Full text | Record of Apple’s Q2 results meeting: Positively optimistic about the Chinese market and regards generative AI as a key opportunity for product development

Special Topic: Apple\’s fiscal 2024 Q2 revenue exceeds expectations and will repurchase an additional US$110 billion in stock. Apple today released its second quarter fiscal 2024 results: total net revenue was US$90.753 billion. A year-on-year decrease of 4%; net profit was 23.636 billion U.S. dollars. A year-on-year decrease of 2%.
Apple\’s revenue in Greater China in the second fiscal quarter was US$16.372 billion, down 8% year-on-year (Note: Apple\’s fiscal year is not synchronized with the natural year. October 2023 to September 2024 is fiscal year 2024).
Apple\’s diluted earnings per share and revenue in its second fiscal quarter both exceeded Wall Street analysts\’ expectations. This drove its stock price to surge by more than 6% after hours.
For details, see: Apple’s second-quarter revenue of $90.753 billion, net profit fell 2% year-on-year. After the financial report was released, Apple management held a conference call. Apple CEO Tim Cook and Chief Financial Officer Luca Luca Maestri participated in the meeting and answered analyst questions.
The following is the main content of the analyst Q&A session of this conference call: Goldman Sachs analyst Michael Ng: My first question is about management’s revenue guidance for the next fiscal quarter (June quarter).
According to guidance, management expects Apple\’s revenue to grow by low single digits in the next fiscal quarter.
Can you ask the management to talk about the reasons why you gave the above guidance around specific products, such as iPhone, etc.? What product performance do you think give you the confidence to make the above prediction? In addition, Apple\’s services business performed better than expected this quarter. What are the reasons behind this? Luca Mastri: In terms of revenue guidance.
In the guidance given for the next fiscal quarter, we expect the company\’s total revenue in the new fiscal quarter to achieve low-single-digit growth; the service business is expected to achieve double-digit growth, similar to the growth rate in the first half of this fiscal year; iPad business Expected to achieve double-digit growth.
The above is our forecast for the new financial quarter.
Service business aspect.
We saw very strong performance in the company\’s services business.
We have just shared with you that Apple\’s service business performance in different categories and geographical divisions has reached record highs: our business coverage is very extensive; the subscription business is progressing smoothly; the number of paying users has achieved double-digit growth.
In addition, we have seen very strong business performance both in developed regional markets and emerging markets.
In short, we are very satisfied with the current progress of our service business.
Goldman Sachs analyst Michael Ng: My second question is. As Apple\’s focus gradually transitions to artificial intelligence and generative AI, can we expect the company\’s capital expenditure rhythm to change? In the past few years, we have seen that the company\’s annual capital expenditure has stabilized at approximately US$10 billion to US$11 billion. As the company increases its research and development of artificial intelligence, will Apple\’s annual capital expenditure change? The management can provide us with detailed analysis from the dimensions of data center, facilities and equipment.
Luca Mastri: We are very excited about the opportunities that generative artificial intelligence brings. There is no doubt about that.
Over the years, Apple has been working hard to promote innovation in various businesses and fields.
In the past five years alone, we have spent more than $100 billion on research and development in related fields.
In terms of capital expenditure.
Apple has always adopted a hybrid model: we not only invest independently, but also share it with suppliers and partners.
In terms of manufacturing, in addition to purchasing manufacturing tools and equipment, we will also invest in related suppliers; the situation in data centers is similar. We not only have our own data centers, but also use third-party data centers.
Apple has maintained the above-mentioned operating model for many years. The results are very good. It will continue to promote the above-mentioned model in the future.
Bank of America Merrill Lynch analyst Wamsi Mohan: Tim, could you please talk about the impact of the EU\’s Digital Market Act (DMA) on Apple? According to the DMA regulatory strategy, Apple must open third-party app stores in the EU. This may bring security risks. It will also affect user and developer experience.
Judging from the current data, how are developers and consumers performing since the implementation of DMA? How many consumers and developers will choose third-party app stores? Tim Cook: It’s really too early to answer this question.
