Dolphin Core Perspective:
Apple (AAPL. O) In the early morning of April 29, Beijing time, the US stock market released its fiscal second quarter 2022 financial report after hours (as of March 2022).
1, the overall performance: behind the unexpected growth slowdown is a hidden worry. $Apple. US reported revenue of $97.3 billion in the quarter, up 8.6% year-over-year and exceeding Bloomberg's consensus estimate of $94 billion. The more than expected growth in the quarter was mainly driven by the iPhone and Mac businesses, but it is also an indisputable fact that the company is facing a decline in growth. Apple's gross margin for the quarter was 43.7%, up 1.2 pct year-over-year, exceeding Bloomberg's consensus estimates (43.1%). The gross profit margin of the software side still maintained an upward growth trend, while the gross profit margin of the hardware side in this quarter declined to a certain extent under unstable factors such as the epidemic.
2, iPhone: multi-factor interference is still growing. In this quarter, under the influence of the epidemic and local wars, the global mobile phone market experienced a double-digit decline, but the company still achieved a higher than expected performance with high-quality product strength. But at the same time, it cannot be ignored that the growth rate of the company's iPhone business has dropped significantly in the quarter. After all, smartphones are a steady-state market, and after the impact of competitors' withdrawals gradually weakens, the high growth of the business may have to press the "pause button".
3, other hardware other than the iPhone: Mac continues to be strong, and wearable highlights are no longer. With the blessing of self-developed chips, Mac continued to exceed expectations this quarter, and its market share more than doubled compared with the same period last year. The iPad business halted a sharp pullback during the quarter and still posted a revenue performance of more than $7 billion. The wearable business is the only business that is lower than expected this quarter, although there are new products such as watches and headphones, but from the performance of the market to the product response is general, there is no previous explosive performance.
4. Software services: steady growth. Software Services revenue for the quarter was $19.8 billion, in line with Bloomberg's consensus estimate of $19.8 billion. From the perspective of user scale and revenue generation, the growth of software services in this quarter came from the double promotion of volume and price, and single-user revenue increased by about 8% year-on-year.
Overall results: Apple continued to outperform expectations this quarter, with only hardware businesses such as wearables falling short of market expectations. Under the impact of the new crown pneumonia, supply chain and Ukraine conflict in the quarter, it is not easy for Apple to hand over such an answer.
But for this earnings report, it also shows some of the potential risks facing the company. Where will the future growth on the hardware side come from? The iPhone business is the company's biggest source of revenue at present, and when the market enters a steady state and the impact of competitor withdrawal weakens, the high growth of Apple's mobile phone business will no longer be there. Hardware new products such as AirPods and Apple Watch have also brought growth momentum to the company, but from the perspective of new products in the second half of 2021, the market is not satisfied with the company's new wearable products. Today, only the Mac business is performing strongly, but the volume of the Mac business is simply difficult to support the growth of Apple's entire hardware side; will the growth rate of the software side also fall? Since Apple is a software and hardware integration company, the shipment growth of the hardware side has brought about the expansion of the scale of software users, and now that the growth of the hardware side is in doubt, the double help of the software end volume and price will gradually become "lame".
Apple, with its own product advantages and industrial chain status, is still a very profitable company. However, when the mobile phone market pattern enters stability and hardware innovation products are no longer sold, Apple also urgently needs to find new growth points. Relying on the ability to integrate software and hardware, Apple is still expected to make efforts in the layout of AR/VR, automotive and other fields. However, before the current product landing is clear, there is still uncertainty about Apple's future growth sources.
In the short term, the impact of instabilities such as COVID-19, supply chains and the conflict in Ukraine will eventually pass, and in the longer term, there is no momentum for the company's continued growth in the future. Tim Cook also mentioned in this conference call that Apple does not rule out the acquisition of large companies, which may also confirm Apple's current efforts to find new growth points in the business.
For details of this financial report, please refer to the following:
First, about Apple, what to know?
Apple is the most branded company in the smartphone market, accelerating the mobile phone market from the traditional machine era to the smart phone era, and also bringing a new model of building an ecosystem for monetization. Today, Apple's software service gross profit accounts for 1/3. The study of Apple is no longer just a pure hardware company that sells mobile phones, but a typical representative of the integration of soft and hard in technology companies.
Through Apple's announcement, the business is split, mainly in hardware and software:
Hardware business: The iPhone business is still the most important part of Apple's revenue composition, so mobile phone shipments and average shipment prices are the key to whether the revenue can reach expectations. This quarter, under the impact of unstable factors such as the epidemic and local wars, the overall mobile phone market performance is sluggish, while Apple's mobile phone is growing against the trend, so how is the specific performance of the iPhone business and total revenue in this quarter?
