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. 309 months ending Sept. 30
Net sales by reportable segment:
Greater China15,08415,47072,55974,200
Rest of Asia Pacific6,3316,37329,61529,375
Total net sales89,49890,146383,285394,328
Net sales by category:
Wearables, Home and Accessories9,3229,65039,84541,241
Total net sales89,49890,146383,285394,328

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. 309 months ending Sept. 30
Net sales:
Total net sales89,49890,146383,285394,328
Cost of sales:
Total cost of sales49,07152,051214,137223,546
Gross margin40,42738,095169,148170,782
Operating expenses:
Research and development7,3076,76129,91526,251
Selling, general and administrative6,1516,44024,93225,094
Total operating expenses13,45813,20154,84751,345
Operating income26,96924,894114,301119,437
Other income/(expense), net29-237-565-334
Income before provision for income taxes26,99824,657113,736119,103
Provision for income taxes4,0423,93616,74119,300
Net income22,95620,72196,99599,803

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.