difficult compare from the supply disruptions in the June quarter a year ago and the subsequent fulfillment of pent-up demand in the September quarter. iPad continues to attract a large number of new customers to the installed base with over half of the customers who purchase iPads during the quarter being new to the product and the latest reports from 451 Research indicate customer satisfaction of 98% in the U.S. Wearables, Home and Accessories revenue was $9.3 billion, down 3% year-over-year.

We had a September quarter record in Europe and we saw strong performance in several emerging markets around the world. Apple Watch continues to expand its reach with nearly two-thirds of customers purchasing Apple Watch during the quarter being new to the product and customer satisfaction for the Watch was recently measured at 97% in the U.S. Services had a great quarter. We reached a new all-time revenue record of $22.3 billion, up 16% year-over-year. And we’re happy to see growth coming from all categories and every geographic segment, which is a direct result of the strength of our ecosystem. Our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem.

And we continue to see increased customer engagement with our Services. Both transacting accounts and paid accounts grew double-digits year-over-year, each reaching a new all-time high. Also our paid subscriptions showed strong growth. We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago. And finally, we continue to improve the breadth and quality of our current services from exciting new content on Apple TV+ and Apple Arcade to additional storage tiers on iCloud. We believe our customers will love this new offering. Turning to enterprise. We are excited to see our business customers in both developed and emerging markets expand their deployment of Apple products and technologies to drive business innovation and employee satisfaction.

Starbucks continuously invest in Apple technology to bring the best experience to the customers and employees, including tens of thousands of iPads across all retail stores to help their teams streamline order management, operations and training. In addition, Starbucks recently refreshed over 10,000 Macs to the latest M2-powered MacBook Air for all store managers, enabling them to do their best work and improve productivity. And in Indonesia, popular technology company GoTo is offering Mac as a choice, so that employees can have the best tools to be most productive. Today, more than half of its workforce are already choosing Mac for work. Let me now turn to our cash position and capital return program. We ended the quarter with over $162 billion in cash and marketable securities.

We increased commercial paper by $2 billion, leaving us with total debt of $111 billion. As a result, net cash was $51 billion at the end of the quarter. And our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $25 billion to shareholders, including $3.8 billion in dividends and equivalents and $15.5 billion through open market repurchases of 85 million Apple shares. We also began a $5 billion accelerated share repurchase program in August, resulting in the initial delivery and retirement of 22 million shares. Taking a step back, as we close our 2023 fiscal year, our annual revenue was $383 billion. While it was down 3% from the prior year, it grew on a constant-currency basis despite the volatile and uneven macroeconomic environment.

Our year-over-year revenue performance improved each quarter as we went through the year, and so did our earnings per share performance, as we reported double-digit EPS growth in the September quarter. We are particularly pleased with our performance in emerging markets with revenue reaching an all-time record in fiscal 2023 and double-digit growth in constant currency. We are expanding our direct presence in these markets from new Apple retail stores in India to online stores in Vietnam and Chile. And we continue to work with our partners to offer a wide range of affordability programs so that we can best serve our customers. We’re very excited about the momentum we have in these markets and the opportunity ahead of us. As we move ahead into the December quarter, I’d like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call.

The color we are providing today assumes that the macroeconomic outlook doesn’t worsen from what we are projecting today for the current quarter. Also, on foreign exchange, we expect a negative year-over-year revenue impact of about 1 percentage point. As a reminder, the December quarter this year will last the usual 13 weeks, whereas the December quarter a year ago spanned 14 weeks. For clarity, revenue from the extra week last year added approximately 7 percentage points to the quarter’s total revenue. Despite having one less week this year, we expect our December quarter, total company revenue to be similar to last year. We expect iPhone revenue to grow year-over-year on an absolute basis. We also expect to grow after normalizing for both last year’s supply disruptions and the one extra week.