As you all know, we only equipped third-party applications on iPhones in the EU in March in accordance with DMA regulations.
At present, what we have to do is still comply with EU regulatory regulations and focus on reducing the impact on user privacy and security you mentioned.
The above work is our current focus.
Bank of America Merrill Lynch analyst Wamsi Mohan: My second question is for Luca.
Could you please talk about Apple\’s product gross profit margin? I saw that the gross profit margin of products decreased this quarter. What are the reasons? In addition, taking into account the inflationary pressure in the macroeconomic environment, as Apple\’s product portfolio changes, does the management observe that user behavior changes at any time? Luca Mastri: From a quarter-over-quarter perspective, the gross profit margin of our products has indeed declined.
The main reason is that our product mix has changed from before; in addition, unlike the holiday quarter of the last fiscal quarter, this fiscal quarter is less affected by holidays.
But the main lever is still a different product mix.
As for the performance of specific product categories, we have not seen significant changes yet.
Morgan Stanley analyst Erik Woodring: Tim, you have mentioned many times that you are excited and looking forward to generative artificial intelligence.
I\’m curious. How does Apple plan to monetize its business through this technology? Judging from past experience, software iteration does not seem to be an important driver of product iteration and monetization.
Do you think artificial intelligence technology will be a special case? How will the use of artificial intelligence technology affect product iteration and replacement cycles? Could you please share your views on this? Tim Cook: I don’t want to share it before the launch. All I can say here is that Apple regards generative artificial intelligence technology as a very critical opportunity in product development. I believe it can bring us a difference. The advantages.
We will also have more details to share with you in the coming weeks.
Morgan Stanley analyst Erik Woodring: My second question is still about product gross margin.
There is widespread concern that rising (commodity) commodity costs will have a headwind impact on Apple\’s product gross margins.
From the perspective of management, from the perspective of Apple\’s various products and components, have you also seen an increase in costs? When do you expect costs to come down? If costs do rise, what plans or strategies does management have to help alleviate these rising costs? Luca Mastri: In fact, judging from the situation in the last financial quarter, the cost of commodities and parts is good for us.
The price of memory did go up. It went up slightly in the March quarter.
But in general, we believe that the cost increase is only temporary.
Looking at the past few quarters, commodity prices have held up well.
Of course, cost fluctuations are cyclical, so various possibilities still exist.
Don’t forget, our gross profit margin is very high.
Our gross profit margin is 46.6%, a new high in decades.
This is a very good start for us.
In addition, whenever the cost cycle is in a positive phase, we will pre-order in advance; if the cost cycle is in a headwind phase, we will also take measures to alleviate cost pressure.
All in all, we are currently in a very good state.
Melius Research analyst Ben Reitzes: Tim. My question is still about the Chinese market.
You visited China some time ago. Does this trip make you more confident that Apple\’s performance in the Chinese market has bottomed out and will gradually rebound in the future? In the long term, we know that you are still confident in the Chinese market. When do you think Apple\’s performance in the Chinese market will gradually recover? Could you please share your specific views in this regard? Tim Cook: You can see from our second fiscal quarter performance report that Apple\’s performance in Greater China declined by around 8%. Compared with the first fiscal quarter\’s performance, it has improved.
The main factor driving growth is the iPhone.
As you can see, in Greater China, iPhone revenue performance is better than the previous report data.
In addition, the top two best-selling smartphones in the Chinese market are both iPhone.
My experience in China this time was very good.
Apple has opened a new store in Shanghai. Everyone is very enthusiastic and energetic. It can be said that this is a particularly wonderful trip. I also enjoy my time in China.
Regarding the Chinese market, I hope everyone will take a long-term view and not be limited to a certain week or quarter.
From a long-term perspective, I am still very positive about the Chinese market.
Melius Research analyst Ben Reitzes: My second question is. Some investors are worried that Apple may lose some of its traffic revenue.
In the long term, can the adoption of artificial intelligence technology help companies monetize their products? How should investors think about the big picture? Perhaps considering the recent media reports, everyone has been worried.
