Apple Inc. Q3 2023 Earnings Conference Call Insights

Key highlights from Apple Inc. (AAPL) Q3 2023 Earnings Concall

Management Update:

• [00:01:46] The company saw strong results in emerging markets, driven by robust sales of iPhone.

• [00:02:13] AAPL set an all-time revenue record in services, driven by more than 1 billion paid subscriptions.

• [00:11:28] Apple doubled its initial commitment to the Racial Equity and Justice Initiative to more than $200 million.

• [00:22:09] AAPL said FX will continue to be a headwind, and Apple expects a negative year-over-year revenue impact of over 2 percentage points.

• [00:22:16] Apple expects iPhone and services year-over-year performance to accelerate from the June quarter. However, the company expects the revenue for both Mac and iPad to decline by double digits year-over-year due to difficult compares, particularly on the Mac.

Q&A Highlights:

• [00:23:57] Shannon Cross with Credit Suisse asked about the trends in iPhone demand on a geographic basis in an uneven macro environment. Luca Maestri CFO replied that iPhone sales in emerging markets grew double digits in constant currency, with strong performance in China, India, Indonesia, Southeast Asia, Latin America, and the Middle East. The company also saw a slight acceleration of performance in the Americas, primarily in the US.

• [00:28:14] Wamsi Mohan of Bank of America asked if there is something changing in terms of seasonality that is causing the lower sequential step-up in product revenue. Luca Maestri CFO answered that AAPL expects sequential acceleration for iPhone and services. However, the company also expects Mac and iPad to decline double digits due to a difficult comparison with the previous year when AAPL was able to fill pent-up demand from factory shutdowns during the Sept. quarter.

• [00:29:47] Wamsi Mohan of Bank of America enquired about the percentage of iPhones that are sold on installment plans, and the thoughts on carrier promotional activity in the U.S. Luca Maestri CFO said that AAPL has implemented affordability programs around the world, with the majority of iPhones sold using some kind of program, trade-ins, installments, or financing, which has helped reduce the affordability threshold for AAPL’s products. This approach has been successful in both developed and emerging markets, and AAPL plans to continue pushing on this front.

• [00:33:53] Erik Woodring at Morgan Stanley asked for insights on how the consumer behavior has changed in last 90 days, if there are any regional differences, and any signs of increased willingness to spend on consumer electronics or continued caution in the market. Tim Cook CEO said that AAPL saw strong performance in emerging markets, with China leading the way. The company also saw a slight acceleration in the U.S., but the Americas segment is still declining YoY. Europe saw a record quarter for the June quarter.

• [00:36:17] Erik Woodring at Morgan Stanley also asked for more details about the cost actions that Apple is taking, and the indicators giving greater confidence in returning to a more seasonal cadence of opex spending. Luca Maestri CFO clarified that AAPL has taken deliberate steps to control spending in response to the uncertain economic environment. The company has slowed down hiring and decelerated some expense growth, while continuing to invest in R&D.

• [00:38:10] Michael Ng from Goldman Sachs asked about the key drivers for AAPL’s confidence in services acceleration next quarter, and what is contributing to the growth in Apple Search Ads and Apple TV Plus. Luca Maestri CFO answered that AAPL’s services business is performing well, with all categories seeing improvement in the June quarter. The company expects further improvement in the Sept. quarter, driven by factors such as a growing install base, more engaged customers, and a healthy subscriptions business.

• [00:42:29] Amit Daryanani at Evercore queried about the impressive growth in the wearables segment and how it is expected to perform in Sept. Luca Maestri CFO replied that AAPL’s wearables business is rapidly growing, with strong performance in Greater China and demand for the Apple Watch. It has become a $40 billion business in the past 12 months, diversifying the company’s revenues and earnings.

• [00:45:23] Harsh Kumar with Piper Sandler asked how a weakening of the US dollar would impact Apple’s revenues and costs. Luca Maestri CFO answered that AAPL hedges its FX exposures to minimize volatility, but the impact on revenue and costs is delayed due to the way the hedging program works.

• Harsh Kumar with Piper Sandler enquired about any carrier upgrade programs in place for the Dec. quarter, and how AAPL expects these programs to impact iPhone sales. Tim Cook CEO answered that it is generally easy to find promotions on phones when hooking up to a service, either by switching carriers or upgrading with the same carrier, and AAPL expects this to be the case in the Dec. time frame as well.

• [00:49:04] Aaron Rakers of Wells Fargo asked how sports content is driving growth in AAPL’s Services business, and what are the plans are for expansion in this area. Tim Cook CEO clarified that AAPL is focused on original content with TV+ and providing a venue for great storytellers. AAPL’s partnership with MLS is going well, exceeding expectations in terms of subscribers.

• [00:50:10] Aaron Rakers of Wells Fargo asked for an update on the continued growth in India and if there are any evolving factors that could accelerate the opportunity for iPhone in that large mobile market. Tim Cook CEO said that AAPL is making strong progress in India, with double-digit revenue growth and two new retail stores that are exceeding expectations. The company sees India as a huge opportunity and is investing heavily to grow its market share.

• [00:52:00] Sidney Ho with Deutsche Bank enquired how does Apple’s AI strategy differ from its peers, and how does the company plan to turn its investment in this area into financial performance in the future. Tim Cook CEO answered that AAPL views AI and machine learning as core fundamental technologies that are integral to virtually every product that it builds. AAPL is committed to investing and innovating in AI technologies to enrich people’s lives.

• [00:55:14] Krish Sankar with TD Cowen asked how is the replacement cycle for iPhone holding up in the face of weak macro and consumer spending. Tim Cook CEO said switchers were a key part of Apple’s iPhone results in the June quarter, especially in Greater China. The company is seeing strong demand for the iPhone in the September quarter.

• [00:57:09] Krish Sankar with TD Cowen enquired about foot traffic and sales in Apple’s retail stores, and how does the company see the trends for the back half of the year. Tim Cook CEO replied that AAPL sees its retail stores as a key part of its go-to-market strategy, and it plans to continue expanding its retail footprint.