We expect Mac year-over-year performance to significantly accelerate from the September quarter. We expect the year-over-year revenue performance for both iPad and Wearables, Home and Accessories to decelerate significantly from the September quarter due to a different timing of product launches. On iPad, we launched a new iPad Pro and iPad 10th Generation during the December quarter a year ago. For the Wearable category, last year we had the full December quarter benefit from the launches of the AirPods Pro 2nd Generation, the Watch SE, and the first Watch Ultra. For our Services business, we expect the average revenue per week to grow at a similar strong double-digit rate as it did during the September quarter. We expect gross margin to be between 45% and 46%.

We expect OpEx to be between $14.4 billion and $14.6 billion. We expect OI&E to be around negative $200 million, excluding any potential impact from the mark-to-market of minority investments and our tax-rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock, payable on November 16, 2023, to shareholders of record as of November 13, 2023. With that, let’s open the call to questions.

Suhasini Chandramouli: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?

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Q&A Session

Operator: Certainly. We will go ahead and take our first question from Mike Ng of Goldman Sachs. Please go ahead.

Michael Ng: Hey. Good afternoon, and thank you very much for the questions. I just have a question on iPhone storage and demand versus iCloud. As demand for storage grows, are you seeing a mix-shift towards higher storage iPhone models or are consumers mostly opting for the same because of increased uptake of iCloud+? What are some of the strategic and financial considerations here and trade-offs, as you think about the mix shift towards higher storage models versus iCloud penetration? Thanks.

Tim Cook: Michael, it’s Tim. As you probably know, we started the line with the iPhone Pro Max at 256, and so we are seeing a different mix, if you will, this year than last year. Outside of that, not significant changes.

Michael Ng: Great. Thank you. And as a separate follow-up, I was just wondering if you could talk a little bit about the market conditions on notebooks and desktops, and then any color that you can share regarding the timing of the Mac — M3 MacBook Pros this year versus the M2 earlier in the calendar year? Thank you.

Tim Cook: Yeah. We’re thrilled to have announced the M3 lineup and get the new MacBook Pro, the new iMac out there. We couldn’t be more excited about it. We — as Luca said, with the lineup that we’ve got and the compare issue that we don’t have during Q1, we anticipate a significant acceleration in the Mac space for Q1. To just repeat a little bit about the circumstances of the performance last quarter, in the year-ago June quarter, we had a factory disruption that lasted several weeks. The pent-up demand that resulted from that was filled in the September quarter, and that made the September quarter not only a record, but a substantial record. And obviously, we’re now comparing against that for ’23 and so that, I wouldn’t look at the negative 34% as representative of the underlying business performance. It’s sort of the net of it.

Michael Ng: Excellent. That’s very clear. Thank you, Tim.

Tim Cook: Yeah.

Suhasini Chandramouli: All right. Thanks, Mike. Can we have the next question, please?

Operator: Our next question is from Aaron Rakers with Wells Fargo. Please go ahead.

Aaron Rakers: Yeah. Thanks for taking the question and congratulations on the execution in the quarter. I’m curious, if you could help us characterize what the demand environment you’re seeing in China looks like. How has the reception been to the iPhone 15? And kind of similar question to the prior one, how would you characterize the mix within China as you go through this current product cycle? And I have a follow-up.

Tim Cook: Yeah. If you look at how we did in Greater China for the quarter, we came in at, on a revenue basis, minus 2. But one thing to keep in mind here is that the FX impact was nearly 6 points. So we grew in constant currency. And underneath that, if you look at the different — the categories, iPhone actually set a September quarter record in mainland China. And the — what pulled down the performance was a combination, largely of Mac and iPad. Services also grew during the quarter and the Mac and iPad suffered from the same issues that the company did with the compare issues to factory disruptions in Q3 that were filled subsequently in Q4 of ’22. We had the — in addition to that, we had the top four selling phones in urban China for last year, and I was — I just took a trip over there and could not be more excited about the interactions I had with the customers and employees and others.

Aaron Rakers: Yeah. And then, as a quick follow-up, I’m curious as we move towards more of an inflationary component pricing environment. Luca, how do we think about that effect? How you’re thinking about the gross margin at the product level, as maybe component pricing starts to turn, what’s been clearly very favorable over the last several quarters to more of an inflationary environment? Thank you.