So I would like to ask the management how Apple plans to realize the continuous realization of its product assets? Luca Mastri: I believe that both generative artificial intelligence and artificial intelligence technology have huge opportunities for us. We will also share more details with you in the next few weeks.
We believe that artificial intelligence technology is absolutely beneficial to us in many aspects. We are also very satisfied with Apple\’s current progress.
TD Cowen analyst Krish Sankar: I know management doesn’t want to reveal too much information. But I’m still curious. At last quarter’s results meeting, Tim mentioned that enterprise users are very interested in Apple’s artificial intelligence technology.
I want to know. Regarding Apple’s artificial intelligence strategy, is the management’s plan to promote both individual users and enterprise users at the same time? Or should we do it step by step, first promote it among consumers, and then open it to enterprise users? Tim Cook: We have always been very focused on enterprise user business.
We previously provided iPhone, iPad and Mac to enterprise users. Recently, we added Vision Pro sales.
We are very excited about the progress so far.
Many large enterprise users choose to purchase our products and explore different application scenarios.
It can be said that we see huge opportunities among enterprise users. This opportunity is not just due to the use of artificial intelligence technology.
All in all, we believe that enterprise users around the world will bring great opportunities to Apple.
TD Cowen analyst Krish Sankar: My second question is that despite the current macro environment or the sluggish consumer environment, the company\’s standard iPhone, Pro iPhone and service businesses are still growing. And growth. The profits are amazing.
What\’s the reason behind this? Luca Mastri: I\’m not sure if I fully understand your question. But in general, in terms of products, users have always been very interested in our products.
Consumers want to buy the best of Apple\’s various products. As time goes by, we will also be able to make our products more affordable and affordable for consumers.
We provide consumers with a variety of purchase options, such as installment payment, trade-in, etc., to lower the purchase threshold.
Therefore, consumers are more willing to buy our high-end products, especially in emerging markets. (As the purchase threshold is lowered) consumers are also more able to afford our products.
These trends are also reflected in changes in our gross profit. We also believe that this trend is sustainable in the long term.
Evercore ISI analyst Amit Daryanani: My first question is about the company\’s capital allocation.
Judging from the data disclosed in the financial report, the company currently has a net cash flow of approximately US$58 billion.
If net cash neutrality is achieved in the future, will management consider share repurchases at some point in the future? Or will Apple return value to shareholders once it achieves net cash neutrality? How does management view leverage in the balance sheet? I\’d like to know the management\’s specific views on this.
Luca Mastri: The idea is to take it step by step.
A few years ago, we proposed the goal of achieving net cash neutrality, and we have been working hard towards that goal.
Over the years, and particularly over the past few years, the company\’s free cash flow performance has been very strong.
You have also seen this year that we have increased our share repurchase funds.
Our previous share repurchase plan was approximately US$90 billion. This year’s share repurchase plan is US$110 billion.
Of course, it will take some time to achieve the goal of net cash neutrality.
But if the goal is finally achieved, there will be many factors to consider. We will re-evaluate the company\’s capital structure and determine the capital structure that is most suitable for the company.
Evercore ISI analyst Amit Daryanani: My second question is still about the Chinese market.
Judging from the data, I see that at least in Greater China, the sales of Apple products are still showing a year-on-year downward trend.
From a macro perspective, management believes that this year-on-year decline is more affected by macro headwinds or is it the result of an intensified competitive environment? Tim Cook: Regarding this issue, I can only share with you what we have seen. After all, I am not an economist myself. Many issues cannot be given a very specific analysis.
Judging from what we have seen so far, our performance in this fiscal quarter has improved compared to the first fiscal quarter.
The main driving force behind this is the iPhone.
Excluding the US$5 billion impact we mentioned before, iPhone sales in mainland China have indeed increased. But this also means that other products performed generally.
So obviously we still have a lot of work to do in this regard.
As for the competition issue you mentioned, I believe the competition last quarter was indeed very fierce.
The above is what I can share with you.
But in fact, we use 90 days as a cycle. Looking back on the past, we can find that more and more people are entering the middle class.
While serving other users well, we also hope to provide good services to these users and satisfy them.