Software business: mainly including advertising, subscription services and other businesses, although the proportion of revenue is not large, but because compared to the hardware side has a higher gross profit margin, so the performance of the software business will become an important factor affecting the company's gross profit margin and final performance.
As smartphones have become a mature market for marketization, the company began to consider the layout of new business markets. With the integration of soft and hardware and its own ecological advantages, Apple is expected to make efforts in AR/VR, automotive and other fields. The landing of new business products is expected to bring a new growth curve to the company.
Data source: company financial report, Longbridge Dolphin investment research collation
Second, the following is a detailed analysis of the Longbridge Dolphin Jun
First, the overall performance: behind the expectations are the hidden worries of slowing down the growth rate
1.1 Revenue: Apple achieved revenue of $97.3 billion in the second quarter of fiscal 2022, up 8.6% year-over-year, exceeding Bloomberg's consensus estimate of $94 billion. Apple's growth in the quarter was mainly driven by businesses such as iPhone and Mac, and only the company's hardware business such as wearables fell short of market expectations in the quarter, and the rest of the businesses met market expectations.
Although Apple's revenue this quarter achieved more than the market expected performance, the fly in the ointment is that the revenue growth rate showed a downward trend. This quarter's revenue growth rate fell below double digits for the first time in six quarters, and the reason is that 1) Apple's new product launch is one month earlier than the previous year, returning to September. From the perspective of new products driving shipments, the advance of the conference has a certain impact on the company's overall shipments in January or the first quarter of this year; 2) the iPhone business is the company's largest source of revenue, and under the influence of the epidemic and local hot wars in this quarter, the sluggish performance of the overall mobile phone market has also dragged down the company's growth to a certain extent.
Data source: company financial report, Longbridge Dolphin Investment Research
From both hardware and software perspectives: Apple's software business still grew by 17.3% this quarter, although the growth rate has declined compared with previous quarters, but it still maintains a solid growth of more than 15%.
However, apple's hardware business growth rate slipped more obviously, only 6.6% in the quarter. Although the company was affected by unstable factors such as the advance of the press conference and the epidemic this quarter, it is undeniable that the company's impact of benefiting from the withdrawal of competitors' share in the past has gradually weakened. After the reshaping of the smartphone landscape, the high growth on the company's hardware side in the past few quarters will fall back to normal. After a short period of abnormal highs, hardware market competition such as mobile phones has returned to the competition of product strength.
Data source: company financial report, Longbridge Dolphin Investment Research
1.2 Gross margin: Apple's gross margin for the second quarter of fiscal 2022 was 43.7%, up 1.2 pct year-on-year, exceeding Bloomberg's consensus estimate (43.1%). Apple's gross margin continued to remain high above 43% during the quarter, but it could also see a slight decline in gross margin sequentially.
From the perspective of the gross profit margin of software and hardware split by Dolphin Jun, the reasons for the increase in Apple's gross profit margin this time:
Apple's software gross margin continued to improve this quarter, holding above the water level of 70%. The most concerned is still the gross profit margin level of the hardware side, although the gross profit margin of Apple hardware in the quarter remained at a historical high of more than 36%, but there was a certain decline in the chain. While the company's hardware-side gross margins rose through high-priced iPhones and self-developed chip Mac products in the second half of the year, the company was not immune to the challenges of COVID-19, supply chains and conflicts in Ukraine this quarter. Under the influence of factors such as the epidemic and chip supply, the company's hardware gross profit margin was subject to certain cost pressures in the quarter.
Data source: company financial report, Longbridge Dolphin Investment Research
1.3 Operating Profit: Apple's operating profit for the second quarter of fiscal 2022 was $30 billion, up 9% year-over-year and exceeding Bloomberg's consensus estimates of $27.9 billion. The more than expected performance of operating profit was mainly due to the unexpected performance of gross margin.
Apple's operating expense ratio for the quarter was 12.9%, an increase of 1.1pct year-on-year, which is basically in line with market expectations. Sales and administrative expense ratios and R&D expense ratios both improved during the quarter, and as the market expected, the company's operating expense ratio increased after the epidemic as wages rose.
Data source: company financial report, Longbridge Dolphin Investment Research
Second, the iPhone: multi-factor interference is still growing
iPhone revenue for the second quarter of fiscal 2022 increased 5.5% year-over-year to $50.6 billion, exceeding Bloomberg's consensus estimate of $49.4 billion. The performance of the iPhone business in the quarter exceeded expectations, mainly driven by the new products of iPhone and Mac in the second half of 2021. But it should not be overlooked that the iPhone business has slowed down significantly after several quarters of high growth. Although the iPhone business this season has been affected by the epidemic, local wars and other factors, at the same time, after the impact of competition and withdrawal weakened, the high growth of the company's mobile phone business will also press the "pause button".
