Apple Loses Some Shine With Q3’23 Financial Report

Apple posted record September quarter revenue of $90.1 billion, up 8% YoY, despite significant foreign exchange headwinds and a challenging macroeconomic environment.

Apple by Segment ($M)	3 months ending Sept. 30		9 months ending Sept. 30
	2023	2022	2023	2022
Net sales by reportable segment:
Americas	40,115	39,808	162,560	169,658
Europe	22,463	22,795	94,294	95,118
Greater China	15,084	15,470	72,559	74,200
Japan	5,505	5,700	24,257	25,977
Rest of Asia Pacific	6,331	6,373	29,615	29,375
Total net sales	89,498	90,146	383,285	394,328
Net sales by category:
iPhone	43,805	42,626	200,583	205,489
Mac	7,614	11,508	29,357	40,177
iPad	6,443	7,174	28,300	29,292
Wearables, Home and Accessories	9,322	9,650	39,845	41,241
Services	22,314	19,188	85,200	78,129
Total net sales	89,498	90,146	383,285	394,328

iPhone revenue grew to $42.6 billion, up 10% over last year. While supply chain disruptions impacted iPhone 14 Pro and Pro Max availability, demand for the new models remains strong, according to the company. The installed base of active iPhones reached a new all-time high. Apple CEO Tim Cook noted that India set an all-time revenue record, while other emerging markets like Brazil, Indonesia, and Vietnam also saw strong double digit growth.

Apple Financials ($M)	3 months ending Sept. 30		9 months ending Sept. 30
	2023	2022	2023	2022
Net sales:
Products	67,184	70,958	298,085	316,199
Services	22,314	19,188	85,200	78,129
Total net sales	89,498	90,146	383,285	394,328
Cost of sales:
Products	42,586	46,387	189,282	201,471
Services	6,485	5,664	24,855	22,075
Total cost of sales	49,071	52,051	214,137	223,546
Gross margin	40,427	38,095	169,148	170,782
Operating expenses:
Research and development	7,307	6,761	29,915	26,251
Selling, general and administrative	6,151	6,440	24,932	25,094
Total operating expenses	13,458	13,201	54,847	51,345
Operating income	26,969	24,894	114,301	119,437
Other income/(expense), net	29	-237	-565	-334
Income before provision for income taxes	26,998	24,657	113,736	119,103
Provision for income taxes	4,042	3,936	16,741	19,300
Net income	22,956	20,721	96,995	99,803

The iPad and Mac segments faced difficult YoY comparisons due to last year’s supply constraints and subsequent demand recapture. iPad revenue declined 13% to $7.2 billion while Mac revenue dropped 25% to $9.2 billion. However, Cook emphasized that the Mac installed base reached an all-time high, positioning the segment well for the recently announced M2 and M2 Pro upgrades.

Wearables, Home and Accessories revenue decreased slightly to $9.7 billion as growth in Apple Watch was offset by declines in AirPods. Apple Watch continues to expand its reach with nearly two thirds of buyers being new to the product. The launch of new Series 8 models with safety features like Crash Detection fueled demand.

But the biggest story continues to be Services, which hit an all-time revenue record of $19.2 billion, up 5% over last year. The App Store, AppleCare, Apple Music, cloud services, and payment services all achieved their highest revenue ever. Apple now has over 900 million paid subscriptions across its platforms, up nearly 150 million in the last year alone.

On the earnings call, Cook and CFO Luca Maestri expressed optimism about growth opportunities in both developed and emerging markets. While macroeconomic conditions remain volatile, demand for Apple products and services remains robust. Maestri noted that foreign exchange headwinds will continue, but Apple expects iPhone revenue to grow YoY in the upcoming holiday quarter. Gross margin also reached a new September quarter record of 42.2% driven by services growth and favorable product mix.

Apple’s R&D spending has steadily increased over $8 billion in the last two years, reflecting investments in future products like the AR/VR headset Apple Reality Pro, Apple silicon, and artificial intelligence. While the guidance provided was cautious given economic uncertainty, Apple expects strong growth trajectories for its ecosystem to continue into 2024.

However, analysts seem to be disappointed by the impact of lower demand in China, Apple’s largest international market, and competition from Huawei and other Android phones in the region. On the earnings call, Cook waxed lyrical about Vision Pro, and the iPhone 15, painting a picture of a steady ship with minor problems that would resolve themselves in time. However, he was also cautious in providing any guidance for the future, perhaps more cautious than normal, and that’s making markets nervous. A nervous market also means nervous Apple suppliers.