You can see this from the opening ceremony of our new flagship store in China.
All in all, my optimistic view on the Chinese market will not change.
UBS analyst David Vogt: My question is about the outlook for the new financial quarter given by management.
According to the financial report, management expects the iPhone business to fall back to mid-single digits in the June quarter.
If this is indeed the case, can the management please talk about the current competitive landscape in the smartphone field? Outside of the China market, is management seeing a change in consumer demand or acceptance of new devices? In fact, smartphone sales have been in trouble for some time. Is this because many companies are pursuing artificial intelligence technology? Can the changes brought about by artificial intelligence technology become a key driver of future smartphone sales growth? Or is it that the current sluggish sales are due to the extension of mobile phone replacement cycles? Maybe later this year or next year. With the arrival of a new cycle of mobile phone upgrades and iterations, will smartphone sales improve? Tim Cook: As I have shared with you before, I do think that artificial intelligence and generative artificial intelligence can bring us very critical opportunities. It can be said that the vast majority of Apple products will benefit from this.
I\’m very, very optimistic about this.
Regarding iPhone, taking into account last year\’s adjustments, our performance in the second fiscal quarter was actually flat.
Luca Mastri: Regarding the specific outlook. I repeat here the forecast I gave before.
We expect the company to achieve low single-digit growth in the new financial quarter; the service business is expected to achieve double-digit growth; the iPad business is expected to achieve double-digit growth.
We will share the specific situation with you in three months.
JP Morgan analyst Samik Chatterjee: My first question is. Apple’s services business grew from 11% to 14% this quarter.
Breaking it down. What specific service businesses do management think drive the above growth? In addition, from the guidance for the new fiscal quarter, I can see that the management seems to believe that this business growth is not sustainable. According to the guidance for the new fiscal quarter, the management believes that the company\’s service business growth may be more even in the future.
I\’m curious as to why management thinks the services business can\’t grow sustainably? Luca Mastri: This is what happens in the service business.
First of all, Apple\’s overall service business performance is very strong.
I just shared with you that the performance of our service business in developed markets and emerging markets has reached a record high; from a global perspective, our service business has performed well. It has also achieved record highs in different categories; some service categories have increased The speed is very fast. The reason is that the initial share is relatively small, such as cloud business, video, payment, etc. These segmented service businesses have set revenue records.
So we\’re very pleased with Apple\’s progress on services.
Regarding the future performance of the service industry, what I want to point out is that you can look back at our growth over the past year.
The growth rate of our service business increased in the last fiscal year. Entering the new fiscal year, competition in the service business will be relatively intensified, and the competitive environment will become more challenging.
But overall, we expect Apple\’s services business to achieve double-digit growth in the June quarter. The growth rate in the first half of the fiscal year is similar.
JP Morgan analyst Samik Chatterjee: My second question is about the Indian market.
I see Apple\’s revenue in India continuing to hit new highs. Does management think this trend will continue? What are Apple\’s retail strategies in the Indian market? Are these strategies related to specific factors such as supply chain and manufacturing in the Indian market? Tim Cook: Indeed. We achieved strong double-digit growth in the Indian market. We are very, very satisfied with this. We set a revenue record for the March quarter.
I have shared with you before that we think the Indian market is a very exciting and incredible market. It is also our focus.
From the operational or supply side, we really need to produce locally to be more competitive.
So what you said is right. Our sales strategy is related to local supply and manufacturing.
But at the same time, we have also adopted a series of operational strategies, such as go-to-market strategy (GTM), etc.
We opened several new directly-operated stores in India last year. We indeed see great potential in the Indian market.
In the future, we will continue to expand channels and strive to build a local developer ecosystem.
We are happy to see that the developer base in India is growing rapidly.
In the future, we will work hard across multiple channels and the entire ecosystem from developers, markets, and operations.
I\’m very excited and looking forward to this.
Wells Fargo analyst Aaron Rakers: My question is still about the Chinese market.
To put it simply, judging from the data report for this fiscal quarter, I am curious about what management believes is the reason for the change in Apple’s attractiveness in the Chinese market? Tim Cook: I may not be able to analyze it for you from a data perspective. I can only share it with you from the results.