Data source: company financial report, Longbridge Dolphin Investment Research
From the perspective of volume and price relationship, Dolphin Jun looks at the main sources of growth of the iPhone business in this quarter:
1) iPhone shipments: Before the disclosure of this quarter's earnings report, Canalys has disclosed the shipments of various brands in the quarter. Affected by the epidemic, local wars and other factors, the global smartphone market in the first quarter of 2022 decreased by 11% year-on-year. With its product strength, Apple's market share increased from 15% to 18%. It is estimated that in the downturn of the industry, the shipment of iPhone mobile phones in this quarter still achieved positive growth, which is not easy;
2) Average iPhone shipment price: Due to the disclosure of Canalys data, iPhone shipments in this quarter have been digested by the market. However, for the average price of iPhone shipments in this quarter, this is the main focus of this financial report. Combined with iPhone revenue and shipments, the average iPhone shipment price in the quarter decreased year-on-year, but still reached more than $850. This may be due to the advance of this new machine conference, which has an impact on the relative sales proportion of the company's high-priced models in this quarter, but the average shipment price still shows a trend of continuing to rise on a month-on-month basis.
Data source: company financial report, Longbridge Dolphin Investment Research
Other hardware other than the iPhone: The Mac continues to be strong, while the wearable highlights are no longer there
3.1 Mac Business
Revenue from the Mac business for the second quarter of fiscal 2022 was $10.4 billion, up 14.6% year-over-year and exceeding Bloomberg's consensus estimate of $9.13 billion. The performance of the Mac business in this quarter exceeded expectations, still mainly driven by the company's new Mac products equipped with self-developed chips released in the second half of 2021.
In fact, the overall PC market has performed sluggishly in the quarter, and overall demand has shown signs of gradually slowing down. According to IDC's report, global PC market shipments fell 5.1% year-on-year during the quarter, while Apple once again bucked the trend with the excellent product strength of the Mac. Dolphin Jun calculated that Apple's Mac business benefited from the double promotion of Mac product volume and price increases in this season.
Data source: company financial report, Longbridge Dolphin Investment Research
3.2 iPad Business
iPad revenue for the second quarter of fiscal 2022 was $7.6 billion, down 2.1% year-over-year and still exceeding Bloomberg's consensus estimate of $7.2 billion. Previously, due to the lifestyle of working from home, learning and entertainment driven by the epidemic, the iPad business ushered in high growth. However, as the impact of the epidemic weakened, the demand in the overall tablet market has declined, and the market has lowered its growth expectations for Apple's iPad business.
Although the iPad business declined year-on-year in this quarter, it still picked up compared with the poor data of the previous quarter. In addition, in last quarter's conference call, it was mentioned that the shortage of parts had a greater impact on the iPad. Judging from this quarter's earnings report, the impact of the parts shortage on the iPad business has eased, and the quarterly revenue of the iPad has been stable above $7 billion after the epidemic, and it may not be a drag on the company's growth after that.
Data source: company financial report, Longbridge Dolphin Investment Research
3.3 Wearable and other hardware
Other hardware businesses such as wearables in the second quarter of fiscal 2022 reported revenue of $8.8 billion, up 12.3% year-over-year, and were the only projects that reported less than Bloomberg expected ($9 billion). While other hardware businesses such as wearables saw growth in the quarter, growth slipped again.
The business sub-item has been driven by the star products of AirPods to achieve high growth, and the AirPods3 released in the second half of last year did not bring about the explosion of previous products, it is obvious that the market is not satisfied with Apple's new watches and headphones released this time. If Apple can't make another explosive product on wearables and other products, then the growth rate of the business may be difficult to achieve high growth.
Data source: company financial report, Longbridge Dolphin Investment Research
Fourth, software services: steady growth
Software services revenue for the second quarter of fiscal 2022 was $19.8 billion, up 17.3% year-over-year, in line with Bloomberg's consensus estimate of $19.8 billion.
The growth rate of software services remained above 15%, continuing to show steady growth. And because Apple is a software and hardware integration model, when the hardware does not return to the previous quarterly high growth, it will also affect the user growth rate of Apple's software service. Therefore, compared with previous quarters, Apple's software service growth rate this quarter has also declined.
Among software services, the most interesting is the gross profit margin level of software services, which continued to increase to 72.6% during the quarter. In the case of the overall downturn in the Internet advertising industry, Apple's gross profit margin can still be achieved, which shows the importance of hardware entry. Apple's software services have continued to improve in recent years, and now it has stood at more than 70% for three consecutive quarters.
Apple now has 1.8 billion active devices by the end of 2021, up from 1.65 billion in the same period last year, up 150 million. Based on this, the ARPU value of a single device is measured for the quarter. Apple's single-device ARPU value rose to $10.8 in the quarter from $10 in the same period last year, up about 8% year-over-year. Software services growth in the quarter continued to benefit from rising volumes and prices.
Data source: company financial report, Longbridge Dolphin Investment Research