Apple faces challenges in China, with revenue impacted by strong dollar

Apple's performance in the past quarter was impacted by a strong dollar, with the Chinese market continuing to pose significant challenges. Additionally, the company offered limited details on the progress of Apple Intelligence, leaving concrete advancements largely unspecified.

In its latest quarterly earnings report, Apple announced a revenue of US$85.78 billion for the third quarter of fiscal year 2024 (October 2023 to September 2024), a 4.9% YoY increase. The company's gross margin reached US$39.68 billion, a 9% rise compared to last year.

Product revenue was US$61.56 billion, up 1.6% YoY, while service revenue saw a significant boost, climbing 14% to US$24.21 billion, surpassing the estimates of US$23.96 billion.

"Today, Apple is reporting a new June quarter revenue record of US$85.8 billion, up 5% from a year ago," said Apple CEO Tim Cook, "During the quarter, we announced incredible updates to our software platforms at our Worldwide Developers Conference (WWDC), including Apple Intelligence, a breakthrough personal intelligence system that puts powerful, private generative AI models at the core of iPhone, iPad, and Mac. We very much look forward to sharing these tools with our users."

"We are also very pleased that our installed base of active devices reached a new all-time high in all geographic segments, thanks to very high levels of customer satisfaction and loyalty," added Apple CFO Luca Maestri.

Segmental performances

Apple CEO Cook said Apple set quarterly revenue records in more than two dozen countries and regions, including Canada, Mexico, France, Germany, the UK, India, Indonesia, the Philippines, and Thailand. And Apple set an all-time revenue record in services, which grew 14%.

iPhone revenue was US$39.3 billion, down 1% YoY. iPhone revenue reached US$39.3 billion, reflecting a 1% YoY decline. However, on a constant currency basis, revenue grew compared to the previous year.

Mac revenue was US$7 billion, a 2% increase from the same period last year, thanks to the latest 13-inch and 15-inch MacBook Air models powered by the M3 chip.

iPad revenue surged to US$7.2 billion, up 24% YoY. This growth was bolstered by the successful launch of the new 11- and 13-inch iPad Air models during the quarter.

In Greater China, revenue fell 6.5% YoY to US$14.73 billion, missing Bloomberg's estimate of US$15.26 billion.

Apple faces strong dollar headwinds

According to MaestriForeign, the exchange is anticipated to remain a headwind, potentially reducing revenue by approximately 1.5pp year-over-year. For the September quarter, total revenue is expected to grow at a rate similar to the June quarter. Services revenue is projected to continue its double-digit growth, consistent with the rate observed in the first three quarters of the fiscal year.

The gross margin is forecasted to be between 45.5% and 46.5%. Operating expenses (opex) are expected to range between US$14.2 billion and US$14.4 billion. Other income and expenses are projected to be around negative US$50 million, excluding any potential impact from the mark-to-market of minority investments.

Bloomberg reported that the news from China has reignited concerns that Apple may be losing ground in one of its most critical international markets. The company faces intensified competition in the region, while China has tightened restrictions on using foreign technology in certain workplaces. Additionally, the economic situation in China has deteriorated.

Bloomberg Intelligence said in a note that Apple's impressive double-digit growth in services and significant gains in iPad sales seem to be somewhat offset by challenges in China, where a strong dollar had a notable impact. This currency pressure is expected to persist in the coming quarters. The third-quarter results, however, boost confidence in the iPhone's competitive standing in China, a crucial market for the upcoming product refresh cycle.

Competitive and slowing Chinese market

Cook said during the earnings call that although revenue in Greater China decreased by 6.5% YoY, on a constant currency basis, the decline was less than 3%, with over half of the YoY drop attributed to currency effects. This marks an improvement from the first half of the fiscal year.

Cook said that the region remains the most competitive market, which continues to challenge companies operating there. Despite ongoing macroeconomic pressures widely reported in the media, the business showed signs of improvement compared to the first half of the year.

Apple Intelligence

Tim Cook said Apple will stagger the release of Apple Intelligence features. Some features are already available to developers, while others will be released throughout the year. The full suite of features, including ChatGPT integration, will be available by the end of the year.

Cook said Apple is actively engaged with regulators in both the EU and China. The company understands the importance of regulatory compliance and is working to integrate these requirements into its rollout plans. The specific timeline for the launch will depend on the outcome of these regulatory discussions.

Tim Cook described Apple Intelligence as a combination of on-device processing and private cloud computing, primarily focused on tasks with a personal context. For broader world knowledge, Apple is integrating with ChatGPT, which will handle this aspect initially.

Regarding the monetization model, the specifics of the commercial agreements remain confidential. However, both personal context processing and world knowledge integration are seen as crucial elements, as users are expected to value both aspects.

Source: Apple, August 2024

Source: Apple, August 2024

Source: Apple, August 2024