Judging from the performance of this fiscal quarter, iPhone sales in the mainland Chinese market have indeed increased compared to the previous quarter.
Wells Fargo analyst Aaron Rakers: My second question is. What is the current inventory situation of iPhone in various channels? Tim Cook: We reduced channel inventory in the March quarter.
Generally speaking, we usually do this in the second fiscal quarter.
We\’re very pleased with our overall channel inventory for iPhone right now.
Arete Research analyst Richard Kramer: My question is about emerging markets outside of China.
Management has repeatedly mentioned the rapid growth of this part of Apple\’s emerging market business.
My question is: Is it possible that Apple’s total exposure to all other emerging markets in the future will exceed the current Greater China market, which is worth $70 billion? When will such a critical point arrive? Can investors assume that growth in these emerging markets will drive growth for the company\’s broader business? Luca Mastri: Your question is very interesting. It coincides with our recent thoughts.
At present, China is still Apple’s largest emerging market.
But when we turn our attention to countries or regions such as India, Saudi Arabia, Mexico, Turkey, Brazil, and Indonesia, we find that the proportion of these emerging markets is growing.
We are very excited about this because Apple’s market share in this part of emerging markets was previously very low.
The number of users in these markets is huge and still growing.
Our products are really making huge strides in these markets. And the excitement around our brand is really high.
Tim recently visited Southeast Asia. Local users were very excited about our visit.
Arete Research analyst Richard Kramer: It has been four years since the release of iPhone 12.
iPhone 12 is a very popular generation product from Apple.
Considering that the company hopes to achieve the goal of net cash neutrality and the company\’s profit margin is currently close to high, how does management plan to allocate funds? For example, to stimulate consumers to upgrade? Provide consumers with more purchasing options. Or increase marketing investment and conduct more promotional activities? Is management considering further increasing profits through the above initiatives? Or is it more important to stimulate sales growth through consumer updates and iterative products? Tim Cook: On the one hand, I think innovation can stimulate consumers to iterate products and accelerate the replacement cycle; on the other hand, the impact of economic factors, operators, partners, etc. cannot be ignored.
There are a lot of variables, but we price our products based on the value we provide.
Luca Mastri: Let me add something.
Looking back over a long period of time, you may not realize that we have experienced a strong period of the US dollar for a long time.
Considering that more than 60% of Apple\’s revenue comes from outside the United States, due to the need to convert local currencies into US dollars, this means that the demand for our products in overseas markets is actually stronger than reported results.
Don\’t forget this, everyone.
Currently, we are making necessary investments in the technologies and technologies that the company needs.
Tim also just talked about the importance of innovation.
We have also made great progress in product purchase plans and trade-in plans. We will continue to invest in the above businesses in the future.
Citibank analyst Atif Malik: Regarding the enterprise users of Vision Pro, can you ask the management to share with us a few product application cases that excite you the most? Tim Cook: What excites me most is that there are so many Amway products. I can’t choose which one is the best.
What impressed me was that, just like people using Macs, Vision Pro could get a lot done.
I see our enterprise users using Vision Pro to complete a variety of tasks. From field service to job training to the healthcare field. For example, helping doctors prepare for surgery and so on.
It can be said that the application scenarios of Vision Pro extend to different vertical categories.
Our focus is to continuously develop the Vision Pro ecosystem and allow more and more applications and enterprise users to participate.
In addition, we are beyond words to express our excitement and excitement for the upcoming press conference.
For enterprise user business, I believe we are gradually getting on the right track.
Citibank analyst Atif Malik: Luca, you just mentioned that the commodity environment in the March financial quarter is favorable.
For the June quarter and even the full fiscal year, what are your expectations for memory pricing? Luca Mastri: Our guidance is only for this financial quarter.
According to the guidance, we will achieve a high level of gross profit margin in the new fiscal quarter, about 45.5% to 46.5%; memory prices may face slight headwinds; foreign exchange will also face headwinds. The foreign exchange rate will face a negative impact of 30 basis points month-on-month.
(over)