Apple Q2 results beat estimates, set records, but guidance is flat

Apple beat estimates for its fiscal Q2 2023, but the results released late Thursday were decidedly uneven.

iPhone sales, services, and emerging markets were the quarter’s high spots, but Mac and iPad sales declined, and wearables seemed flat. Looking ahead, Apple officials predict a slight decline as long as the economic situation doesn’t deteriorate.

Apple beats expectations, but revenue falls

First, the numbers: Apple posted quarterly revenue of $94.8 billion, down 2.5% year over year with profits of $24.2 billion and earnings per share  of $1.52. 

This was ahead of analyst expectations of $93 billion in revenue and $22.6 billion in profits. (The company noted out that if currency rates had remained constant, it would have grown revenues by 3%.)

“We are pleased to report an all-time record in services and a March quarter record for iPhone, despite the challenging macroeconomic environment, and to have our installed base of active devices reach an all-time high,” said Apple CEO Tim Cook. “We continue to invest for the long term and lead with our values, including making major progress toward building carbon-neutral products and supply chains by 2030.”

iPhone set new records

It seems that deferred demand for the iPhone in the wake of production problems in Q1 did indeed carry into success in the January-March quarter.

With $51.3 billion in revenues, Apple set a Q2 record for the iPhone, the company said. That’s significant, given it means the company grew revenue 2% even as the wider smartphone industry shrank by 15%.

That feels like a good direction of travel. Apple must be hoping to boost average revenue per user with additional device sales to iPhone users. Apple also shared some customer satisfaction metrics from 451 Research during its financial results call with analysts:

• Customer satisfaction for iPhone 14: 99%.
• Customer satisfaction for Mac: 96%.

But Mac and iPad sales slowed

Apple confirmed slowing Mac and iPad sales – though nowhere near as slow as some analysts had predicted. In terms of  revenue, Mac sales fell 31% to $7.2 billion, the lowest by revenue number since 2020. That’s still a big number, but far less than some of the alarming analysis that was being widely shared in advance of the results.

iPad sales declined 13%, also the lowest revenue since 2020. Apple’s wearables segment also saw a small decline, from $8.8 billion to $8.76 billion, though the company noted that two-thirds of those buying an Apple Watch were new to it.

In one interesting aside, Cook pointed out that six out of every 10 customers purchasing a Mac in China are buying one for the first time.

Apple’s services story is far from told

While the rate of growth has slowed, Apple’s services segment grew 5.5% to reach $20.9 billion, a new record. The company said it’s added 150 million paying subscribers to its services in the last 12 months, with 975 million people paying for services. Apple CFO Luca Maestri calls services Apple’s “economic engine” for the future.

That’s twice as large a group as the company held just three years ago.

Apple’s services division now accounts for 22% of all revenues, and Apple said its services business hit an all-time high in China during the quarter.

Expect new services to come and an expansion of existing ones. Cook has big ambitions, telling analysts, “I think our services are under-penetrated in a number of different ways. So, the way I look at it is there’s opportunity in many of them.”

Don’t forget that it was only in 2017 that Apple began intensive development of a segment that now accounts for a major chunk of its revenue. (Services generated a total of $24.3 billion revenue for Apple throughout all of 2016 — now, it’s responsible for a similar amount each quarter.)

Profitability is high: the company yields 71% margin on these compared to 36.7% on hardware, meaning that each time a new person signs up for Apple TV+, an Apple investor somewhere probably sings a happy little song

India and emerging markets

Emerging markets also saw growth, with revenue increasing 15.3% year-on-year in Asia Pacific; Apple also reported that India revenue climbed “very strong double digits.”

Having just returned from opening Apple’s first two stores in India, Cook talked a lot about the growing importance of the country during the company’s financial announcements call. “The switcher and first-time buyer metrics look very good there,” he said. “There are a lot of people coming into the middle class, and I really feel that India is at a tipping point.”

The company also confirmed that it set new quarterly records in several nations, including Mexico, Indonesia, the Philippines, Saud Arabia, Turkey, Brazil, Malaysia, and India. These good results help offset other areas, such as the 2.9% decline in Greater China and a 7.1% decline in Japan.

But, as Maestri noted, growth in emerging markets has a long-term benefit: it means the company attracts lots of new users, and in so doing expands its installed base.

Mass layoffs and the ‘parade of horribles’

Apple has rejected the kind of mass layoffs that have become so popular across the tech industry since Elon Musk fired most of Twitter. “I view that as a last resort and, so, mass layoffs is not something that we’re talking about at this moment,” Cook said.

That’s not to say the company hasn’t felt the strain of events across the last few years.

“If you sort of step back and look at how we’ve performed over the last three years on the supply chain, despite this, this parade of horribles if you will between the pandemic and the chip shortages and macroeconomic factors, the supply chain has been incredibly resilient and we feel good about what we are and what our plans are,” Cook said.

Apple has done this before, of course — it thinks that having spent a lot of money to recruit great talent, the best approach is to keep them on board while working out of recession. “We will manage for the long term, just as we always have, with our eyes to the horizon, with limitless creativity, and with a deep belief that we can achieve anything we put our minds to,” Cook said.

Cook on AI and machine intelligence

The company was asked obligatory questions concerning Generative AI. Cook warned that there is a need to be cautious in deployment of such technologies. “There’s a number of issues that need to be sorted, as is being talked about in a number of different places,” he said.

Given that governments globally are now urgently examining the sector while experts warn that the impact of AI on how we live could be catastrophic, he makes a good point.

Cook stressed that AI remains important to the company, and cited some of the ways, such as fall and crash detection, in which it already makes use of machine intelligence in its products. “We view AI as huge, and we’ll continue weaving it in our products on a very thoughtful basis,” he said.

Apple and the enterprise

Apple didn’t say much about it, but offered up enough comment to make it clear that enterprise sales remain another bright spot in Apple reality.

Speaking to analysts, Cook admitted that the enterprise business is growing, driven in part by employee-choice schemes, which broadly speaking favor Apple, since so many people want to use Macs and iPads at work.

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