Luca Maestri: Well, as you’ve seen from our results in Q4 and the guidance for Q1, we’re obviously experiencing very strong levels of gross margin. The 45.2% was a record for the September quarter. And then, the guidance for Q1 is obviously strong at 45% to 46%. Our gross margins are affected by multiple factors. Obviously, the commodity environment is one of them, as you mentioned. It’s been a good environment in recent quarters. But equally important is the mix of what we sell. And obviously, growth in Services for us is favorable, and that has helped our company gross margin. Foreign exchange, on the other hand, has been a drag for us for several quarters, given the strength of the dollar. We don’t provide guidance past the December quarter, which is a very important one for us because it’s the beginning of the product cycle for many products. And so we feel very good, very confident about, this coming year, and I think the gross margin guidance reflects that.

Aaron Rakers: Thank you.

Suhasini Chandramouli: Thanks, Aaron. Can we have the next question, please?

Operator: Our next question is from Erik Woodring with Morgan Stanley. Please go ahead.

Erik Woodring: Awesome. Thank you very much for taking my questions. Maybe if I start, Luca, I know that the iPhone 15 Pro and Pro Max are constrained today, but I think some of your comments suggests you should be back to supply demand balance before quarter end. So, I guess, my question is, does your December quarter revenue guidance account for any supply constraints? And if so, is there any way to kind of quantify how much supply would be limiting your December quarter revenue performance? And then, I have a follow-up. Thank you.

Luca Maestri: Yes. It’s correct. We are constrained today on iPhone 15 Pro and iPhone 15 Pro Max. We’re working very hard to get the product in the hands of all the customers that have ordered it. We expect, as of today, that we’re going to be in supply demand balance by the end of the quarter. So the guidance reflects that.

Erik Woodring: Okay, very clear. Thanks. And then, maybe for you and Tim. You guys have been on the leading end of — edge of innovation across hardware, software, silicon, services. And I’m sure there’s plenty of technology in kind of longer-term projects that you’re investing in. How should we think about your capital intensity as we look to fiscal year ’24, just given over the last few years, CapEx as a percentage of revenue had been relatively low compared to the eight years prior? So should we expect a step-up or kind of similar capital intensity? And what are the more notable moving pieces, if any, that we should be thinking about? Thanks.

Luca Maestri: Well, the big areas of investment for us are tooling and equipment for manufacturing plants. Our investments in data centers and our investments in our own facilities, both corporate facilities and retail stores. And so, both for the tooling in our plants and our data center investments, we tend to have a bit of a hybrid model where we share some of the investments with our partners and suppliers and so maybe that’s why you see sometimes a bit of variability. But over the last few years, we’ve made all the investments that we needed to make. And obviously, we’re planning to make all the investments that we believe are needed and appropriate in order to continue to innovate.

Erik Woodring: Great. Thanks so much for the color, guys.

Suhasini Chandramouli: Thanks, Eric. Can we have the next question, please?

Operator: Our next question is from David Vogt with UBS. Please go ahead.

David Vogt: Great. Thanks, guys for taking my question. I know you covered China. I want to pivot to the US for a second. Obviously, iPhone and the business looks like it returned to growth in the quarter. But it’s still relatively softer kind of where I thought it would be at this point in the cycle and some of the U.S. carriers obviously haven’t been that particularly aggressive in promoting upgrades. So just wanted to kind of get a sense, first, what you’re seeing from your partners in the U.S. kind of currently and going forward and what do you expect? And then, second, Luca, on the margins, I mean, is it fair to say that the mix in Q1 from a product versus services dynamic is kind of the key driver of the better gross margin guide as a whole relative to, let’s say, the December quarter? Or is there anything else? I know you mentioned there’s a lot of moving pieces, but is that the primary driver of the uplift in the margin? Thanks.

Tim Cook: On the U.S. carriers and the U.S. business in general, it’s really too early to call the iPhone cycle, particularly with the constraint around the Pro and the Pro Max and the U.S. tends to do quite well with those products. It’s really too early to tell what the upgrade rates will be and what the switcher rates will be.